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GBP - Sterling exposed to energy risk
Sterling enters the week on the defensive as geopolitical risk reasserts itself across global markets. The escalation of hostilities between Iran, Israel and the United States over the weekend triggered a decisive risk-off shift, with Brent crude trading approximately 7% higher near $78 per barrel as attention focused on disruption through the Strait of Hormuz.
The market response has been textbook: capital rotated into traditional safe-haven currencies (the US Dollar, Swiss Franc and Japanese Yen) while the Pound struggled to attract defensive demand. Cable briefly traded down toward $1.3365, while GBP/EUR slipped toward the €1.1380 region before stabilising near €1.1400.
For the UK, higher oil prices represent a macroeconomic complication rather than a tailwind. A sustained rise in crude risks interrupting the recent disinflation trend that had provided the Bank of England with greater flexibility. Markets had been pricing one near-term rate cut with scope for another later this year; that second move is now less certain if energy-driven inflation proves persistent.
Labour’s by-election defeat in Gorton and Denton has added a secondary layer of political scrutiny ahead of May’s regional elections. While FX markets remain macro-led, periods of geopolitical stress amplify sensitivity to domestic stability.
This week’s Spring Statement is expected to be fiscally contained. As such, Sterling will continue to take its cue from external risk dynamics and oil price movements rather than domestic policy shifts.
Weekly Data:
3rd March
12.30pm - Annual Budget Release
EUR - Dollar dominance caps the Euro
The Euro spent much of last week consolidating within a fragile range. EUR/USD is trading near $1.1720, having broken throguh support levels at $1.1740–1.1750. A sustained break below this zone would expose the 200-day moving average and materially weaken the medium-term structure.
The European Central Bank left rates unchanged in a unanimous and widely anticipated decision. President Christine Lagarde reiterated before the European Parliament that inflation is projected to stabilise at the 2% target over the medium term. Preliminary German CPI printed at 1.9% year-on-year, marginally below January’s 2.0% reading, a modest cooling, not a turning point.
Yet EUR/USD continues to be driven more by Washington than Frankfurt. The US Supreme Court’s ruling against President Trump’s global tariff framework introduced renewed trade uncertainty, while geopolitical escalation in the Middle East has redirected capital flows toward the Dollar.
Positioning data show speculative net long Euro exposure at its highest level since 2020, while short interest has also increased sharply. Elevated open interest confirms conviction on both sides, a dynamic that leaves the pair sensitive to external catalysts.
Analysis from Commerzbank highlights the structural vulnerability: as the Euro area remains a net energy importer, a sustained oil shock deteriorates its terms of trade relative to the United States. In prior energy crises, EUR/USD weakness has been swift and pronounced.
Until clarity emerges around the Federal Reserve’s 2026 rate trajectory, or the Euro area delivers a stronger cyclical impulse, rallies are likely to remain measured.
For now, it remains Dollar first, Euro second.
No Major Data This Week
USD - Safe haven reasserted
The Dollar has decisively regained its defensive premium.
As geopolitical risk intensified, demand for Dollar liquidity strengthened materially. Analysts at Barclays note that every 10% rise in oil prices historically contributes approximately 0.5–1% to Dollar strength through improved US terms of trade and elevated risk aversion.
The United States’ net oil exporter status provides relative insulation from energy price shocks compared with Europe and the UK. Markets also assume that, should inflation re-accelerate via higher energy costs, the Federal Reserve retains greater latitude to respond than peers facing weaker growth dynamics.
The Fed’s policy stance remains cautious but steady, with markets continuing to price a gradual easing path contingent on sustained disinflation. A prolonged oil-driven inflation impulse would complicate that outlook and reinforce rate differential support for the Dollar.
In the week ahead, attention centres on:
Developments around the Strait of Hormuz and energy supply flows.
US inflation expectations and energy pass-through effects.
Federal Reserve communication regarding inflation persistence versus growth resilience.
Absent a rapid geopolitical de-escalation, the Dollar’s structural bid is likely to remain intact.
Weekly Data:
2nd March
3pm - ISM Manufacturing PMI
4th March
1.15pm - ADP Non-Farm Employment Change
3pm - ISM Services PMI
5th March
1.30pm - Unemployment Claims
6th March
1.30pm - Average Hourly Earnings m/
1.30pm - Core Retail Sales m/
1.30pm - Non-Farm Employment Change
1.30pm - Retail Sales m/m
1.30pm - Unemployment Rate
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