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GBP - Sterling Strength Driven by Shifting Rate Expectations
Sterling strengthened against the Euro through the latter part of last week and into early Monday trading, with GBP/EUR briefly touching a multi-week high near €1.1560 before consolidating around the €1.1520 area. The move reflects a rapid reassessment of relative monetary policy expectations and the market’s reaction to sharply higher energy prices.
European gas prices surged at the start of the week, rising as much as 30% to €69.50/MWh, more than doubling since the onset of the latest Middle East supply disruption. Markets have quickly revisited the Eurozone’s vulnerability to energy shocks, recalling the economic drag experienced during the early phase of the Russian invasion of Ukraine.
For the UK, the dynamic has been somewhat different. Prior to the geopolitical escalation, rate markets had been pricing at least two Bank of England cuts in 2026. That expectation has now shifted materially, with just one cut currently priced, as higher energy prices feed into inflation projections. The repricing of UK rate expectations has therefore been more pronounced than in other developed markets, lending support to Sterling.
The week ahead will centre on whether this repricing persists. Markets will be closely monitoring UK inflation expectations and commentary from the Bank of England, particularly as energy costs filter into forward pricing models. If energy prices remain elevated, Sterling may continue to benefit from relatively tighter policy expectations compared with continental Europe.
Weekly Major Data
Thursday: 09.30 Gov Bailey Speaks
Friday: 07.00 GDP m/m 0.2%
EUR - Energy Exposure Re-Emerges as a Core Euro Risk
The Euro began the week under pressure as the surge in global energy prices renewed concerns around Europe’s terms of trade and industrial cost base. EUR/USD has drifted back toward the $1.1500 threshold, a level many in the market view as technically and psychologically significant.
The Eurozone remains acutely exposed to imported energy costs. With large portions of Middle Eastern oil supply disrupted, traders have quickly reassessed the region’s growth outlook, particularly as elevated energy prices threaten to weaken the narrative of synchronised global expansion.
Attention has therefore turned to potential coordinated intervention. Reports indicate the G7 may discuss a large strategic reserve release through the International Energy Agency, potentially in the range of 300–400 million barrels. For context, during the early months of the Russian invasion of Ukraine, the agency coordinated releases of 62 million barrels in March and 120 million in April to stabilise markets.
A release on the scale currently under discussion could provide temporary relief to energy markets and modest support for the Euro. However, markets broadly recognise that unless geopolitical tensions ease materially, structural pressure from higher energy costs will remain.
From a technical perspective, the $1.1475–1.1500 zone in EUR/USD is widely viewed as a critical support area. A sustained break below this range could accelerate volatility and open the path toward the $1.1400 level, particularly in periods of reduced liquidity or risk-off positioning.
No major data this week
USD - Dollar Demand Strengthens as Global Risk Re-Prices
The US Dollar has regained upward momentum as geopolitical risk and surging energy prices reshape global market positioning. The US Dollar Index has retested the 99.65–99.70 range, with many participants watching the 100.25–100.35 region as the next key resistance area.
Energy markets remain the primary macro driver. The longer oil prices remain elevated, the more aggressively short-term interest rate expectations are being repriced higher across developed markets. At the same time, rising long-dated bond yields are tightening global financial conditions and increasing pressure on equity valuations.
These dynamics tend to reinforce Dollar demand, particularly during episodes of rapid deleveraging. Positioning data indicates that speculative accounts had been running net short USD exposure, meaning bouts of volatility can trigger sharp short-covering rallies, a dynamic seen during last week’s market stress.
The macro data calendar will also attract attention. While the most recent US labour market data came in softer than anticipated, the market focus now shifts to inflation. This week brings February CPI data on Wednesday and the core PCE deflator on Friday, the latter being the preferred inflation gauge of the Federal Reserve.
Current consensus suggests core PCE may rise to around 3.1% year-on-year, reflecting the annual repricing cycle many companies implement at the start of the year. A stronger print would reinforce the view that the Federal Reserve may delay the timing of rate cuts, a scenario that typically supports the Dollar.
For now, FX markets remain primarily driven by geopolitics and energy markets. Until there are clearer signs of stabilisation in Middle Eastern supply dynamics, the prevailing bias in global currency markets continues to favour defensive positioning and a structurally firmer US Dollar.
Weekly Data:
Thursday: 12.30 Unemployment claims 216k
Friday CPI 12.30 0.2% m/m
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