USD: Dollar strength with a side of doubt
The dollar moved higher on Friday as the conflict shows no concrete signs of de‑escalation, and the diplomatic track still lacks the substance needed to convince markets that an end is in sight. Missile strikes ripped across the Middle East over the weekend, and reports of Yemen‑based Houthi militants firing missiles at Israel raised concerns about the conflict escalating further.
Market sentiment remains subdued, with the S&P 500 ending the week 2% lower, pressured also by a fresh layer of trade tension after China opened investigations into US supply‑chain and renewable‑product practices. The move is widely viewed as retaliation for US trade probes ahead of an expected presidential summit, mirroring Washington’s own turn to legal channels to revive President Trump’s tariff agenda after the Supreme Court struck down his 2025 duties.
The dollar was broadly unfazed by the news. Higher oil prices and broader deleveraging flows would outweigh any sentiment‑driven selling tied to the “trade uncertainty” risk premium that sent the dollar reeling in April 2025 but against which it has since become more resilient. That said, if we see concrete signs of de‑escalation in the coming weeks, the dollar may find itself with far less support as it retreats from recent highs. Until then, establishing a firmer foothold above the 100 mark hinges on clearer signs that the diplomatic route has effectively collapsed.
Looking ahead, the US jobs report is due this week. The Fed has highlighted signs of a stabilising labour market, but severe early‑year weather across the country – now compounded by the ongoing conflict – has muddied that narrative. February was weak, with the US shedding 92k jobs, though this was not entirely surprising given adverse weather and the strong +100k gain the month before. It may still be too early for conflict‑related anxiety to show up in the March release, but the report remains important in the context of the Fed’s dual mandate and its rate‑hike considerations amid conflict‑driven inflation pressures. Even so, the dollar’s reaction function will remain closely tied to the state of the conflict – and, crucially, to how markets perceive it – as we approach Friday.
EUR: Conflicted ECB, vulnerable euro
The hawkish persona the ECB has tried to project since the conflict still lacks clear substance, as mixed signals over the urgency to hike understandably dominate. ECB officials are all contemplating a preference for tightening to counter conflict‑driven inflation pressures, yet their messaging on timing remains inconsistent. On Friday, Governing Council member Madis Müller suggested there may be no need to wait for second‑round inflation effects to materialise, while others, such as Christodoulos Patsalides, argued that the Bank should not rush into any adjustment in borrowing costs as “we don’t have sufficient information to make a decision”.
This mixed backdrop reinforces how little sway narrowing rate differentials currently hold in driving EUR/USD. Instead, the pair has taken on the role of a sentiment barometer since the conflict began, with investors leaning into USD safe‑haven flows amid risk-off conditions. Oil prices have edged higher, but the FX transmission through the eurozone’s terms of trade remains indirect and far too mild to justify the scale of the move. On the growth outlook, fears have risen, but there has been little material re‑pricing to link the pair’s MTD drop of over 2% to that narrative. Long‑term inflation expectations (5y5y forward swaps) remain anchored for the eurozone, and the yield curve has been affected mostly at the front end, suggesting that markets are focusing on re‑pricing short‑term rate expectations rather than long‑term growth. Meanwhile, the ECB’s revised March projections – still showing inflation returning to target by 2027 after a temporary spike in 2026 – reinforce that view. We therefore believe that there is little evidence of a deeper, fundamentals‑based repricing just yet. That leaves the euro vulnerable to swings in geopolitical mood rather than a structural reset, and it also means the downtrend could unwind quickly if de‑escalation signals re‑emerge. For now, we expect consolidation in the 1.14–1.15 range as diplomatic efforts remain stalled, keeping the pair below the 21‑day moving average at 1.1566. A break below 1.1411 – the March 13 low – becomes our base case if recent diplomatic overtures are formally abandoned.
On the data front, this week brings Germany’s (today) and the eurozone’s (tomorrow) March inflation prints. Consensus points to a 0.8% increase in the aggregate measure, taking the headline rate from 1.9% to 2.7% y/y as conflict‑driven energy shocks begin intensifying inflation pressures across the bloc. An inflation trajectory rising this sharply may well validate the ECB’s hawkish inclination and bring more cohesion amongst the still mixed hawkish voices at the Bank.
GBP: Sterling’s resilience is fraying
Sterling’s resilience is beginning to look more fragile as the geopolitical backdrop continues to deteriorate. The brief flickers of optimism around a potential US–Iran deal have offered only shallow, short‑lived relief for risk assets. Equities remain under pressure, volatility is elevated and energy prices are still uncomfortably high — a combination that rarely favours a high‑beta, energy‑importing currency like the pound.
Even so, GBP has outperformed most G10 peers through March. GBP/USD is down around 1.5%, compared with a 2.5%+ decline in EUR/USD, and although GBP/EUR has eased back from seven‑month highs above 1.16, the cross is still on track for its strongest monthly performance in more than a year. The technical picture remains constructive, with the 21‑day moving average providing steady support throughout the month.
The backbone of this outperformance has been the aggressive hawkish repricing in UK rates. Markets have shifted from expecting cuts to pricing almost three BoE hikes this year — the largest hawkish recalibration among major central banks. That yield support has helped offset the terms‑of‑trade shock that has weighed on other energy‑sensitive currencies.
But this support is not unconditional. UK gilt yields continued to climb last week as markets priced the inflationary spillovers from the Iran conflict and the prospect of further BoE tightening. Higher yields can still support GBP, but when the inflation impulse is supply‑driven, they also amplify growth concerns — naturally limiting the upside.
Indeed, although the rates channel has been GBP-supportive, it’s the overall risk aversion and volatile market backdrop that has dominated the direction of GBP/USD. The currency pair is hovering just below 1.33, with upside capped by the 200‑day moving average at 1.3434 — a level the pair has failed to break since the conflict began. With energy prices elevated and UK growth risks building, the near‑term bias remains skewed lower. 1.32 is the first key support, with 1.30 coming into view if geopolitical tensions intensify.
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Calendar: 30 March – 3 April
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
