No relief
Markets have been whipsawed by conflicting US signals over the likely duration of the conflict — one day hinting at rapid de‑escalation, the next warning of a prolonged campaign — leaving risk appetite fragile and volatility deeply embedded in the headlines. The latest escalation – Iran’s new supreme leader pledged to keep the Strait of Hormuz effectively shut, with US President Trump also striking a defiant tone.
The reported mining of the Strait of Hormuz is also unnerving investors. This is a material threat to an energy system already running a structural shortfall, thus crude oil closed above $100 for the first time since 2022 yesterday.
The IEA’s coordinated release of 400 million barrels briefly steadied nerves earlier in the week, but it’s a band‑aid on a far larger wound: some 18 million barrels a day, nearly a fifth of global supply, should be flowing through Hormuz. Ultimately, the only variable that really matters now is duration — how long the disruption lasts and how deeply it impairs physical energy flows. That’s why terms of trade has snapped back into the FX driving seat, dictating currency performance far more forcefully than rate expectations or traditional macro signals.
Oxford Economics warns that if global oil prices were to average around $140 per barrel for even two months, the combination of tighter financial conditions, renewed supply‑chain stress and a deterioration in business and consumer sentiment would be enough to tip parts of the global economy into a mild recession.
USD: Most bullish since 2022
The US dollar index hit a new 2026 high this morning, on track for its second weekly gain as safe‑haven demand stays firm amid an unrelenting Middle East conflict. FX options are leaning the same way: one‑month risk reversals have jumped to their strongest levels since late 2022, signalling growing appetite for bullish dollar protection. Oil’s surge is reinforcing the move — higher crude quickly feeds US inflation and keeps rate‑cut expectations from drifting dovish, widening rate differentials and supporting the dollar, especially against energy‑importing currencies facing a terms‑of‑trade squeeze. It’s a reminder of the dollar’s petrocurrency tendencies when oil drives the macro narrative. Rising inflation risks have already pushed expectations for the next Fed cut back from July to September. All eyes now turn to January’s PCE report for a read on underlying price pressures, even though it won’t capture the fallout from the Iran war.
GBP: Stagflation fears mount
Sterling has slipped below $1.33 as risk appetite sours and UK stagflation worries intensify. Surging energy prices are reviving inflation fears just as a run of weak activity data exposes how fragile the economy was even before the Middle East conflict erupted. With the 100‑week moving average sitting just under $1.31, that level could act as a magnet if geopolitical tensions fail to ease.
This morning’s UK data only deepened the gloom. GDP flatlined in January, missing expectations and undershooting December’s modest 0.1% gain. Growth was already barely positive late last year, with firms and households squeezed by high rates, the drag from the US trade war, and uncertainty over potential tax rises in November’s Budget. Before the conflict, the UK was edging out of stagnation: inflation was easing, the labour market was softening, and the BoE was inching toward a more balanced debate. But unemployment has risen faster than expected, while inflation has proved stickier than hoped — a mix that complicates the policy outlook.
The latest surge in oil and gas prices now threatens the BoE’s baseline. The Bank had expected 0.3% growth in Q1; the OBR has warned inflation could end the year closer to 3% if energy prices stay elevated. Traders have responded by scaling back rate‑cut expectations. Markets now see Bank Rate holding at 3.75% and assign roughly a 75% chance of a hike by year‑end — a dramatic shift from the 50 bps of easing priced before the war.
EUR: Oil shock deepens EUR slide
EUR/USD is extending its slide to fresh seven-month lows, and is now down 2.9% month‑to‑date. Year‑to‑date, the pair is 2.3% lower – a striking reversal given it touched a multi‑year high of 1.2081 in January.
With the war showing no signs of easing, headlines about global leaders trying to ease price pressures are failing to move markets. The reaction is increasingly numb. Yesterday brought news of Trump’s plan to suspend the Jones Act, which would allow foreign tankers to help supply refiners with fuel. The act currently permits only American‑built ships to transport goods between US ports.
On the policy‑path front, while hawkish repricing is hitting central banks across the board, the US is positioned to weather it better than its peers thanks to its extensive oil‑production capacity. As a result, hawkish repricing tends to pass through more fully into the dollar than the euro, with the former already supported by a mechanical bid from surging oil prices, given that oil transactions are USD‑denominated.
With Brent hovering back near $100 a barrel, the euro remains poised for further downside. The November low at 1.1469 has already been tested this morning and July’s low at 1.1392 is next in line.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: March 09-13
All times are in GMT
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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.
