USD: Between inflation and the next headline
Global markets are navigating intense volatility as the Middle East conflict stretches into its sixth week. The situation is escalating further now that Iran has turned down a US truce offer delivered through Pakistan. Instead, Iranian officials are insisting on a permanent end to the fighting and secure navigation guarantees through the Strait of Hormuz. Meanwhile, risks to civilian infrastructure are rapidly growing. The US has warned of potential strikes on bridges and power grids, while Iran countered with threats against regional desalination facilities. US President Trump intensified pressure ahead of tonight’s deadline from the White House, keeping escalation risks elevated.
These mounting military tensions are heavily impacting the energy sector and fueling fresh inflation concerns. Following reports that US forces plan to target Iranian energy sites, WTI crude oil quickly surged past $111 a barrel. This rapid rise in energy costs is clearly rippling through the broader economy. Recent service sector data shows a significant jump in costs paid by businesses, marking the most dramatic increase observed since 2012. Interestingly, this inflation spike occurred even as overall service activity and related employment metrics actually cooled down last month.
Despite these global headwinds and rising costs, the domestic labor market remains incredibly complex and surprisingly resilient. March delivered much stronger payroll figures than anticipated, bouncing back from a slow February with healthy momentum in the healthcare, construction, and manufacturing sectors. However, this underlying strength sits alongside a truly historic anomaly. The economy has bounced back and forth between adding and shedding jobs for an unprecedented eleven straight months, easily shattering the previous historical record of six months established in the late 1960s.
While the recent job gains provide a welcome bright spot, investors remain incredibly cautious about the road ahead. The current three-month average of 68,000 new jobs comfortably exceeds the updated Federal Reserve benchmarks needed to keep unemployment steady. Still, unpredictable variables loom large over the economy. If oil prices keep climbing due to overseas conflicts, we will likely see widespread demand destruction that eventually hurts corporate hiring. Ultimately, navigating a prolonged international standoff means that ongoing market unpredictability is simply here to stay.
Beyond geopolitical risks, inflation takes center stage this week. Investors will closely monitor mid-week bond auctions and the latest FOMC minutes (Wed) for insight into how the Federal Reserve is weighing global instability against domestic policy. Inflation remains the most critical variable, with core PCE (Thu) and CPI data (Fri) expected to show a notable jump in annual price pressures. These macro updates coincide with the launch of quarterly earnings season. Reports from Delta Air Lines, Exxon, and Shell will provide a first look at how major industries are navigating today’s complex economic landscape.
EUR: Stuck in a range
EUR/USD has unwound sharply since the Middle East conflict began, sliding from 1.19 to just above 1.14 as risk aversion surged and the terms‑of‑trade shock swung decisively in favour of the US. That move made sense regardless of broader scepticism around US policymaking. A further escalation on the ground in Iran would almost certainly drag the pair lower again — but whether 1.14 finally cracks is the key question.
Technically, the euro remains pinned around its 21‑day moving average, still searching for direction. The pair has been trapped in a 1.14–1.16 range since mid‑March, with the 50‑week moving average at 1.1622 acting as a firm ceiling for four straight weeks. With resistance intact, real‑yield dynamics unfavourable, and Europe’s energy vulnerability unresolved, EUR/USD continues to screen as a sell‑on‑rallies market until the broader risk backdrop stabilises.
The fundamentals reinforce that bias. The initial impact of the oil‑and‑shipping shock is already visible in forward‑looking survey data. Global manufacturing PMIs show lengthening supplier delivery times, rising input costs, and firmer output prices. In the euro area specifically, factory input costs rose at the fastest pace since October 2022, while selling prices increased at the quickest rate in more than three years — a clear sign that Europe’s energy‑intensive industrial base remains exposed to further supply disruptions.
Meanwhile, the US economy — though slowing — continues to show relative resilience, particularly after last Friday’s jobs report. That contrast matters: a sturdier US backdrop paired with Europe’s energy‑linked fragility keeps the balance of risks tilted toward a softer euro.
In short, the euro’s attempts to recover lack both technical and macro support. Until energy pressures ease and Europe’s inflation dynamics stabilise, EUR/USD rallies are likely to remain shallow and short‑lived.
GBP: Energy shock meets policy hesitation
Despite sharp swings in oil and equities yesterday, FX stayed relatively calm. GBP/USD held within a sub‑one‑cent range and continues to hover just above the key 1.32 support level we’ve been flagging for weeks. But the broader backdrop is turning less forgiving for sterling.
Alongside a firmer dollar, the case for a weaker pound is building on fundamentals. If the Bank of England (BoE) hesitates to tighten in response to the likely inflation spike from surging energy prices, there is a risk that longer‑dated gilt yields would rise and sterling falls as investors demand a higher inflation risk premium on both gilts and GBP. Governor Bailey’s attempt to cool rate expectations last week — warning that markets are “getting ahead of themselves” — only reinforces that risk.
The BoE’s dilemma is familiar. Bailey will remember the 2022 episode, when inflation surged into double digits and credibility was tested. And while the UK economy has shown resilience, avoiding the deep recession the BoE once warned of, that doesn’t insulate it from another supply‑driven inflation shock.
Valuations add another headwind. Based on the BIS’s real effective exchange rate, GBP remains overvalued relative to 2020, weighing on export competitiveness. A renewed inflation spike would only worsen that misalignment. With real rates likely to turn sharply negative as energy prices surge, sterling’s carry appeal also diminishes.
For now, 1.32 is holding. But the balance of risks is shifting: policy hesitation, sticky inflation dynamics and stretched valuations leave GBP increasingly vulnerable if energy markets remain volatile.
The clearest upside risk to the bearish GBP narrative is a swift de‑escalation of the conflict and a reopening of the Strait, allowing oil and gas flows to normalise. That would unwind a large part of the supply‑driven inflation impulse currently building in the UK’s pipeline.
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Calendar: April 06-10
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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.
