USD: Trump’s tough talk dents peace hopes
Market optimism around a potential off‑ramp in the Middle East proved short‑lived. Hopes for rapid de‑escalation faded after President Trump’s overnight remarks, in which he reiterated the 2–3 week withdrawal timeframe but emphasised that key objectives remain unmet and revived threats against Iranian energy infrastructure. Iran, for its part, has maintained a more restrained posture, repeating that it will adhere to its preconditions for peace and is not yet engaged in active negotiations. Much hinges on what Tehran defines as “essential guarantees,” particularly if these mirror the conditions outlined in its earlier response to the US ceasefire proposal — a bar that may be difficult for Washington to meet.
This shifting policy tone has produced another bout of market whiplash. Equities and bonds continue to swing with oil prices, which have surged more than 7% so far today – with Brent back above $108 per barrel. Precious metals have reversed sharply, with gold and silver down almost 6% and 4% respectively, while cryptocurrencies have come under heavy pressure. The US dollar has retraced nearly all its weekly losses, bouncing off a key short-dated moving average, as investors rotate back into defensive positioning.
The dollar has been one of the clearest beneficiaries of the conflict, and will continue to remain firm in the short term. However, it is also vulnerable to a sharper unwind should ceasefire expectations build. Beyond the near‑term geopolitical impulse, the broader outlook for the buck remains challenging. The dollar’s weak start to the year — including a four‑year low in January — reflected concerns around US policy unpredictability, and those dynamics have not disappeared.
Options markets reinforce this divide. Traders have been aggressively buying short‑dated USD calls as a tactical hedge, yet longer‑dated risk reversals show little evidence of structural demand. Historically, extreme quarter‑end skew in one‑week risk reversals (as we’ve witnessed) has often preceded meaningful dollar declines over the subsequent six months.
However, even with intermittent de‑escalation rhetoric, the unresolved status of the Strait of Hormuz remains the market’s central concern. Five weeks into the conflict, the strait remains effectively closed, constraining energy flows and driving a surge in oil prices. The resulting supply shock continues to raise the risk of a simultaneous inflation spike and growth slowdown — a combination that will keep volatility elevated across asset classes and potentially support the safe haven dollar.
Data steady, risks mount
On the economic front, the latest US data suggest the domestic backdrop was reasonably resilient heading into the Middle East conflict — an important counterweight to the surge in geopolitical risk premia. Retail sales delivered a marginal beat, with February’s gain offsetting a mixed set of January revisions. On balance, the data imply the consumer entered the period of rising energy prices from a position of relative strength, which may help cushion the impact of higher gasoline costs in the near term.
The ISM manufacturing print told a similar story: the headline index rose to 52.7, its strongest level since August 2022, reinforcing the recent rebound in industrial activity. But the underlying details were less encouraging. Prices paid jumped sharply to 78.3 — the highest since mid‑2022 — while employment and new orders softened. The mix points to ongoing output growth but also to renewed cost pressures that could complicate the inflation outlook if energy prices remain elevated.
Labour‑market dynamics will be the next major test. We expect a weaker labour market in 2026 than previously assumed due to the economic drag from the conflict, but March payrolls are unlikely to capture that shift. The survey period largely predates the escalation, meaning Friday’s report will mostly reflect pre‑war conditions. As such, the data may still show a labour market that is cooling only gradually, rather than one already absorbing the shock from higher oil and heightened uncertainty.
This matters for the USD because it sits at the intersection of geopolitics and macro fundamentals. Stronger‑than‑expected data would reinforce the dollar’s defensive bid and support the case for additional Fed tightening later this year. But any signs of labour‑market softening — even if unrelated to the conflict — risk amplifying concerns that the US economy is losing momentum just as global supply shocks intensify.
In short, the economic data offer a stabilising force, but not enough to offset the volatility generated by shifting geopolitical signals. The USD remains supported for now, yet increasingly sensitive to any cracks in the domestic macro story.
EUR: Recovery stalls yet again
The euro’s brief recovery proved fleeting. EUR/USD pushed above 1.16 earlier in the session, but Trump’s latest remarks quickly reversed the move, pulling the pair back toward the 1.15 handle. The 50‑week moving average — which we flagged yesterday as a key resistance level — held cleanly overnight, reinforcing the technical ceiling.
Rate differentials aren’t offering the euro much support either. It’s not that spreads have lost relevance, but their appeal diminishes when inflation becomes the dominant concern and erodes the real value of nominal yield advantages. Moreover, this is an environment where energy prices are dictating market psychology more than traditional carry dynamics.
Further to this point, German gas storage levels ended winter roughly 22% full — the lowest in seven years, according to Gas Infrastructure Europe. With the refilling season beginning on April 1, the European Commission has already urged member states to start replenishing inventories early to avoid competing for scarce supply later in the year. That structural vulnerability keeps Europe far more exposed to energy‑price volatility than the US, and by extension, keeps EUR/USD biased lower whenever geopolitical tensions flare.
In short, the euro’s bounce looked fragile alongside broader risk appetite. The combination of technical resistance, unfavourable real‑yield dynamics, and Europe’s acute energy dependence continues to cap upside, especially in a market still trading every twist in the Middle East narrative through crude and the USD.
GBP: UK supply chain strain
Sterling briefly pushed back above 1.33 against the US dollar yesterday, but much like the euro – those gains quickly faded. GBP/USD is once again flirting with the key 1.32 support level we’ve been flagging, and the price action suggests that threshold is doing a lot of heavy lifting.
If 1.32 gives way, the 100‑week moving average near 1.3110 looks like the next logical downside target. Beyond that, 1.30 emerges as the major psychological support zone, and a break below it would materially shift the medium‑term tone.
UK manufacturing data underscored mounting domestic pressures. S&P Global’s PMI showed the sharpest supply‑chain strain and fastest input‑cost inflation since late 2022, driven by shipping delays and material shortages. Output contracted for the first time in six months, and business confidence fell to a series low.
The UK’s structural rigidities — regulated utility prices and inflation‑linked public‑sector wages — are making price pressures far stickier than in peer economies. That stickiness has fed directly into higher gilt yields and a more cautious tone from the BoE. The pre‑war narrative of UK outperformance versus the euro area has reversed quickly, reflecting the economy’s limited flexibility.
The conflict is a clear setback for the BoE, which is now assessing whether additional tightening is needed to contain the renewed inflation impulse building through supply chains.
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