US: Dollar back on the offensive as oil rises
Global markets are back on the defensive after Iran formally rejected the US‑backed 15‑point peace proposal and instead laid out its own conditions for ending the conflict. The shift has quickly unwound the sharp revival in risk sentiment seen earlier this week, when hopes of a diplomatic breakthrough briefly compressed the geopolitical risk premium embedded in energy markets.
That earlier optimism had been powerful. Brent’s retreat from $119 to near $96 per barrel helped ease immediate inflation concerns, reducing pressure on global central banks and triggering a broad rally across bonds, equities and precious metals. The US dollar also came under selling pressure as markets tentatively priced a softer geopolitical backdrop. But the move was always fragile — and the latest developments have confirmed as much.
Tehran’s response was unequivocal. State‑linked media reported that Iran will end the conflict strictly on its own terms, demanding:
- a full halt to attacks and assassinations
- guarantees the war will not restart
- compensation for damages
- an end to fighting across all regional fronts
- and recognition of its control over the Strait of Hormuz
The last point is the most economically consequential. While the US and Israel hold military leverage, Iran has demonstrated it holds the economic choke point. With the Strait still effectively shut, fuel rationing has already begun in parts of Asia, and the longer the disruption persists, the greater the drag on global growth and inflation.
Markets reacted swiftly. The dollar, Treasury yields and oil prices all pushed higher, while the S&P 500 slipped to session lows following reports of another strike on Iran’s Bushehr nuclear facility. There’s also been a report of a Turkish oil tanker hit by drones in the Black Sea. The sense of geopolitical whiplash is intensifying, and with no credible path to de‑escalation, the likelihood of a sustained easing in energy prices — or a durable USD sell‑off — remains slim.
In short, the conflict remains the dominant macro driver. Until there is clarity on the Strait of Hormuz and a genuine diplomatic framework, markets will continue to trade in short, sentiment‑driven bursts rather than durable trends.
EUR: Energy shock bites as Germany’s rebound falters
The euro is trading with a heavier tone as the Middle East conflict feeds directly into Europe’s macro outlook. EUR/USD has repeatedly failed at its 21‑day moving average, which continues to roll over, signalling that rallies are still being sold rather than built upon.
The broader backdrop is turning more challenging. The latest Ifo survey underscored how quickly sentiment has deteriorated: the headline index fell to 86.4 from 88.4, with expectations suffering their sharpest drop since Russia’s invasion of Ukraine (90.2 → 86.0). Germany’s long‑awaited cyclical upswing hasn’t been derailed, but it has clearly been delayed. Soaring energy prices and renewed uncertainty have punched a hole in business confidence just as momentum was beginning to build.
Energy security is now the dominant theme. European gas storage is unusually depleted for March — Dutch facilities are only 6% full, Germany sits near 22%, and the closure of the Strait of Hormuz for more than three weeks has kept large volumes of gas off the global market. Italy and Spain are already scrambling to secure additional North African supply, while Brussels has urged member states to begin refilling storage early to avoid a summer price spike.
Against this backdrop, President Lagarde stressed that the ECB will act “decisively and swiftly” if the energy shock risks a broader inflation overshoot. Markets continue to price a meaningful chance of an April hike and almost three hikes in total by year-end. But the policy signal is being overshadowed by a deteriorating growth environment.
For EUR/USD, this leaves the currency trapped between a more vigilant ECB and a worsening terms‑of‑trade shock. Until there is clarity on Hormuz and a stabilisation in energy markets, the euro’s upside remains limited around the $.16 mark and the balance of risks still tilts to the downside.
GBP: Hawk talk, dovish market
We heard from BoE rate‑setter Megan Greene yesterday, who spoke at a panel event in London. She struck firmly hawkish remarks as she pointed to the conflict’s lasting effects on UK inflation, even in a “best case” scenario where tensions in the Middle East de‑escalate swiftly. As a proud hawk, she stressed that her inflation concerns outweigh those on growth, while also acknowledging that there is now more slack in the economy and therefore “greater downside risk to demand” compared with 2022.
As widely expected given her well‑known hawkish bias, her comments did little to halt the market’s unwinding of tightening expectations on renewed hopes of de‑escalation. In fact, her emphasis on growth risks may have resonated more with markets, and the move lower across the yield curve likely reflected a shift in the market’s fear barometer toward growth rather than inflation. Ultimately, the UK macro backdrop remains stagnant, with a softening labour market feeding a sharper hawkish unwind whenever a de‑escalation window opens.
GBP/USD moved lower yesterday, while stocks rebounded and oil pared some gains. We read sterling’s move lower against the dollar therefore as symptom of that unwind. Markets now price just above two quarter‑point rate hikes by the BoE for this year, compared with four on Monday. GBP/USD price action has been capped firmly by the 200‑day moving average at 1.3434 since the start of the conflict. A swift de‑escalation may lift the pair above that level as the USD loses its mechanical support from higher energy prices. That said, we do not see room for meaningful upside above‑1.35 from here.
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Calendar: March 23-27
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.
