USD: Oil big swings on headline shifts
The US dollar and broader financial markets currently sit in a state of high-tension anticipation as investors parse conflicting signals from the Trump administration regarding the Middle East. While the S&P 500 rebounded from Monday lows and the greenback retreated on hopes of de-escalation, this optimism remains fragile because volatility is deeply embedded in the fluctuating headlines. For instance, Defense Secretary Hegseth asserts that the United States will not cease operations until the enemy is defeated, yet President Trump suggests a swift conclusion is near. This dissonance is further complicated by special envoy Steve Witkoff, who notes that while the President remains open to dialogue, current evidence, pinpointed by Witkoff, suggests Iran lacks a genuine interest in a diplomatic solution.
Beyond the political rhetoric, the physical security of global energy infrastructure continues to dictate the rhythm of market fluctuations. Recent reports indicate that the UAE’s Ruwais refinery has stopped operations as a precaution following drone activity, while Qatar warns that restoring production to pre-conflict levels could take months. The Strait of Hormuz remains the ultimate flashpoint, especially with intelligence suggesting the potential mining of shipping lanes and the subsequent need for US military escorts for oil tankers. Consequently, oil prices continue to dance to the beat of these volatile updates, leaving traders to weigh the risk of a prolonged infrastructure disruption against the hope of de-escalation. Given the uncertainty, investors in the oil market are currently paying record premiums for oil call options over put options, pointing that the risk remains skewed toward higher prices despite the temporary calming of spreads. WTI at $100 feels both worlds away and a single headline away.
Looking ahead, even if the administration succeeds in decimating the regime’s immediate capabilities, the persistent presence of the IRGC raises serious questions about the long-term viability of a US exit. If production effectively takes months to be restored, and the conflict premium persists in Oil prices beyond March, the focus will shift squarely to central bank forward guidance, with the Federal Reserve stepping into the spotlight next week. Some argue that unlike the 2022 crisis, this situation could act primarily as a negative demand shock by undermining global consumer confidence through higher uncertainty and spending squeeze as consumers pay more at the pump. In regions where sentiment was already precarious, if the protracted scenario materializes, the path for central banks will be difficult to anticipate as they navigate a tricky landscape where business and consumer confidence is shaken while inflation bites once again.
EUR: De-escalation is best for euro
Reassurance from global leaders about prompt intervention to curb rising oil prices helped restore a cautious sense of optimism in markets yesterday. That pulled the commodity lower and allowed stocks and bonds to stage a fragile rebound, while the US dollar pared recent gains. The underlying backdrop, however, remains tense: the Pentagon reported that the US and Israel carried out the most intense day of attacks yet on Iran yesterday and signalled they are prepared to continue until the Islamic Republic is subdued. This contrast highlights how short‑lived any verbal patch – or even a policy fix such as a coordinated G7 release of oil reserves – may prove for a more durable recovery in the euro. A swift de‑escalation of the conflict is needed to lift the common currency, which has been consolidating around the 1.16 handle and has so far resisted breaking below that level since hostilities began. That posture remains highly fragile, however.
Some form of near‑term de‑escalation would represent the best‑case scenario for the euro: it would preserve an economic outlook that has not been revised materially lower and, therefore, allow for a cleaner pass‑through from what we would still expect to be a more hawkish‑leaning ECB. Under this scenario, while the Governing Council would be unlikely to actively entertain the prospect of a rate hike, it is justifiable for it to strike a less‑neutral, more cautious tone today than it would have in a no‑conflict environment.
Given the complacent tone in markets, we continue to see buying interest forming around the 1.16 mark if tested this week, effectively capping further meaningful losses in EUR/USD. The downside scenario hinges largely on any shift in the US administration’s tone regarding the durability of the conflict, ahead of next week’s ECB meeting, which may help anchor the pair’s price action further.
GBP: Next test sits near $1.35
UK gilts have swung violently over the past 48 hours, with both the short and long end outperforming peers after Trump hinted the Iran conflict may be nearing an end. The UK had carried one of the largest geopolitical‑inflation premia in G10 rates, and once energy prices retreated, that premium unwound quickly, whilst sterling has strengthened against most majors bar the Antipodeans.
Two‑year gilt yields surged as much as 25bps on Monday as markets briefly priced in around 18bps of BoE tightening for 2026 — a remarkable shift given that, before the conflict escalated, money markets were fully pricing two quarter‑point cuts this year. This sensitivity reflects the UK’s still‑elevated inflation backdrop: headline is 3%, services remain sticky, and the Bank has been reluctant to accelerate easing despite its dovish tilt in February. That arguably makes the UK curve more exposed to energy‑driven inflation scares.
But the UK’s terms‑of‑trade hit from higher energy prices is arguably not as severe as Europe’s, thus markets possibly over‑priced the inflation risk. Hence, when crude and gas prices tumbled on Tuesday, the front end retreated as traders leaned back toward a BoE cut rather than the hike priced only a day earlier. The long end followed, helped by a compression in the fiscal‑risk premium that had widened during the initial shock.
in FX, the pound has joined the broader rebound against the US dollar, carving out a clear technical base after repeatedly failing to close below $1.3356 despite last week’s slide to $1.3253. That resilience suggests sellers have struggled to extend the downside even amid the fog of war. With the immediate dollar squeeze easing, attention now shifts to the next resistance level near the 21‑day moving average around $1.35. Still, the dollar’s reversal remains tightly bound to energy markets: oil needs to start flowing again for this move to extend. What matters most is a reopening of the Strait of Hormuz and a restart of Middle Eastern production — without credible headlines pointing to a ceasefire or de‑escalation, the greenback is unlikely to surrender the gains accumulated over the past two weeks.
Against the euro, sterling has outperformed. The hawkish repricing in BoE expectations has been far more pronounced than the ECB’s, reinforcing GBP/EUR strength alongside the positioning dynamics we highlighted yesterday. That swing has left GBP/EUR better anchored than might be expected in a geopolitical shock of this magnitude.
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Calendar: March 09-13
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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.
