FX Market Update: USD Strengthens as Oil Prices Surge, GBP Outperforms and EUR Weakens

Key Highlight

• The US dollar strengthened sharply as geopolitical tensions and rising oil prices boosted demand for safe-haven assets.
• Sterling has outperformed, supported by markets reassessing how much the Bank of England can cut rates amid rising energy-driven inflation risks.
• The euro remains under pressure, with Europe’s reliance on imported energy amplifying the economic impact of higher oil and gas prices.

Market Recap

The US dollar recorded its strongest weekly performance in over a year, climbing around 1.4% as investors moved into safer assets following escalating tensions in the Middle East. A surge in energy prices, with Brent crude rising roughly 25% since the US and Israel struck Iran, has intensified inflation concerns and prompted markets to scale back expectations for Federal Reserve rate cuts.

While recent US economic data was mixed, including a 92,000 decline in nonfarm payrolls, the market reaction was limited. Investors remain more focused on geopolitical developments, oil prices, and global demand for dollar liquidity.

Sterling has been one of the best-performing major currencies. UK rate expectations have shifted in a more hawkish direction as higher energy prices raise doubts about how aggressively the Bank of England can ease policy this year. UK two-year gilt yields jumped by as much as 21 basis points, with traders largely removing expectations for further BOE rate cuts in 2026. This repricing has provided particular support for GBP against the euro.

Meanwhile, the euro has been the weakest of the major currencies, falling around 2% during the week. Rising energy costs are simultaneously weighing on growth prospects while sustaining inflation pressures across the eurozone, creating uncertainty around the European Central Bank’s ability to tighten policy further. As a result, the currency has struggled against both the stronger USD and the increasingly rate-supported GBP.

Market Update

Energy markets remain at the centre of global sentiment. Oil prices briefly approached $120 per barrel before easing after reports that G7 officials may consider releasing emergency reserves in coordination with the International Energy Agency to help stabilise supply. However, the situation remains fragile, with the Strait of Hormuz still disrupted and production cuts across parts of the Middle East continuing to threaten supply.

Natural gas prices have also climbed sharply, prompting markets to reassess interest rate paths. Current pricing now suggests the possibility of a Bank of England rate hike by year-end and roughly 50 basis points of tightening from the European Central Bank over the same period. Despite this shift, the euro remains under pressure while the dollar continues to benefit from safe-haven demand.

Looking ahead, geopolitical developments are likely to dominate market direction. The shutdown of Qatar’s LNG exports and ongoing shipping disruptions in the Gulf region are keeping energy markets volatile, meaning economic releases — including US CPI and PCE inflation, eurozone inflation data, UK industrial output, and Japanese GDP revisions — may have a more limited impact on currency movements than usual.

For sterling, stronger yields and hawkish policy expectations have provided support, though the outlook remains balanced. Persistently high borrowing costs and gilt market volatility could eventually weigh on growth, particularly if the labour market weakens while inflation remains elevated.

Overall, the US dollar is expected to remain well supported as long as geopolitical tensions and energy prices stay elevated. The euro continues to face structural pressure due to Europe’s dependence on imported energy, while sterling’s performance will largely hinge on how UK inflation and interest rate expectations evolve.

09th March 2026

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