One Closed Strait and Every Currency Holding Its Breath

Sterling defends 1.33. The euro slips as Lagarde signals a possible hike. The dollar absorbs every safe-haven flow going. Oil at $100 and a closed Strait of Hormuz are rewriting rate expectations in real time.

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GBP: Sterling Sticky With Inflation

GBPUSD: 1.3362 | EURGBP: 0.8655

The British pound clung to the $1.3300 level against the dollar, struggling to snap a two-day losing streak. Wednesday’s data revealed headline inflation at 3.0% in February. While this matches January's figure, it sits uncomfortably above the target. Core inflation climbed to 3.2%, signalling that underlying price pressures in the services sector refuse to fade.

These figures validate a cautious stance from the Bank of England (BoE). Rising energy prices, driven by instability in the Middle East, threaten to reignite inflationary fires just as policymakers hoped for a cooling period. Traders now price in a "higher for longer" narrative, as the central bank cannot afford to pivot while services inflation trends upward.

Iran's foreign minister confirmed on Wednesday that Tehran reviewed a US proposal but ruled out direct talks to end the Middle East conflict. Asian trading opened without direction as a result.

The question investors are sitting with: genuine de-escalation, or the opening move in a longer standoff? The closure of the Strait of Hormuz has driven energy prices to their highs. If a ceasefire or truce takes shape and oil sells off, the inflation premium priced into rates could unwind within 48 hours. Current rate pricing is drawing from the post-COVID playbook, when central banks missed the first wave of inflation as government spending surged.

UK retail sales data for February arrives tomorrow. Forecasted at -0.8% MoM (prior: +1.8%) and +2.1% YoY (prior: +4.5%). The reading tracks the volume of goods sold by British retailers to end consumers. A soft print could carry bearish implications for the sterling direction.

UK GfK consumer confidence for March will also be released tomorrow. A strong reading typically signals expansion, while a weak print signals contraction. Both data points close the week for sterling.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3420 and Support sits at 1.3300

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8700 and Support sits at 0.8600

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EUR: ECB Rate Hike in Play

EURUSD: 1.1565 (from 1.16)

The EUR/USD pair slid from 1.16 and now trades near 1.1565, extending a two-session loss. The trigger: Lagarde opened the door on Wednesday to a eurozone rate hike if the Middle East energy shock persists.

In a European Central Bank (ECB) Watchers Conference, Lagarde remarked that the relationship between energy shocks and inflation can be non-linear. She confirmed the current policy stance is broadly neutral and flagged that the pass-through from energy price shocks runs stronger when capacity utilisation is high and unemployment is low.

ECB Governing Council member Joachim Nagel added: The ECB will have sufficient data by April to decide whether to act or hold. He noted that every passing day raises inflationary risks and confirmed an April hike is an option, though not the only one.

German business sentiment soured, with the IFO Business Climate Index dropping to 86.4 in March from February’s 88.4. The steepest single-month fall this cycle. German business confidence is deteriorating at a pace.

European government bond yields fell in step. Italian BTPs led the move, reflecting Italy's high dependence on fossil fuel imports. The 10-year German Bund yield shed 5.1 basis points to 2.96%.

We are witnessing a standoff. Initially, the dollar surged on safe-haven flows, but Lagarde’s hawkish tilt creates a potential floor for the single currency. If the ECB pursues hikes while the Federal Reserve pauses, the euro could see a tactical bounce. However, the decline in German expectations to 86.0 suggests the eurozone’s "engine" is stuttering, complicating the ECB’s path.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1620 and Support sits at 1.1500

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USD: Safe Haven Demand Holds the Floor

DXY: 99.61 (Wednesday session low: 99.10)

The dollar index (DXY) continues to exert dominance, trading near 99.61 after a brief dip to 99.10. The greenback is on track for a 2% monthly gain, reinforcing its status as the world’s preferred refuge.

With inflation expectations rising and the Federal Reserve (Fed) expected to hold throughout the year, the dollar's strength has structural backing. CME FedWatch prices a 64.4% probability of a Fed hold at the December meeting, up from 60.2% the prior day.

Investors trimmed some bets on a Fed hike after Fed Governor Stephen Miran suggested looking beyond temporary oil shocks, but the dollar continues to act as the primary beneficiary of global instability.

Fed Governor Stephen Miran, who was appointed by President Donald Trump himself, said on Wednesday that central banks should look through the oil shock and argued the Fed's current settings are restraining economic activity. The comment drew attention but ran against the prevailing hold consensus.

Foreign investors have sold $50 billion in regional equities since the US and Israeli strikes on Iran began on 28 February. This massive exit by investors from regional stocks since late Feb has funnelled liquidity directly into the dollar, creating a structural bid that may be hard to displace. Tehran's retaliation and a new front in Lebanon have extended the risk-off tone across asset classes.

The Strait of Hormuz, which handles about one-fifth of global gas and crude supply, stays shut. Iran confirmed non-hostile vessels may cross if they coordinate with Iranian authorities, but the restriction is still in force.

US EIA data this week revealed crude inventories rose 6.9 million barrels, gasoline stocks fell 2.6 million, and distillates added 3.0 million barrels.

The dollar’s "smile" is in full effect; it gains on both US economic outperformance and global fear. With oil prices hovering above $100 per barrel and set for a 40% monthly jump, the dollar is acting as a natural hedge against rising global energy costs and the resulting inflationary pressure on other G10 economies.

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Other Pairs: Caught in the Dollar's Slipstream

AUDUSD: 0.6953 | NZDUSD: 0.5803 | USDJPY: 159.45 | GBPJPY: 213.03

The USD/JPY pair hovered at 159.45, tantalisingly close to the 160.00 level. Many see this as a "line in the sand" for Japanese authorities to intervene. Despite the yield on the two-year Japanese government bond hitting a thirty-year high, the yen stays under immense pressure. Meanwhile, the GBP/JPY pair maintained its footing above 213.00, eyeing monthly highs as the yen's weakness persists.

In the commodity space, both the Aussie (AUD/USD) and Kiwi (NZD/USD) traded flat to lower. The AUD/USD pair struggled below 0.7000, touching the mid-0.6900s as escalation risks drove investors toward the safety of the dollar.

In a notable alignment, the yen, gold, bitcoin and ethereum all fell in Thursday's session, and the dollar absorbed every safe-haven flow.

Energy disruption spread beyond oil. South Korea's President Lee Jae-myung called on the public to conserve electricity on Thursday. The Philippines suspended its wholesale electricity spot market across all three grids. The supply shock is not only contained in oil.

The effective closure of the Strait of Hormuz continues to cast a long shadow. While some countries are more exposed than others, the general flight from stocks and bonds into the dollar is still the dominant trend of the month.

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Current Rate Table:

(as at the time of writing)

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Market Lookahead

Thu, 26 Mar

• US Initial Jobless Claims (4-week avg)
• Federal Reserve member speeches
• Bank of England member speeches

Fri, 27 Mar

• UK GfK Consumer Confidence
• UK Retail Sales (Feb)

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