Peace or Pause? FX Reprices the Risk Beneath

War in the Middle East drives volatility. Oil stays elevated as Middle East tensions simmer. Sterling holds steady while German data drags the euro down. Data now meets geopolitics at a fragile turning point. The dollar finds safety in energy independence as trade routes face new Iranian tolls.

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GBP: Sterling Shields as Middle East Fires Burn

GBPUSD 1.3395 | EURGBP 0.8707

The pound sterling is trading in a narrow corridor near 1.3400 against the dollar. Middle East war uncertainty keeps the pair in a tight grip. Israel’s continued strikes on Lebanon disrupt the ceasefire optimism that briefly lifted spirits.

Amid this backdrop, Iran’s Qalibaf sounds a sharp alarm. He claims the United States violated three clauses of the 10-point peace proposal. These geopolitical frictions anchor the pound. If the 1.3325 floor breaks, the technical bias may change. Structural risk is prominent in the sterling outlook. The currency maintains a modest bullish bias above its 20-day EMA at 1.3325, while domestic data disappoints.

Macroeconomic shifts take centre stage as the ceasefire wobbles. Recent data from the United Kingdom and the Euro Area disappoints. UK house prices contracted in March. This weakness contrasts with a US economy that stays robust despite global turmoil. Geopolitical instability usually triggers a flight to safety. The dollar wins that race almost every time.

These economic and geopolitical pressures spill over into global markets. The ongoing Middle East war has impacted everything. Oil prices sit 40% higher than their pre-conflict levels. This surge is expected to cause an inflationary spike. Hard data across the globe will soon reflect this reality. A vast gulf separates investor hope from cold reality. We must ask whether this is true peace or merely a pause in hostilities.

Turning to diplomatic efforts, Iranian ambassador Reza Amiri Moghadam confirmed, in a tweet on X during early European trading hours on Thursday, that a team is scheduled to visit Pakistan at night for the first round of talks on the 10-point plan with the United States (US). Moghadam added that Iran is sending delegates despite Israel violating the ceasefire terms by attacking Lebanon.

Uncertainty in the Strait of Hormuz affects global energy prices, which eventually filters into UK inflation data and clusters volatility around this uncertainty. This energy-driven inflation has historically shaped currency behaviour through its impact on rate expectations, and as a result, policy divergence grows between the Bank of England and its peers.

Key Technical levels for the GBP/USD pair: Resistance sits at 1.3450, 1.3520 and Support sits at 1.3325, 1.3250

Key Technical levels for the EUR/GBP pair: Resistance sits at 0.8750 and Support sits at 0.8650

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EUR: The German Engine Sputters in the Dark

EURUSD 1.1663

The euro soft-pedals near $1.1660 following dismal German data. Industrial production in Europe’s powerhouse dropped 0.3% in February, defying forecasts of a 0.9% increase and underscoring a worsening industrial slump. The currency pair retreated sharply from 1.1721 as the grim reality of Eurozone stagnation set in.

Energy costs cast a heavy shadow over markets. Tomorrow brings Germany’s CPI and HICP data for March, setting the stage for fresh insights. European bonds have recently surged ahead, while US Treasuries lag behind. Fed officials remain in no rush to lower rates, with some even hinting at the possibility of tightening further.

The divergence between the Federal Reserve (Fed) and the European Central Bank (ECB) grows sharper. Fed minutes suggest rates might stay higher for longer. Conversely, European markets now price in fewer rate cuts as growth stalls. German factory orders missed targets, and producer prices contracted. These lagging indicators suggest the Eurozone entered the recent conflict from a position of fundamental weakness.

The euro’s inability to hold above 1.1700 betrays investors’ lack of faith in a Eurozone rebound. Surging energy costs hammer the bloc harder than the US. Shifting rate expectations leave the currency pair on shaky ground. Weak industrial output, combined with rising energy inflation, poses a risk of stagflation for the ECB.

Key Technical levels for the EUR/USD pair: Resistance sits at 1.1720, 1.1800 and Support sits at 1.1600, 1.1550

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USD: The Dollar Dominates as the Petrodollar Transmutes

DXY 99.10

The dollar index (DXY) holds firm at 99.10 as traders weigh a fragile US-Iran truce. Initial claims and GDP data today provide the next catalyst. Market consensus anticipates a 0.4% rise in core prices. Crude futures jumped over 3% to $97.33 as the Strait of Hormuz faces de facto closure. Iran’s demand for "tolls" in yuan or crypto sends ripples through the global financial order. Against this backdrop, the broader implications for dollar dominance grow more pronounced.

The US functions as a net energy exporter, shielding the dollar from oil price spikes that cripple Japan and Europe. Meanwhile, Iran's Revolutionary Guards now test their power over a waterway that handles a fifth of the world's oil. By forcing payments in non-dollar assets, they challenge the petrodollar system, where major oil transactions are conducted in US dollars. This friction, in turn, keeps the dollar supported as a hedge against systemic transition and energy inflation.

With these pressures in play, the dollar continues to act as the primary beneficiary of the current conflict. With the Fed sounding no retreat on inflation, the greenback serves as both a safe haven and a high-yield play. Geopolitical leverage over shipping lanes adds a layer of complexity to global supply chains.

The dollar thrives on its status as an energy-independent haven. Fed hawkishness provides a second pillar of support, reinforcing its current position even amid shifting global dynamics.

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Commodities and Rest of FX: Pressure Builds at the Edges

AUDUSD 0.7039 | NZDUSD 0.5832 | USDJPY 158.81 | GBPJPY 212.72

Risk-averse sentiment permeates the Asian session. As a result, the Australian dollar and New Zealand kiwi both weakened against the greenback. Meanwhile, Chinese blue chips fell 0.6%. Gold acts as the ultimate sanctuary amongst commodities, firming near $4,777. Simultaneously, in the crypto space, both Bitcoin and Ethereum declined as investors retreated from speculative assets toward the safety of the dollar.

Amid these market shifts, supply disruptions remain the RBNZ's and other central banks' core concern. Should the Middle East conflict persist, the supply-side shock to inflation will force banks to keep policy restrictive despite slowing growth. At the same time, the Bank of Japan maintains negative real rates, keeping the country's financial conditions accommodative, yet the dollar-yen pair eyes a rebound toward 159.00 on any strong US data.

Despite these ongoing challenges, global markets are behaving as if the region has normalised, yet the underlying data suggests otherwise. Fragile truces and shipping bottlenecks provide a backdrop of persistent volatility.

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Current Rate Table:

(as at the time of writing)

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Market Lookahead

Thu, 9 April

• US Q4 GDP (third estimate)
• US Initial Jobless Claims + 4-week average
• US Core CPI & PCE (Feb)

Fri, 10 April

• US CPI
• Germany CPI & HICP (March)

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