Stagflation Risks Rise as Energy Wars Redraw the FX Map

UK GDP flatlines in January. The euro tests 1.15. The dollar hits a November high as oil tops $100. Central banks meetings to take place next week. Energy shock and geopolitical dynamics reshape global currency sentiment.

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Sterling Stalls as Growth Vanishes and Inflation Looms

GBPUSD 1.3336 | EURGBP 0.8627

The UK economy did not grow in January. The flat reading falls short of the expected 0.2% expansion. Middle Eastern conflict and energy shocks have already set a tough tone for the year. High interest rates and trade tensions stalled growth. Now, surging oil and gas prices threaten to stop it entirely.

The Office for Budget Responsibility warns that inflation could hit 3% by year-end if energy costs persist. This reality forces a shift in the narrative. While some traders recently bet on imminent rate cuts, the Bank of England (BoE) now faces a "toxic mix" of stagnant growth and sticky prices. Next week, the Monetary Policy Committee is likely to hold rates at 3.75%, as the BoE has signalled caution about loosening policy amid persistent inflation. Industrial production slipped 0.2% in January, further proving that the British engine is currently idling. The lack of momentum suggests a difficult climb ahead for the pound.

This sets the stage for a deeper challenge: the structural mismatch between weakening growth and rising energy-driven inflation creates a "stagflation" trap. The BoE cannot easily cut rates to stimulate the economy without risking a secondary inflation spike.

Sterling now sits between two forces: weak domestic growth and the risk of energy-driven inflation. This tension tends to increase volatility in GBP crosses when global shocks hit.

Key technical levels for GBP/USD: Resistance 1.3400, 1.3475 and Support 1.3280, 1.3200.

Key technical levels for EUR/GBP: Resistance 0.8670, 8720 and Support 0.8580

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EUR: Euro Tests Lows as Energy Dependency Haunts the ECB

EURUSD 1.1505

The euro recently touched its weakest levels since November, testing the 1.1500 handle. Europe’s position as a massive net energy importer leaves it uniquely exposed to the current oil spike. While speculators once eyed a September pivot from the Fed, the European Central Bank (ECB) may have to strike a hawkish tone as early as June just to keep inflation expectations from drifting. Fragile growth across the Eurozone complicates the ECB’s mission. Policymakers must decide whether to fight the energy-induced price surge or protect a softening economy. This tension keeps the euro under pressure, especially as the "safe-haven" flow bypasses the continent in favour of the Atlantic.

Fiscal risk is intensifying. Higher energy costs act as a de facto tax on European consumers, dragging down real disposable income and making the euro less attractive relative to energy-exporting economies. Geopolitical tensions traditionally drive participants to adjust their risk management.

The euro's struggle to hold ground above 1.15 in the recent session reflects that structural tension. Activity in euro volatility products has picked up ahead of the ECB meeting. The policy divergence story between a patient Fed and a potentially more active ECB is starting to define short-term direction across euro crosses. Central bank messaging next week could shape the pair's near-term direction.

Key technical levels for EUR/USD: Resistance 1.1580, 1.1650. Support 1.1500, 1.1420.

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USD: The Dollar’s Reign, A Safe Haven Built on Crude

DXY 99.80

The US dollar hit its highest mark since November, bolstered by a rare dual status: it is the primary global safe-haven and the currency of a net energy exporter. While the rest of the world frets over $100 oil, the US economy finds a cushion in its own resources.

The labour market is not giving policymakers a reason to rush. Unadjusted initial jobless claims came in at 206,161, down 8,108 on the week. The four-week moving average stood at 212,000, down 4,000. A labour market that continues to hold steady gives the Fed room to stay patient.

Political noise adds a layer of intrigue. President Trump posted publicly this week, demanding the Federal Reserve cut rates "immediately, not at the next meeting." Calls from the White House for immediate rate cuts clash with the Fed's data-dependent mantra. Fed officials maintain that economic reality, not political pressure, dictates the dollar's near-term path. With the US Treasury issuing temporary licenses for certain energy products to stabilise global supply, the dollar serves as the undisputed anchor amid stormy seas.

Brent held at $100.30 a barrel. WTI sat at $95.37. The deeper concern - stagflation- did not dissolve with one licence.

Policy divergence is the core driver here. The US economy’s resilience allows the Fed to keep rates higher for longer than its G7 peers, widening the yield gap and drawing capital into the greenback.

The dollar's premium over traditional safe havens reflects a repricing of the trajectory of interest rates. Investors have been increasing exposure to dollar-denominated assets as the rate divergence between the Fed and other major central banks comes into focus.

The dollar tends to strengthen when global uncertainty rises. Energy dynamics and geopolitical developments now reinforce that pattern. As long as oil prices stay elevated and tensions persist, the dollar may retain its defensive appeal.

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Global: The Moving Goalposts

USDJPY 159.35 | GBPJPY 212.51 | AUDUSD 0.7066 | NZDUSD 0.5832

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Current Rate Table

(rates as at the time of writing)

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Market Look ahead

Fri, 14 Mar

• Eurozone – Industrial Production
• US – GDP (Q4 revision)
• US – JOLTS Job Openings

Tue, 17 Mar

• Australia – Reserve Bank of Australia Rate Decision

Wed, 18 Mar

• Eurozone – HICP Inflation
• US – Producer Price Index
• US – Federal Reserve Rate Decision

Thu, 19 Mar

• UK – Claimant Count Change
• UK – Unemployment Rate
• UK – Bank of England Rate Decision
• US – Jobless Claims
• Eurozone – ECB Deposit Facility Rate

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