Sterling Stands Tall as Oil Wars Reshuffle the Global Deck

Oil tops $90 after Iran strikes tankers in the Strait of Hormuz. Rate cut bets collapse across the board amid inflation fears. The dollar steadies after US CPI and the sterling finds a temporary foothold; while the euro and the yen struggle to breathe under the pressure of $100-a-barrel oil.

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GBP: Sterling Grips the Reins

GBPUSD 1.3375 | EURGBP 0.8628

The pound held its ground this morning, refusing to buckle even as geopolitical tremors shook the broader market. While investors everywhere are frantically recalculating the cost of a prolonged Gulf conflict, sterling found support in a simple, brutal reality: inflation is back on the menu. With oil prices flirting with the $100 mark after three vessels faced projectile attacks on Wednesday, the "lower for longer" bank interest rate narrative has evaporated.

Britain’s economic calendar looks light today, but the silence is deceptive. Oxford Economics warns that a two-month closure of the Strait of Hormuz could drive UK inflation up by 0.4%. UK’s Finance Minister Rachel Reeves has already signalled that the government won't rush to shield households from soaring energy costs.

OBR's David Miles sets the upper bound higher: consumer prices could finish the year 1% above current projections if energy costs sustain at these levels. This leaves the Bank of England (BoE) with little choice but to keep rates restrictive. While the Eurozone faces a sharper hit to growth from energy dependency, the UK’s stubborn price pressures make the pound a more attractive hold for those betting on delayed rate cuts.

BoE Governor Andrew Bailey addresses the public later today. His words will either soothe the sterling or could send it into a spin. Tomorrow brings the UK's January GDP figures, forecasted to rise 0.2%, up from the previous 0.1%. Positive growth in a high-inflation environment could force the central bank to keep rates higher for longer.

Energy shocks often ripple through inflation expectations. Central banks then face a difficult choice to either support growth or tackle price pressures. For the BoE, that dilemma grows sharper if oil keeps climbing.

Rate-cut expectations have cooled as energy risks return to the inflation outlook. The pound therefore, finds support while global volatility builds.

Key technical levels for GBP/USD: Resistance 1.3420, 1.3500 and Support 1.3300, 1.3240.

The euro has declined against the pound for five consecutive days. While some still price a 60-70% chance of an ECB rate hike by June, the growth risks feel more immediate. Fading bets on a BoE rate cut provide a floor for the pound that the euro simply lacks.

Key technical levels for EUR/GBP: Resistance 0.8700, 8760 and Support 0.8600, 0.8540.

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EUR: The Euro’s Energy Trap

EURUSD 1.1541

The euro slipped below the 1.1550 level against the dollar and hit a fresh low against the pound, marking its fifth consecutive day of decline. Europe is a massive net importer of energy, and the threat of $200 oil, as teased by Iran’s military command, is a direct hit to the continent’s industrial heart.

European Central Bank (ECB) President Christine Lagarde insists the bank will prevent a repeat of the 2022 energy shock, but the market smells stagflation. ECB policymaker Joachim Nagel warns that the central bank must act decisively if energy spikes feed into durable inflation. However, the market is sceptical. Investors are weighing a potential ECB hike against the very real risk that high energy costs will choke off European growth entirely. Several ECB officials prefer a "wait-and-see" approach. This hesitation hurts the euro. This fear of "growth-less" inflation keeps the euro on the back foot compared to the more insulated US economy.

The prospect of rate hikes alongside deteriorating growth puts the bloc in stagflation territory. Falling energy prices could erase expectations of an ECB rate hike and compress two-year yields. Sustained high energy costs could initially steepen the euro swap curve before weighing on longer-dated rates. Participants with euro exposure are navigating conditions where neither scenario offers a straightforward path higher for the single currency.

Key technical levels for EUR/USD: Resistance 1.1600, 1.1670. Support 1.1480, 1.1400.

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USD: Dollar Holds as US CPI Lands on Target

DXY 99.45

The dollar stands as the ultimate victor in this climate of fear. Wall Street shares may be stuttering, but the greenback is firm. US inflation data for February landed exactly as expected, 0.3% MoM and 2.4% YoY.

These figures don't even capture the gasoline spike from the last twelve days of war. The market knows what is coming. Higher energy costs lead to higher interest rates. The Federal Reserve (Fed) now has every reason to keep the squeeze on. Core inflation, excluding food and energy, sits at 2.5%. This matches forecasts but offers no relief.

The dollar is flexing its muscle with US President Trump's move to invoke the Defence Production Act to restart offshore drilling in California, indicating that the US intends to use its energy independence as a geopolitical shield.

The International Energy Agency (IEA) is releasing 400 million barrels of oil from strategic reserves in a desperate move to cap prices; the 172 million barrels come from the US alone. While Japan and the rest of the IEA release millions of barrels from strategic reserves to cool the jets, the dollar benefits from its status as both a safe haven and a high-yield play. Elevated oil prices weigh on Europe and Asia far more than on the energy-independent US. This creates a stagflation trap for the rest of the world.

The dollar benefits when global uncertainty rises. Oil shocks amplify inflation risk while pushing investors toward safety.

That combination supports the greenback across major pairs.

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Resource Rallies and the Yen’s Descent

USDJPY 159.05 | GBPJPY 212.70 | AUDUSD 0.7125 | NZDUSD 0.5896

The Aussie dollar sits at US$0.7125, fighting a two-front war. Global risk aversion usually hurts the Aussie, but the scent of higher interest rates provides a shield. Three major Australian banks now predict a rate hike to 4.10% next week, with a further move to 4.35% in May. Australia faces a direct inflationary hit from the Middle East conflict, creating urgency for the Reserve Bank of Australia (RBA) to move quickly to contain expectations.

Australia is more resilient than its neighbour. The kiwi dollar is lagging significantly, hit by heavy selling against the Aussie, which recently touched a 13-year high against the NZD.

Meanwhile, the Japanese yen is in a freefall toward 159 per dollar. Japan, being a massive oil importer, is a direct hit to its trade balance due to the rising crude prices. Tokyo is watching for the data ahead. Japan agreed to release 80 million barrels from its reserves, but the yen still slid to its weakest level in 18 months. Intervention is the only word on anyone's lips.

Oil has seemingly become the master of all pairs right now. WTI is back above $90 and eyeing $100. If the Strait of Hormuz stays blocked, the supply disruption will have a permanent impact, with ripples into inflation, growth, and, by extension, currencies. 20% of global fuel passes through that needle's eye, and Iran’s recent threats to tankers have only managed to scare off traffic.

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Current Rate Table

(rates as at the time of writing)

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Market Look ahead

Thu, 12 Mar (Today)

• UK – Speech by BoE’s Andrew Bailey
• US – Initial Jobless Claims
• US – Trade Balance (Jan)

Fri, 13 Mar

• UK – GDP (Jan)
• UK – Industrial Production
• UK – Trade Balance
• France – CPI (Feb)
• US – GDP (Q4)
• US – JOLTS Job Openings

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