Twelve Days of War. Every Rate Path Shifted.

The pound holds its ground against a surging dollar as geopolitical tensions shift the BoE’s timeline, while the euro faces liquidity strains and energy-driven uncertainty with dollar demand spiking at the margin. US CPI prints today.

---

GBP: The British Pound, Political Rot and Rate Shifts

Sterling firmed against the dollar to trade near $1.3448, currency posted a 0.3% monthly loss. British government bonds clawed back territory following Monday's sharp sell-off, showing a market eager to find a floor. EUR/GBP sits at 0.8650 after a firm run higher.

Poor UK fundamentals usually trigger a shakeout followed by a rebalancing recovery. Investors now expect the Bank of England (BoE) to delay interest rate cuts until the second quarter. That shift triggered short-covering from speculators who held short sterling positions for some time. This short-covering is a technical unwind, prompted by changing positioning rather than improving fundamentals or real optimism about the pound’s outlook. Some observers may mistake this mechanical market adjustment for an actual turning point, but the pound’s underlying story stays unchanged.

While Middle Eastern tensions dominate the headlines, the local political calendar looms. Markets currently underprice the potential for volatility surrounding the May local elections.

UK fundamentals provide little comfort. Growth data disappointed last year, Public debt sits elevated, and a current account deficit persists. Sticky inflation significantly narrows the BoE's room for manoeuvre. With the May local elections less than two months away, a potential leadership challenge to Prime Minister Starmer sits as an unpriced tail risk in the background, which may be quiet for now, but not gone. Domestic uncertainty could return to the forefront.

Key levels in focus for GBP/USD: 1.3500 caps topside, 1.3300 key support

Key levels in focus for EUR/GBP: 0.8700 near-term pivot, 0.8900 medium-term target risk, support 0.8550

The recent climb in the EUR/GBP pair stems from faded hopes of a March rate cut. Positioning dictates how uncertainty affects various currencies. Risk points to a gradual rise in EUR/GBP over the coming months. EUR/GBP analysis points to long EUR positions built through spring 2025 on Eurozone optimism, following Germany's debt brake reform being trimmed in recent weeks amid energy cost concerns. That unwind gave sterling incidental support. The broad view is EUR/GBP resuming its slow grind higher toward 0.89 by year-end.

The divergence between sticky inflation and a precarious fiscal buffer suggests the recent pound recovery lacks a long-term anchor. Volatility reflects structural fragility, not noise. The pound trades on positioning as much as fundamentals. When flows shift, price moves can accelerate.

---

EUR: The Euro, Energy Shocks and ECB Hesitation

EUR/USD trades at 1.1632, steady but off recent highs. The euro has lost roughly 1.5% against the dollar since late February as the Middle East conflict escalated.

A fortnight ago, the European Central Bank (ECB) was priced flat all year with whispers of a slim chance of a rate cut. The ECB has held rates unchanged since June 2025, but one week of war-driven energy shock has shifted that pricing sharply. Rate futures now price the ECB to hike rates.

ECB policymakers like François Villeroy de Galhau now preach patience. He expects the Iran conflict to lead to more inflation and slower growth, but sees France's growth trajectory holding on course. He flagged no stagflation and a hike unlikely at next week's meeting. He views energy prices as a small part of consumption. His peers might disagree. The ECB moves when the data compels it.

The cross-currency basis swap tells a more urgent story. Three-month EUR/USD basis swaps hit their lowest level since Liberation Day last April, falling to 0.625% from around 6.4% late Monday. The lower the reading, the stronger the pull toward the dollar over the euro. On 7 April last year, this rate hit a low of 6.625%. The direction is clear: dollar funding demand is building at the margin. While Wednesday's move is not at that level. The direction, however, is noteworthy.

Currency volatility stayed contained relative to the spike in oil and gas prices. That gap between commodity volatility and currency containment is a divergence worth watching.

The policy gap between rhetoric and pricing creates tension. If oil stabilises, rate hike expectations could unwind. If energy climbs, inflation risk may force a sharper debate in Frankfurt.

Key levels in focus for EUR/USD: 1.1700 resistance, 1.1500 structural floor

The euro trades at the intersection of energy exposure and policy patience. Positioning has lightened but not reset. Cross-currency funding stress shows dollar demand still dominates.

---

USD: The Dollar, The Last Safe Haven Standing

The Dollar Index (DXY) eased near 98.75 on Wednesday but held close to Monday's three-month high. Safe-haven demand continued to channel into the dollar as the US-Israeli conflict stretched into its twelfth day.

In this conflict, the dollar stands alone. Neither gold nor Treasuries have served as traditional havens this time; inflation fears have fogged the bond market, while equity losses are forcing investors to liquidate gold gains. The dollar absorbed the flows that both would traditionally hold.

February US CPI prints today. Consensus expects core inflation at 0.2% month on month and headline inflation at 0.3%. If US CPI data today exceeds the expected 0.3% headline jump, the dollar’s dominance will only sharpen.

Fed funds futures now price 39.7 basis points of cuts by year-end, just short of one full 25 bps cut, with real uncertainty over whether a second follows. A sign that the "higher for longer" narrative is back.

The International Energy Agency IEA proposed the largest release of oil reserves in its history to stabilise crude prices. Brent Crude swung between gains and losses before settling 0.2% higher at $87.89 a barrel. WTI held near $83.47 after an initial dip on the news. Equities drew brief relief from the announcement. Bonds and currencies were little changed in response. The Strait of Hormuz is the chokepoint the oil market is watching most closely. The prospect of low-level Iranian drone attacks on energy infrastructure beyond any formal ceasefire could extend instability well into next year. Central banks across the globe are expected to maintain their cautious tone for as long as the conflict's inflationary implications continue to feed through the data.

The dollar sits at the centre of global risk transmission. US CPI figures releasing today will test whether the current bid is driven solely by fear or by fresh inflation data.

Other Pairs, Where Divergence Sharpens

USD/JPY trades at 158.15. The yen weakened past 158 as oil risk weighed on Japan’s import bill. Producer prices rose 2% in February, the softest pace in nearly two years. The government confirmed it stands ready to release emergency reserves to offset supply risks. The Bank of Japan holds its cautious stance. The yen finds little anchor when domestic price pressure eases and external pressure rises. GBP/JPY trades at 212.70, reflecting both yen softness and sterling’s relative resilience. A shift in either policy trajectory could sharply reprice this pair.

AUD/USD hit 0.7182, its highest level since mid-2022. RBA Deputy Governor Andrew Hauser warned that elevated oil prices would push Australian inflation higher and add pressure for a rate rise at next week's policy meeting. The Aussie was the sharpest mover in the G10 space across the past two sessions. A commodity-linked currency backed by a newly hawkish central bank carries a distinct tailwind in this environment.

Central banks across the globe are expected to hold their cautious tone for as long as inflationary pressures from the conflict persist.

The conflict between the United States, Israel and Iran entered its twelfth day. Air strikes intensified. Iran warned of its readiness to respond. Attention centres on the Strait of Hormuz, a critical artery for global oil flows.

If safe passage falters, supply risk escalates. Even if major hostilities ease, sporadic attacks could extend instability into next year.

Central banks will closely track this corridor. If oil sustains current levels, inflation prints will likely reflect that pressure through the summer.

---

Current Rate Table

(rates as at the time of writing)

---

Market Look ahead

Wed, 11 Mar

US CPI (Feb)

Thu, 12 Mar

BoE Governor Bailey speech

Fri, 13 Mar

UK January GDP & Manufacturing Production

US Core PCE & Preliminary Q4 GDP

---

Stay Ahead in the Currency Game

Whether you're a daily FX trader or handle international transactions regularly, our 'Currency Pulse' newsletter delivers the news you need to make more informed decisions. Receive concise updates and in-depth insights directly in your LinkedIn feed.

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

---

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.

---