USD Strengthens Amid Geopolitical Tensions and Oil Price Spike

US Dollar (USD)

Overview:

The USD has strengthened significantly, supported by escalating Middle East tensions and associated risk aversion. The US Dollar Index has climbed toward multi‑month highs (~99.5+), as investors seek defensive assets amid rising volatility.

Drivers:

• Safe haven demand on widening conflict between the US, Israel and Iran.
• Oil surges above $100/bbl on supply disruption fears, driving inflation expectations and risk avoidance.
• Equity weakness reinforcing flight to quality.

Monetary Policy Context:

• The Federal Reserve has paused rate cuts after trimming policy late last year, highlighting persistent inflation pressures. Markets now see a ~99% probability that rates remain at 3.50–3.75% at the March FOMC.
• Futures markets have pulled back expectations of imminent cuts as geopolitical, and commodity driven inflation risks linger.

This Week’s Data Focus (USD):

• CPI MoM – Expected +0.1% (Wed, 11 Mar)
• Core PCE Price Index – Forecast unchanged (Fri, 13 Mar)
• GDP Annualized – Forecast unchanged (Fri, 13 Mar)
• Michigan Consumer Sentiment – (Fri, 13 Mar)

These prints could influence interest rate expectations and short term volatility.

Euro (EUR)

Overview:
The Euro remains under pressure as energy costs rise and growth prospects dim. The broad USD advance and lack of supportive data from the Eurozone have kept EUR weak.

Monetary Policy Context:

• The European Central Bank is signalling an extended policy hold, even as inflation pressures emerge via commodities.
• Markets anticipate that elevated energy costs and inflation risks could force the ECB to remain cautious on cuts, limiting EUR downside, but broad risk off flows and USD dominance remain headwinds.

Data:

• Quiet Eurozone macro calendar this week leaves markets focused on dollar drivers and geopolitical headlines.

British Pound (GBP)

Overview:
Sterling has weakened against the USD on increased risk aversion and oil related inflation concerns, trading nearer the lower end of recent ranges.

Monetary Policy Context:

• The Bank of England holds rates at ~3.75%. Markets are debating timing of future cuts, with some forecasts pointing to cuts later in 2026, though the Middle East energy shock could delay easing if inflation remains elevated.

This Week’s Focus:

• BoE Governor Andrew Bailey speech – Thu, 12 Mar — key for forward guidance on inflation and rate outlook.

Commodities Snapshot

Oil:

• Brent and WTI prices have surged sharply, with Brent breaching ~$110–$119/bbl on heightened conflict and supply disruption concerns. This spike has triggered risk off sentiment across markets and reinforced inflationary pressure.

Gold:

• Despite traditional safe haven appeal, gold prices have softened, pressured by a stronger USD and rising real yields.
• Technical and sentiment indicators point to bearish near term trends, though longer term inflation and geopolitical uncertainties could underpin support.

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