Energy shock lifts USD and leaves GBP exposed

Yesterday's currency recap

USD demand stayed firm throughout yesterday’s session after Donald Trump warned that Iran-related attacks may last weeks, lifting USD to its best performance since late January. The rally was not purely technical; it reflected a mix of geopolitical risk and energy-driven flows, with crude oil surging on conflict fears and adding to concerns about rising inflation and thus fading back rate cut expectations.

US ISM manufacturing surprised on the upside, particularly in prices paid, reinforcing doubts about near-term rate cuts. Markets reacted with EURUSD sliding to multi-week lows and GBPUSD bouncing off of the 18th of Jan low but remaining vulnerable, as investors weighed energy risk, inflation signals, and political uncertainty.

In the UK, BoE member Alan Taylor cautioned that monetary policy cannot fully offset supply-driven inflation and highlighted economic fragility, reinforcing the need to keep focus on bringing inflation back to the 2% target. The combination of sticky inflation and a fragile economy leans stagflationary, offering little support for GBP.

Today's GBP rates

Key data points

Today's speeches

• USD: Fed Williams, Kashkari
• EUR: ECB Lane and Sleijpen

What we think

USD demand remains firm this morning, with energy prices continuing to climb following Donald Trump's comments that he vowed to do “whatever it takes” as well as indicating his readiness to allow the conflict to go on for longer. Global government bonds have continued to sell of sending yields higher as markets show concerns over inflation. Markets now only see a 32% chance of a rate cut by the BoE this month and are now pricing in a small chance of a rate hike by the ECB by the end of the year.

RBA Governor Michelle Bullock spoke in the early hours signalling her concern over inflation conceding that every bank meeting is “live” in response to a question of whether the RBA was only considering changing rates on a quarterly basis.

Today brings Eurozone February CPI, with the market watching both headline (YoY 1.70%) and core inflation (YoY 2.20%) closely. Consensus expects little change from the prior month, though the 0.50% MoM headline gain signals a modest uptick versus January’s -0.60%.

We also have several central bank speakers. John Williams and Neel Kashkari speak this afternoon, while the ECB’s Philip Lane and Olaf Sleijpen are also on the wires, keeping rate expectations in play amid sticky inflation concerns. On the political side, Donald Trump meets Friedrich Merz, and later holds talks with Scott Bessent and Energy Secretary Chris Wright, adding potential geopolitical and energy-related headline risk. In the UK, Chancellor Rachel Reeves delivers her Spring Statement, which will be key for how the gilt markets perform and broader GBP sentiment.

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