Sterling staged a solid recovery on Monday, snapping a four-session losing streak as oil prices pulled back from recent highs and the dollar weakened. The retreat in crude prices eased immediate concerns about petrodollar dynamics that had been supporting the greenback in recent weeks. However, overnight developments have reignited energy market concerns, with Iran targeting additional infrastructure in the Gulf region and setting a gas field ablaze. The RBA delivered a split 5-4 vote to raise rates by 25bps to 4.1%, citing intensifying inflation risks from the Middle East conflict.
*Daily move - against G10 rates as of 17:00 GMT, 16.03.26
** Indicative rates - interbank rates as of 17:00 GMT, 16.03.26
The dollar has stabilised this morning as the mood sours on rising oil prices, with Brent crude surging back above $104/barrel after Iran stepped up attacks on energy infrastructure around the Persian Gulf. Markets are now questioning Monday's optimism, which was driven by reports of limited shipping resuming through the Strait of Hormuz. UK gilt yields are falling as investors await the Bank of England's rate decision on Thursday, with markets expecting rates to hold at 3.75% but keen to see how policymakers balance inflation risks from elevated energy prices against a struggling economy.
Looking ahead, today's German ZEW sentiment data at 10:00 GMT will be critical in gauging how European business confidence is holding up amid the energy shock and stagflation risks. Sterling may find support if the data disappoints, reinforcing the view that Europe faces a double handicap of being an energy importer without the tech sector strength seen elsewhere. With the BoE decision looming Thursday, any signs of deteriorating European sentiment could bolster the case for UK policy divergence. The key risk remains oil price persistence – if crude continues at elevated levels, it threatens to derail growth forecasts across G10 economies while keeping central banks in a holding pattern.
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