The Strait – how long can this last?

Oil markets ended last week in dramatic fashion. Brent crude futures have now risen more than a third since the last day of February, trading above $113 a barrel on Friday, while the physical price of oil delivered from Middle Eastern sellers has surged even further. The cause is the same one that has dominated every trading session this month: the Strait of Hormuz.

Iran’s closure of the strait has disrupted roughly 20% of global oil supplies and significant volumes of liquefied natural gas. Oil industry executives and analysts are increasingly warning that if the waterway is not reopened by mid-April, the fallout could escalate sharply – with stopgap measures such as strategic reserve releases losing their effectiveness in the weeks ahead. The International Energy Agency has acknowledged that even its largest ever reserve release of 400 million barrels can only compensate for a matter of weeks of disruption.

For currencies, the energy shock is now doing most of the heavy lifting — and it is reshaping the rate-cut story that dominated financial markets just a month ago. The Bank of England, European Central Bank and US Federal Reserve all kept rates on hold, stating that the war had made the economic outlook more uncertain, creating upside risks for inflation and downside risks for growth.

So all three major central banks are now on hold — and the direction of travel for rate cuts has gone into reverse. Markets have scaled back expectations for rate reductions in 2026, with growing speculation about one or two rate rises from the ECB this year as higher energy prices threaten to push eurozone inflation back above target. In the UK, higher energy prices are expected to push consumer price inflation to between 3% and 3.5% over the next few quarters.

The damage to growth, unemployment and inflation has not shown up in the data yet, but will almost certainly do so in the next couple of months.

For the week ahead, the calendar brings its own tests. Tuesday sees the eurozone’s flash inflation estimate for March alongside the UK’s quarterly national accounts, while Wednesday brings US data including the ADP employment report and the manufacturing purchasing managers’ index (PMI) from the ISM. Good Friday falls at the end of the week, with European and US markets closed, meaning Thursday is effectively the last major trading session before markets shut for Easter. The oil price trajectory — and any signals from Washington or Tehran about the conflict’s duration — will set the tone for all of it.

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GBP: Data dents demand story

The pound drifted lower into the end of last week, shaped by UK retail sales figures showing a 0.4% fall in February after a strong January, with the Office for National Statistics noting that some spending may have been pulled forward into January to take advantage of discounting. The pound is caught between two forces: markets have shifted away from pricing near-term rate cuts and are increasingly leaning toward a prolonged hold — or even tighter policy — as energy-driven inflation risks build, which has provided some support via higher gilt yields. The key domestic release this week is Tuesday’s quarterly national accounts from the ONS, which will include revisions to gross domestic product (GDP) data stretching back to early 2024 — a potential prompt for reassessment of the UK’s underlying growth picture.

GBP/USD past year

EUR: Growth outlook weighs on single currency

The ECB’s March projections now see eurozone growth averaging just 0.9% in 2026, a downward revision driven by the global effects of the Middle East war on commodity markets, real incomes and confidence — while headline inflation has been revised up to 2.6% for this year. Traders have already moved to price in the possibility of ECB rate hikes later this year, even as the central bank itself is stressing a data-dependent, meeting-by-meeting approach. The euro’s challenge is that Europe is particularly exposed to imported energy costs, and any signal that the strait closure is becoming entrenched will press harder on the eurozone’s fragile growth outlook than almost anywhere else. Tuesday’s flash inflation reading for March will be closely scrutinised for early signs of energy pass-through into consumer prices.

GBP/EUR past year

USD: Safe haven — but with a ceiling

In periods of risk aversion, the dollar has been drawing capital flows for safety, with elevated yields adding further attraction for global investors — making it one of the strongest-performing major currencies in recent sessions. However, there are signs the rally has limits. Any indication of easing geopolitical tensions or stabilisation in oil prices has triggered short-term dollar weakness, suggesting positioning is becoming crowded and vulnerable to shifts in sentiment. Fed Chair Powell’s term expires in May, with nominee Kevin Warsh expected to take over — and markets are pricing in that any rate cut is more likely in the second half of the year, after the leadership transition. Wednesday’s ADP report and ISM manufacturing PMI will be the first meaningful US data tests of the week.

USD/GBP past year