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Markets are still trading the same story, but the mood shifted overnight. Reports that Iranian operatives have indirectly approached the CIA to discuss terms for ending the conflict gave investors a reason to exhale – and the dollar, which had surged roughly 2% earlier in the week, gave back a fraction of those gains.
That doesn’t mean the crisis is winding down. The conflict is now in its sixth day, with no formal ceasefire talks under way and contradictory signals from all sides. But even the hint of a diplomatic offramp was enough to take the edge off oil prices, which have pulled back from their midweek highs and are now holding in the low $80s per barrel.
The bigger question is what happens next to inflation expectations. Even at current levels, Brent crude is sitting well above where it was a fortnight ago. That feeds into shipping costs, energy bills and business overheads – and central banks on both sides of the Atlantic are watching closely.
In the UK, the fallout from Rachel Reeves’ spring statement is deepening. Think tanks including the Resolution Foundation have already declared the Office for Budget Responsibility’s (OBR) forecasts “out of date” – arguing that sustained energy price rises could add over £500 to typical household bills and roughly a percentage point to inflation. Today’s £3.5 billion gilt auction will be an early test of whether markets are willing to fund UK borrowing in this environment.
Sterling has actually recovered a touch this morning, clawing back some of its sharp losses from earlier in the week as the dollar eased. The pound is also marginally firmer against the euro. But make no mistake – this is a bounce driven by a softer dollar, not by any improvement in UK fundamentals.
The euro, meanwhile, remains caught in its own bind. Inflation in the bloc ticked up unexpectedly last month, and with energy costs surging, the European Central Bank’s path back to rate cuts has got a lot murkier. And in the US, a surprisingly strong services survey yesterday reminded markets that the world’s largest economy isn’t slowing down in the way some had expected – complicating the Federal Reserve’s own calculations.
All eyes now turn to tomorrow’s US jobs report, with the conflict remaining the dominant force across currencies in the meantime.
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GBP: Gilt auction puts borrowing appetite to the test
The pound’s modest recovery this morning is welcome after a bruising few days, but it masks a deeper shift in market expectations. Financial markets now price just one Bank of England rate cut for the whole of 2026 – down from at least two at the start of the week. That dramatic repricing reflects the energy shock’s potential to keep inflation elevated for longer than anyone had hoped.
Today’s gilt auction is the immediate focus. With yields still elevated after this week’s spike, the Treasury needs to sell £3.5 billion of bonds into a jittery market. A smooth sale would settle nerves; a weak one could put further pressure on borrowing costs and, by extension, sterling. The next Bank of England decision on 19 March looms large.
GBP/USD: the past year
EUR: Energy shock clouds the ECB’s rate path
The euro has edged higher against the dollar this morning, but it remains under heavier pressure than the pound thanks to the eurozone’s acute dependence on energy imports. The old rule of thumb still holds – when oil surges, Europe pays a disproportionate price.
That’s a headache for the European Central Bank, which was already grappling with an unexpected rise in consumer price inflation to 1.9% last month, with sticky services prices the main culprit. The Iran conflict has effectively shelved any prospect of near-term rate cuts, and some analysts now say a rate hike is no longer unthinkable. Eurozone retail sales data are due today, but the real event is the ECB’s meeting on 18–19 March, which will include updated economic projections.
GBP/EUR: the past year
USD: Strong data adds to the Fed’s dilemma
The dollar eased overnight as markets latched onto the Iran diplomatic signal, but it remains well above where it started the week. The conflict has reinforced its role as the default destination when investors are nervous – and with the situation in the Middle East still highly fluid, that bid is unlikely to disappear entirely.
Yesterday’s data added a fresh wrinkle. The ISM services purchasing managers’ index (PMI) jumped to 56.1 in February – the strongest reading since mid-2022 and well above expectations. The ADP private payrolls report also beat forecasts. Both releases point to an economy still running hot, making it harder for the Federal Reserve to justify cutting rates anytime soon. Tomorrow’s non-farm payrolls report is the week’s main event – a strong reading could lock in the dollar’s recent gains, while a soft one might give other currencies room to breathe.
EUR/USD: the past year
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