Dollar misfortunes reverse as energy prices spike

The USD has gained following the events in Iran

Investors have rightly been questioning whether the dollar would continue to act as a safe haven in times of stress, given that it had been the US administration’s policy shifts that had sparked uncertainty in the past twelve months. On the surface, this week’s moves would suggest that yes, it would, but there’s a lot more than risk sentiment at play here. Arguably the biggest factor driving FX markets at the moment is energy prices. Net-energy exporters – of which the US is one – have fared better than they might have done otherwise, while those heavily dependent on energy imports have struggled. The latter includes the Japanese yen, which would usually appreciate in times of stress, but in this instance USDJPY has continued its resurgence towards ¥160.00 this week, prompting comments from Japanese authorities.
 

Options markets now lean towards further dollar strength

Since last spring, markets have rarely been bullish on the USD, but the events of the past week have turned a corner. FX options markets now demand a greater premium for protection against further USD strength, showing a bias for the dollar’s rally to continue given the current risks. The pricing is in sharp contrast to most FX forecasts, which for some time have looked for a further modest dollar weakening. Were sharply higher energy prices to be sustained, such forecasts may well be recalibrated in due course. Meanwhile on the levels front, EURUSD has closed below its 200-day moving average for the first time since March 2025, which is a sign of the swing in momentum that this has caused. One saving grace for many currencies though, perhaps capping some losses, is the huge repricing in interest rate expectations following the soaring energy prices.

Notes: risk reversals show the implied volatility skew between equivalent calls and puts
Sources: Bloomberg, Macrobond, Investec

Interest rate markets now only expect one UK rate cut this year

A more optimistic tone recently from the Bank of England on prospects for wage inflation to recede had seen rate cut expectations build. In fact, a 25bp cut this month had been 83% priced in at 27 February’s close, but that implied probability has been scaled back to just a 25% chance. Bank of England decisions have been finely balanced of late, and so it’s little surprise to have seen a shift given that higher energy prices, if sustained, could keep inflation higher for longer. However, the shift in outlook has been so dramatic that now a cut is only just fully priced in all year. That came too late to lift public borrowing forecasts at the Spring Forecast though, no doubt to the relief of the Chancellor. Meanwhile on the Continent, markets now expect the ECB to raise interest rates at some point this year, contrary to suggestions of a cut only a week ago. GBPEUR movement has been fairly contained, considering the sharp movement in markets generally.
 

Energy commodity exposure and risk sentiment are dictating wider FX markets

The Australian dollar and the Norwegian krone remain 2026’s outperformers, with both economies being net energy exporters, and the former already having seen an interest rate hike this year. Both currencies would normally be seen as risk-on and typically struggle at times of geopolitical tensions, but support from surging energy prices has been the overriding factor. GBPNOK traded at a three-year low this week. Meanwhile the Swedish krona has fallen by roughly 3% against its G10 peers, having rallied by close to 15% in 2025. Similarly, the rand has given back nearly 5% of its gains, after touching a three-year high versus the USD in January. The developing situation in the Middle East looks set to dictate FX market movements for the time being, with President Trump noting that the conflict will unfold over the coming weeks, not days.

Notes: annotations to the right show the implied change in Bank rate over 2026 in basis points
Sources: Bloomberg, Macrobond, Investec

Forecasts

Sources: Macrobond, Bloomberg, Investec

Sources: Macrobond, Bloomberg, Investec

Sources: Macrobond, Bloomberg, Investec

Notes: Forecasts are produced by Investec Economics and are for end-quarter
Chart data as of 08:33 GMT, 04 March 2026