Forex News

RaboBank's Global Strategist Michael Every highlights that Gulf War 3 and the closure of the Strait of Hormuz have pushed Oil prices about 60% above pre-war levels, with specific products like diesel and jet fuel particularly affected in Asia. The bank warns that if the conflict extends for months, the energy shock could rival Covid-19 and the 1970s oil crises combined.

Hormuz closure drives severe energy shock

"As the war enters its fifth week, the impact of the closure of the Strait of Hormuz is clear even if some geographies and parts of the energy/petrochemicals complex (i.e., diesel, bunker fuel, jet fuel, fertiliser, naphtha, sulphur, and helium) are hurting more than others. Oil prices overall are up 60% from pre-war levels, but some products are not available in some locations - Asia, diesel, and jet fuel ‘lead’ but others will follow if the war doesn’t end soon."

"Were it to extend for months, the crisis could equal the Covid-19 epidemic and the 1970’s oil shocks combined – and that doesn’t account for supply-side damage to Gulf energy flows from war and oil-well shut-ins."

"In short, for now we are sticking to our geopolitical base-case scenario of the war being over in 2-3 weeks on largely US terms, then a slow return to normal for energy… but not for geopolitics: the world won’t look the same on the other side of this whether the US wins or loses."

"Yet there are obviously huge fat tail risks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• Retail Sales in the US rose more than expected in January.
• The USD Index stays deep in negative territory below 99.50.

Retail Sales in the United States (US) rose 0.6% to $738.4 billion in February, the US Census Bureau reported on Wednesday. This print followed the 0.1% contraction recorded in January and came in slightly better than the market expectation for an increase of 0.5%.

"Total sales for the December 2025 through February 2026 period were up 3.1 percent from the same period a year ago," the press release read.

Market reaction

The US Dollar (USD) struggles to find demand in the American session on Wednesday. At the time of press, the USD Index was down 0.42% on the day at 99.44.

Commerzbank’s Bernd Weidensteiner and Christoph Balz argue that the US economy is better positioned to absorb higher Oil prices than in past crises. Lower oil intensity, near self-sufficiency and experience from the 2022 shock support resilience. Their base scenario sees only a Q2 growth dip, with US GDP expanding 2.4% in 2026 and 2.3% in 2027.

Growth hit seen as temporary and contained

"Following Russia’s invasion of Ukraine in February 2022, oil prices also rose sharply. This served, in a sense, as a “test run” to see whether the U.S. economy could now cope better with an oil price shock than it did in the 1970s. U.S. growth was barely affected; at most, the decline in inflation following the COVID-19 shock was delayed."

"However, even during the oil crises of the 1970s and early 1980s, the oil price shock alone was hardly enough to push the economy into recession. Rather, inflation was already on an upward trend as a result of the overly expansionary monetary and fiscal policies of the 1960s."

"In the current case, the greatest risk is that inflation expectations will break free from their anchor. Fed Chair Powell recently pointed out that inflation has now been above the Fed’s 2% target for five years."

"A renewed price shock could therefore force the Fed to adopt a more restrictive policy. With loosened inflation expectations, the monetary policy textbook’s recommendation to “look through” supply-driven price shocks may not be feasible."

"Under these circumstances, the U.S. economy is likely to get off with a dip in growth in the second quarter, partly due to the strong underlying growth trend."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• GBP/JPY edges higher on Wednesday, snapping a four-day losing streak as risk sentiment improves.
• UK PMI misses forecasts but stays in expansion; Japan data mixed.
• BoE’s Bailey cautions on rate hike expectations; BoJ highlights stagflation risks.

GBP/JPY rebounds on Wednesday, as signs of easing geopolitical tensions between the US and Iran improve market sentiment and support risk appetite. The shift in sentiment boosts demand for the higher-yielding British Pound (GBP) while weighing on the Japanese Yen (JPY), allowing the cross to snap its four-day losing streak.

At the time of writing, GBP/JPY is trading around 210.82, up nearly 0.43% on the day.

US President Donald Trump, speaking from the Oval Office, told reporters that the United States “will be leaving Iran very soon,” adding that military action could end within “two or three weeks.” His comments came after Iranian President Masoud Pezeshkian said on Tuesday that Iran has the “necessary will” to end the conflict, but wants guarantees to make sure the war does not happen again.

On the data front, the UK S&P Global Manufacturing Purchasing Managers Index (PMI) came in at 51.0 in March, below the forecast of 51.2 and the flash estimate of 51.4, though it remained above the 50.0 threshold for a fifth consecutive month.

However, S&P Global Market Intelligence Director Rob Dobson noted that manufacturing output contracted for the first time in six months, as the Middle East conflict and ongoing domestic policy concerns weighed on production.

In Japan, the Manufacturing PMI was revised higher to 51.6 in March from a preliminary estimate of 51.4, though it slipped from a 45-month high of 53.0 in February. Meanwhile, the Tankan Large Manufacturing Index rose to 17 in the first quarter, beating expectations of 16, while the outlook index came in at 14, down from 15 but still above the forecast of 13.

Traders also digested comments from Andrew Bailey, Governor of the Bank of England (BoE), who said markets may be getting ahead of themselves in pricing in interest rate hikes. He added that the central bank will act if appropriate, but stressed that addressing the root cause of the energy price shock is most important. Bailey also noted that policymakers may debate a precautionary rate increase, though any decision will depend on how best to return inflation to target.

Meanwhile, Bank of Japan (BoJ) policymaker Toichiro Asada said that rising Oil prices are putting upward pressure on inflation while weighing on growth, creating a “stagflationary trend.” He added that “how to deal with stagflationary situation is difficult question for monetary policy.”

While speaking to Reuters at the Bank of England's (BoE) London headquarters on Reuters, BoE Governor Andrew Bailey argued that markets are getting ahead of themselves by pricing in interest-rate hikes.

Key takeaways

"We will have to act if appropriate but tackling source of energy price shock is most important."

"If we have prolonged high energy prices and supply disruption, it will strain many countries quite seriously."

"I'm very clear we need to return inflation to target in way that causes least damage to growth and jobs."

"We look at inflation expectations very carefully, but short-run often follows headline inflation."

"Businesses I speak to say they have a real lack of pricing power."

"UK growth is below potential, labour market softening."

"MPC may debate case for a precautionary rate rise, but need to judge that in context of remit and how to return inflation to target."

"Gilt market moves orderly but stretched, we're watching it hourly."

"Need to watch out for investor loss of confidence in private credit."

Market reaction

GBP/USD preserves its bullish momentum following these comments and gains more than 0.5% on the day near 1.3300.

Richmond Federal Reserve Bank President Tom Barkin told Reuters on Wednesday that he does not see inflation expectations at the risk of breaking out.

Key takeaways

"Firms, consumers, not acting as if they expect long-term effects from oil shock."

"Consumer spending still seems resilient."

"Expect slow progress on inflation, not a quick return to target."

"Goods firms feel pricing power is limited, but services firms feel they have more leeway."

Market reaction

The US Dollar Index remains under bearish pressure in the American session on Wednesday and was last seen losing 0.35% on the day at 99.50.