CAPITALDIGEST MARKET REVIEW, 16/03/2026
March 16, 2026
DOLLAR STEADY AS MARKETS BRACE FOR BUSY C.BANK WEEK AMID MIDEAST WAR
The dollar held near a 10-month high on Monday in a tentative start to the week, as investors braced for a slew of central bank meetings under the shadow of the U.S.-Israel war on Iran. At least eight central banks, including the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan meet this week to set rates, in their first policy meetings since the Middle East conflict began Focus will be on policymakers’ assessment of the impact of higher oil prices on inflation and growth. “The war … poses downside risk to economic growth and upside risks to inflation, so central bank responses will very much depend on the recent context, specifically whether inflation has been above, on, or below target,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. Ahead of the meetings, the dollar retraced some of last week’s strong gains, leaving the euro bouncing slightly from a 7-1/2-month low hit earlier in the session to trade 0.14% higher at $1.1433.Sterling was up 0.17% at $1.3245, though was not far from the 3-1/2-month low it hit on Friday as it clocked a 1.5% weekly decline. The dollar index eased slightly to 100.20, but remained perched near last week’s 10-month high. U.S. President Donald Trump said on Sunday he is demanding that other countries help protect the Strait of Hormuz, adding that Washington is in talks with several nations about policing the critical shipping lane for oil and gas.He warned in a separate interview with the Financial Times that NATO faces a “very bad” future if U.S. allies fail to assist in opening up the Strait. The prospect of easing global energy disruptions sent oil prices down slightly, but markets remained in disarray with geopolitical tensions still running high and uncertainty over when the war, now in its third week, could end. “As things stand now, the likelihood we will really see a change in current trajectory for central banks and their monetary policies around the world is, in our view, very, very limited,” said Jorry Noeddekaer, head of global emerging markets and Asia at Polar Capital, whose base case is for the war to be relatively short-lived.
STERLING DROPS VS EURO AND DOLLAR AFTER WEAK ECONOMIC DATA
The pound headed for a fourth daily loss against the dollar on Friday after weak UK economic data, while concerns about the economic impact of the conflict in the Middle East drove investors into the greenback. Britain’s economy stagnated unexpectedly in January, data showed on Friday, while long-term inflation expectations stayed stubbornly high. The Reuters Iran Briefing newsletter keeps you informed with the latest developments and analysis of the Iran war. Sign up here. Economists said the pace of demand growth shortly before the Iran war began is an important input into the debate on how the Bank of England will react to the resulting energy price shock. The pound was last down 0.51% on the day against the dollar at $1.3273 . “We think that the renewed risk of persistent inflation will lead the Monetary Policy Committee (MPC) to vote 8-1 in favour of a hold rather than a cut next Thursday,” said Andrew Wishart, an economist at Berenberg. “However, once energy prices fall back, or it becomes clear that demand is soft enough for underlying disinflation to continue despite higher energy prices, we expect the BoE to resume interest rate cuts,” he added. The euro rose 0.13% to 86.37 pence after hitting 86.18 pence on Thursday, its lowest since early February. “Swap markets are now largely pricing in a 25 basis-point hike by the end of 2026,” said Matthew Ryan, head of market strategy at global financial services firm Ebury. “We think that this is excessive given weak domestic demand and a cooling jobs market, not to mention that it is unclear at this stage whether the supply-side shock will be enough to de-anchor inflation expectations,” he added Markets are betting on the European Central Bank raising rates at least once in 2026. British 2-year government bond yields were last up 0.5 basis points at 4.11%, after jumping more than 50 basis points since March 2 as markets priced in a more hawkish Bank of England. “The next rate cut, we think, will come in the second quarter this year, when the MPC sees more evidence of falling core inflation alongside a likely resolution of the Iran conflict,” said Sanjay Raja, chief UK economist at Deutsche Bank.
DOLLAR RISES BROADLY AS INVESTORS WEIGH MIDDLE EAST RISKS
The U.S. dollar rose across the board on Friday, set for a second straight weekly gain, as the war in the Middle East drove investors toward safe-haven assets and weighed on energy-sensitive currencies such as the euro. President Donald Trump said the U.S. was going to be hitting Iran “very hard over the next week”, shortly after issuing a partial 30-day waiver for purchases of sanctioned Russian oil, hoping to ease prices fuelled by the U.S.-Israeli war on Iran. A sharp and prolonged rise in oil prices would severely hurt the economies of Japan and the euro zone, which are heavily reliant on crude imports, while the United States would be relatively insulated, having been a net crude exporter for almost a decade. “Global investors are unwinding cross-border exposures, pushing money into safe havens, and punishing currencies issued by net energy importers,” said Karl Schamotta, chief market strategist at Corpay in Toronto. The euro was 0.6% lower against the dollar at $1.14395. The dollar index , which measures the greenback’s strength against a basket of currencies, was up 0.7% at 100.35. The index is up 1.5% for the week. Schamotta, however, warned that FX markets face two-way risks “As the war drags on, both Tehran and Washington have strong motivations for returning to the negotiating table and there are good reasons to suspect they could strike a face-saving bargain as soon as this weekend,” said Schamotta.
STERLING SINKS FOR THIRD DAY AS OIL CRISIS BURNISHES DOLLAR
The pound headed for a third daily loss against the dollar on Thursday, as concern about a lasting rise in energy prices and nervousness about the war in the Middle East drove investors into the dollar. Bank of England Governor Andrew Bailey was due to speak later on Thursday, a week before the central bank’s rate-setting meeting. As oil and natural gas prices have surged, so have investor expectations for inflation. Sterling, which has fallen by just 0.7% since the outbreak of the war on February 28, is one of the better-performing currencies among those belonging to economies that rely heavily on imported energy. The euro and the Korean won have lost 2% to 3%, while the Indian rupee and Japanese yen have lost more than 1.5% each. Highlighting the heavier fire for the single European currency is the euro’s 1.3% drop against the pound since the start of the conflict. The pound was last down 0.2% on the day against the dollar at $1.3386 and weakened against the euro, which rose 0.1% to 86.3 pence. Typically, higher bond yields and the prospect of higher interest rates tend to support currencies, which may have cushioned the pound, to an extent. Money markets have swung wildly in the last two weeks. Traders’ assumption at the end of February was for the Bank of England to deliver two interest-rate cuts this year. That has now flipped to a near-50% chance for one hike by December. The European Central Bank could raise rates twice this year, based on swaps market pricing, while the Federal Reserve looks less likely to deliver the two cuts markets had widely expected previously. The aggressive repricing of BoE rate-cut expectations is providing some support to sterling,” City Index strategist Fiona Cincotta said. “For now, the focus will remain on geopolitical developments and concerns over the war-driven surge in energy prices and inflationary pressures,” she said. As investors have increasingly leaned towards a number of major central banks raising rates rather than cutting them, or leaving them on hold, they have sold short-dated bonds, which tend to benefit from stable, or falling, rates. British gilts have been the hardest hit among the big bond markets, with 2-year gilt yields rising 50 basis points since the start of the war, compared with a roughly 38-bp rise in Italian yields, a 30-bp rise in Australian yields and just a 21-bp increase in 2-year Treasury yields.
DOLLAR FLIRTS WITH NEW 2026 HIGHS AS OIL PRICE JUMP HURTS EURO
The dollar rose against the euro for a third straight day on Thursday, inching closer to its strongest levels this year as surging energy prices sparked worries about Europe’s import-dependent economy and drove investors toward the safety of the greenback. Oil prices rose sharply as Iran stepped up attacks on oil and transport facilities across the Middle East, fueling concerns of a prolonged conflict and potential disruption to oil flows. Iran’s new Supreme Leader Mojtaba Khamenei on Thursday vowed to keep the Strait of Hormuz closed. The rapid increase in energy prices poses a threat to global growth, with economists warning that a prolonged conflict in the Middle East would further amplify the economic impact. The world’s biggest energy importers have seen their currencies post the largest losses against the dollar since the start of the U.S.-Israeli war on Iran. The Indian rupee and Japanese yen have lost more than 1.5% each, while the euro and the Korean won have lost 2% and 3%, respectively. Meanwhile, the dollar has risen by more than 1.5% against a basket of major currencies and is close to its highest level since November, thanks in part to its safe-haven appeal, but also because the United States is a net energy exporter. The euro was down 0.5% at $1.1513, not far off its lowest since November. “A disappointing supply update from the International Energy Agency, and commitment from Supreme Leader Khamenei to keep the Strait of Hormuz closed is to blame,” Benjamin Ford, researcher at macro research and strategy firm Macro Hive, said. “Ahead, we expect EUR/USD can fall to 1.14 with FX markets trading the 2022 Russia-Ukraine game plan,” Ford said. The IEA on Wednesday agreed to release a record 400 million barrels of oil from strategic stockpiles, which would cover only about 20 days of supply lost due to the disruptions along the Strait of Hormuz, and will take weeks or months to reach markets. “The main thing that matters today is gas and oil, and the euro zone is quite exposed to these things. So you see the euro selling off across the board,” Barclays strategist Lefteris Farmakis said.
