CAPITALDIGEST MARKET REVIEW, 23/03/2026

STERLING DIPS AS OIL RISES, STILL SET FOR WEEKLY GAIN ON HAWKISH BOE 

Sterling fell on Friday as rising oil prices weighed on sentiment, though the pound remained on course for a weekly gain after the Bank of England delivered a hawkish surprise that repriced UK rate expectations. At 12:52 GMT, the pound was last down 0.3% at $1.34, reversing part of Thursday’s 1.31% jump. For the week, sterling is up 1.2%.  EUR/GBP was little changed as hawkish repricing at both the ECB and BoE broadly offset each other. EUR/USD slipped 0.2% to 1.15, pulling back from Thursday’s 1.2% rally, as the dollar found tentative support despite the ECB putting an April rate hike firmly on the table. The BoE on Thursday voted unanimously 9-0 to hold borrowing costs, wrong-footing markets that had expected at least two members to favour a cut. The MPC’s most dovish member, Swati Dhingra, openly discussed rate hikes to stabilize inflation dynamics. Money markets moved swiftly, with traders now pricing around 80 basis points of tightening by year-end. ING cautioned the pricing looks excessive, noting conditions for second-round inflation effects are less pronounced than in 2022.Oil remained the dominant market driver, with Brent volatile amid uncertainty over the Iran conflict and the Strait of Hormuz. “Rate expectations should remain fluid and commodity price dependent, and continue to play a secondary role for FX,” said Francesco Pesole, FX Strategist at ING. Pesole noted the hawkish BoE shift was nonetheless offering sterling some additional support, even as geopolitical developments continued to dictate the broader market mood ING maintains a bullish bias on EUR/GBP, targeting 0.88 by end-Q2, citing May’s local elections and the prospect of BoE cuts further out. 

DOLLAR GAINS BUT STILL SET FOR WEEKLY DROP AS CENTRAL BANKS TURN HAWKISH 

The dollar gained on ​Friday but was still headed for a weekly fall against major currencies as investors pared back bets on ‌interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.-Israeli war on Iran began in late February, investors had priced in two Fed cuts this year. But they now largely believe one Fed rate cut is a distant prospect, and other major ​central banks are turning even more hawkish. The euro, yen, sterling and Swiss franc headed for weekly gains against the dollar as ​policymakers laid the groundwork for higher interest rates in response to the war in the Middle East, which ⁠has choked oil and gas supplies. The euro was down 0.39% to $1.15350 but on track to add 1.1% this week. The yen was ​down 0.85% against the greenback to 159.07 per dollar. It is set to gain 0.43% this week.Sterling weakened 0.78% to  $1.3325 but was ​set to gain nearly 0.8% against the dollar for the week. “The overall picture is still that central banks sound more confident (about the impact of inflation) than people thought, especially the Bank of England and the Bank of Japan as well,” said Juan Perez, director of trading at Monex USA in Washington. “This ​followed a message from the Federal Reserve on Wednesday that is tied to the idea that everyone has been thinking that ​there’s going to be one or two cuts for 2026 and they have no interest in cutting rates.” Benchmark Brent crude futures are up about ‌50% ⁠since the U.S. and Israel attacked Iran, which has all but closed the Strait of Hormuz and disrupted Middle East energy exports. The dollar index was up about 0.4% at 99.63 but on track for a 0.86% weekly decline, its largest since late January. Still, many analysts think a prolonged fall is unlikely. 

STERLING TODAY: POUND GAINS AS BOE HOLDS RATES STEADY IN A UNANIMOUS VOTE 

Sterling rose on Thursday after the Bank of England kept interest rates unchanged, with investors watching for guidance from policymakers about the impact of the Iran war. The central bank’s Monetary Policy Committee voted unanimously to keep borrowing costs on hold, with some members noting the prospect of raising rates. As of 13 GMT, pound rose 0.3% touching $1.33 against the dollar, while the euro edged slightly lower against the pound, with EUR/GBP at 0.8638, down 0.01%. ING forecasts two rate cuts by the Bank of England and maintains a bullish bias on EUR/GBP for the coming months. The bank has set an end-Q2 target of 0.88 for the currency pair, which also incorporates political risk associated with local elections scheduled for May. “The Bank of England’s decision to hold rates had been anticipated, and perhaps reflects a cautiously optimistic assessment of the UK growth outlook. Holding rates suggests the continuation of a more balanced approach, underscoring the view that policy is now firmly in restrictive territory, while avoiding the risk of overtightening into a weakening macroeconomic backdrop,” according to Chris Cheverall, Head of UK at CMC Markets. 

DOLLAR GAINS AS FED LEAVES RATES UNCHANGED 

The U.S. dollar strengthened against other major currencies on Wednesday, on track to claw back losses from the past two sessions after the U.S. Federal Reserve left interest rates unchanged.  The Fed projected higher inflation as well as one interest rate cut for the year as officials weighed the economic impact of the U.S. and Israeli war on Iran. The dollar has strengthened overall since the Middle East conflict almost three weeks ago, reaching a 10-month high late last week as the conflict and rising oil prices drove investors into safe-haven U.S. assets. “The consistent tone, paired with a fresh set of projections showing lower growth, weaker employment, and higher inflation than in December, marks the clearest signal yet that Chair Jay Powell’s Fed sees higher energy prices playing a temporary, but demand-destructive role in the U.S. economy,” said Karl Schamotta, chief market strategist at Corpay in Toronto. The dollar strengthened 0.92% to 0.792 against the Swiss franc. The euro was down 0.5% at $1.148. The Fed didn’t change expectations of where rates will be heading or that Treasury markets are headed in the wrong direction, which is positive for the dollar, said Joseph Trevisani, senior analyst at FX Street in New York. “It’s a hawkish hold and the main reason for that is because the base case going forward was still one rate decrease in 2026 and although that hasn’t changed, treasury rates are higher than they were two or three months ago,” Trevisani said.  The dollar index was up 0.51% to 100.0. In his press remarks following the Fed decision, Chair Jerome Powell said the central bank will look through the impact of higher oil prices induced by the conflict if there’s more progress this year in bringing down core inflation driven by goods prices. Prior to the Fed’s decision, data from the U.S. Labor Department showed that the Producer Price Index surged 0.7%, while economists polled by Reuters had forecast a 3% rise. 

EURO AND YEN GAIN, PUSHING DOLLAR INDEX LOWER FOLLOWING CENTRAL BANK DECISIONS 

The euro and the Japanese yen advanced against the U.S. dollar on Thursday ​as key central banks kept interest rates steady amid concerns about inflation from rising oil prices in the midst of the Middle East ‌conflict. The European Central Bank left interest rates unchanged as expected but signalled it was closely watching growth and inflation risks from surging oil prices. The euro was up 1.18% against the dollar at $1.1585. The Bank of Japan held interest rates steady but maintained its bias for tighter monetary policy. The yen was up 1.4% against the greenback to 157.61 per dollar. The Bank of ​England voted unanimously to keep borrowing costs on hold in the face of inflation risks from the war in the Middle East. Sterling strengthened ​1.4% to $1.34360. “Every central banker in the world is looking at the inflation effects, the likely output effects and asking ⁠themselves ‘how much credibility do I have?’,” said Steve Englander, global head of G10 FX research at Standard Chartered in New York. The Federal Reserve also held interest rates steady ​on Wednesday and projected higher inflation, steady unemployment and a single reduction in borrowing costs this year. The U.S. dollar index , which measures the greenback’s strength against ​a basket of six currencies, was last down 1% to 99.20. The index is still near its 10-month high reached late last week as the conflict and rising oil prices drove investors into safe-haven U.S. assets. “The Fed was pretty confident and Powell was resolutely on the fence, saying he’s going to wait and see what the true impact of the war ​is likely to be. Now you look at other central banks, Canada was sort of neutral and the BoE, which was hawkish. The market sees ​more inflation risk in the UK than they do in the U.S., possibly because the UK is an energy importer and the economy is less flexible,” Englander said. Oil ‌prices gained ⁠after Iran attacked energy facilities across the Middle East following Israel’s strike on its South Pars gas field, a major escalation in the war. Brent crude futures rose 1.18% to settle at $108.65.