Dollar Strength and Rising Oil Prices Drive FX Volatility: What It Means for GBP and International Payments

Key Highlight

• Safe-haven demand boosted the US dollar, as escalating tensions in the Middle East pushed investors towards defensive assets. The Bloomberg Dollar Spot Index rose around 0.7% over the week, putting pressure on most major currencies.

• Sterling faced additional domestic pressure after UK economic data showed January GDP unexpectedly stalled, raising concerns about the strength of the UK economy as energy prices climb.

• Rising oil prices are creating headwinds for energy-importing economies such as the UK and Eurozone, increasing volatility across major FX pairs.

Market Recap

Currency markets were largely driven by geopolitical developments this week as the conflict involving Iran intensified. This heightened uncertainty triggered a shift into safe-haven assets, benefiting the US dollar and weighing on most G10 currencies.

The pound struggled throughout the week, moving towards a weekly decline of around 1% against the dollar. Alongside global risk aversion, weaker-than-expected UK data added to the pressure. January’s GDP reading came in flat, signalling that economic momentum may already be slowing before the full impact of rising energy costs is felt.

With oil prices climbing sharply, currencies tied to energy-importing economies – including the UK – have become particularly sensitive to geopolitical developments.

Market Update

The coming week could prove significant for currency markets, with several major central bank decisions scheduled within a short period. The Federal Reserve, Bank of England, European Central Bank, and Swiss National Bank are all due to announce policy decisions, which could influence market sentiment.

While monetary policy updates will be closely monitored, geopolitical developments and energy prices may continue to play the dominant role in driving currency movements.

Expectations for the Bank of England have shifted notably. Some analysts now anticipate the central bank may hold interest rates at around 3.75%, adopting a cautious “wait-and-see” approach while assessing how sustained energy price increases could affect inflation and growth.

For sterling, the outlook remains mixed. Rising energy costs could add to inflation pressures and potentially support higher interest rate expectations. However, weak economic growth and heightened geopolitical risk may continue to weigh on the currency in the near term.

 Key Events to Watch

• Central bank policy decisions from the Fed, BOE, ECB and SNB this week

• UK labour market data, which could influence Bank of England policy expectations

• Developments in the Middle East conflict, which remain a key driver of oil prices and global risk sentiment

16th March 2026

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