Oil Surge Sparks Inflation Fears as Fed Split Deepens and Central Banks Face Crucial Decisions

Key Highlight

• Oil shock drives markets: Brent crude surged above $126 (+7%), fuelling inflation concerns and lifting the US dollar across G10 currencies.

• Central bank divergence intensifies: The Fed held rates but revealed its largest internal split in decades, highlighting growing uncertainty. BoE and ECB decisions are due today amid rising policy pressure.

• Inflation back in focus: Surging energy prices are forcing markets to reprice rate expectations higher across major economies.

Market Recap

Markets were initially steady following the Fed’s decision to leave rates unchanged, but attention quickly shifted to the unusually deep division within the committee, the most pronounced since the early 1990s. This signals increasing disagreement on how to handle persistent inflation risks.

Overnight, sentiment shifted sharply as geopolitical tensions escalated. Reports of potential US military action against Iran triggered a spike in oil prices, pushing Brent above $126 and reinforcing inflation fears globally.

FX markets responded decisively:

• The US dollar strengthened broadly, supported by both safe-haven demand and rising inflation expectations.

• EUR/USD declined to a two-week low despite expectations for multiple ECB rate hikes this year, with inflation data across the Eurozone remaining firm.

• GBP/USD weakened, with sterling pressured by rising political uncertainty and higher gilt yields. Markets have notably repriced Bank of England expectations, now anticipating multiple rate hikes this year.

Elsewhere, the Bank of Canada held rates steady but struck a more hawkish tone, warning that sustained energy-driven inflation could necessitate further tightening.

Market Update

The immediate focus turns to key US data releases, which could set the tone for global markets:

• Core PCE (Q1) is expected to jump sharply, signalling a renewed acceleration in inflation.

• GDP (Q1) is forecast to rebound, suggesting underlying economic resilience.

A stronger-than-expected outcome on both fronts would reinforce the “higher for longer” rate narrative, likely driving further US dollar strength.

For central banks:

• Bank of England: Markets are heavily positioned for a hawkish outcome. Any confirmation that policymakers are responding aggressively to rising energy prices could support GBP, while a more cautious tone risks a reversal.

• European Central Bank: The key risk lies in forward guidance. A lack of commitment to near-term tightening could weigh on the euro, even with firm inflation data.

Bottom Line

Oil remains the dominant force driving markets. Elevated prices, combined with escalating geopolitical risks, are feeding directly into inflation expectations and central bank policy outlooks.

In this environment:

• The US dollar remains well supported by both safe-haven demand and policy dynamics.

• Central bank communication today is critical. It will determine whether tightening expectations can counterbalance the current flight to safety.

The key question for markets is whether policymakers will match the urgency implied by rising energy-driven inflation.

30th April 2026

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