The British pound and the euro fell on Thursday as the U.S. dollar regained strength, driven by a flight to safety tied to escalating tensions in the Middle East. By 09:58 GMT, sterling was down 0.2% at $1.3539 and the euro was 0.2% lower at $1.1779.
Dollar strengthens despite solid UK data
The move came even as fresh data showed the United Kingdom’s economy grew more strongly than expected in February. Output rose 0.5% on the month, beating forecasts of 0.1% and following an upwardly revised 0.1% gain in January.
Growth was broad-based, with both services and industrial production up 0.5% and construction jumping 1.0% despite poor weather. Yet the figures failed to provide lasting support for the pound as traders focused on global risk rather than domestic momentum.
Traders shifted away from risk-sensitive currencies and assets, lifting the dollar as they reassessed geopolitical and economic risks, notably the conflict involving Iran.
ING: dollar moves driven by risk sentiment, not fundamentals
Analysts at ING said the earlier weakening of the dollar had been driven mainly by a move into risk assets, not by a deterioration in U.S. fundamentals. They noted that U.S. interest rates remain stable and there is little sign of sustained capital outflows from U.S. assets, limiting the scope for a deeper correction in the dollar.
The same analysis suggested the Federal Reserve is likely to stay the course for now. Solid U.S. growth and a resilient labor market mean expectations for early rate cuts may be misplaced, reinforcing support for the greenback.
Middle East tensions push oil and dollar higher
Geopolitical tensions in the Middle East, including conflict involving Iran, have propelled Brent crude above $110 a barrel. The jump in oil prices has amplified uncertainty and encouraged a broad move into safe-haven assets, notably the U.S. dollar.
This backdrop has pushed the U.S. Dollar Index close to the 100.0 mark after a recent surge. The dollar’s yield advantage over European benchmarks continues to underpin its position, shielding it from sharper falls even as diplomatic efforts to ease the conflict begin to emerge.
Federal Reserve seen holding rates steady
Against this mix of firm growth and renewed energy-driven price pressure, Federal Reserve officials are expected to keep the federal funds rate in the 3.50%–3.75% range at their April 28–29 meeting.
Fed Vice Chair Jefferson recently pointed to the balance between downside risks to the labor market and upside risks to inflation, arguing that holding rates steady gives policymakers time to assess how higher energy prices feed through to the broader economy.
UK outlook clouded despite February rebound
In the United Kingdom, economists cautioned that early-year data are often distorted by seasonal adjustment effects, suggesting underlying momentum may be weaker than headline figures indicate.
The Organisation for Economic Co-operation and Development recently cut its 2026 UK growth forecast to 0.7% from 1.2%, citing the outsized impact of the energy shock. Domestic indicators add to the caution: annual wage growth slowed to 3.8% in the three months to January, a trend that could erode consumer spending power later in the year.
The Bank of England, which left its policy rate at 3.75% in March, is now widely expected to hold that level at its April 30 meeting. This marks a clear shift from the rate cuts that many had anticipated at the start of the year.
Eurozone faces slower growth and policy hesitation
The euro, which had recently traded near its highs after a strong rebound from March levels, lost traction as the dollar strengthened. While markets still price in additional monetary tightening in the euro area, ING warned that EUR/USD may face short-term downside risks.
The broader Eurozone outlook has also darkened. The International Monetary Fund cut its 2026 growth forecast for the bloc to 1.1%, highlighting the drag from higher energy costs on both industry and households.
Headline inflation in the currency area rose to 2.5% in March, but European Central Bank officials appear reluctant to lift the 2.0% deposit rate at their upcoming meeting. Policymakers are waiting for clearer evidence that the latest jump in energy prices is feeding through to broader and more persistent inflation.
ECB President Christine Lagarde has warned that the recent experience of high inflation could make firms pass on cost increases more quickly than in the past. That risk is likely to keep the central bank on alert even as it hesitates over near-term action.
Market focus shifts to risk sentiment and central banks
With few major economic releases due in the coming days, currency markets are expected to take their cues from shifts in global risk appetite and communication from central banks.
Recent trading suggests market participants are wary of pushing the dollar much lower from current levels, given the combination of geopolitical risk, elevated energy prices, and a policy stance in the U.S. that remains firmly on hold.
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