Key Points
- Middle East Escalation: The killing of Iran’s Supreme Leader Ayatollah Khamenei has sent shockwaves and can be expected to elevate safe-haven demand and lift oil prices. This is a key macro driver, especially for the early part of the month.
- GBP Pressure: The pound faces continued headwinds as domestic political and economic uncertainty weighs.
- USD Near-Term Tailwinds: Barclays and HSBC analysts expect the dollar to hold an upper hand in the near term as geopolitical risk aversion supports demand for safe-haven assets.
US Dollar (USD)
There is only one place to start. The US dollar is expected to gain support as we enter March amid a significant escalation in the Middle East. Following the killing of Iran’s Supreme Leader, markets are expected to move swiftly to price in higher energy costs and elevated risk aversion.
Themistoklis Fiotakis, Head of FX Research at Barclays, noted that the situation adds to recent dollar tailwinds via higher energy prices, estimating approximately 0.5–1% of upside to the dollar for every 10% rise in oil.
HSBC strategist David May echoed this view, suggesting the USD is likely to have an upper hand in the near term, though he cautioned that the market’s reaction may differ from the more contained response seen during the June 2025 Iran conflict.
Key Levels
- EUR/USD: Higher – 1.1922, Lower – 1.1540
- GBP/USD: Higher – 1.3700, Lower – 1.3340
- USD/JPY: Higher – 157.70, Lower – 154.50
Euro (EUR)
The euro had a somewhat weaker February against the US dollar. However, economically, heading into March, it has a relatively constructive footing. Eurozone sentiment remains broadly upbeat. However, given the current geopolitical situation, that could soon change.
ING analysts view the recent dip in the European Commission economic sentiment indicator as a minor setback rather than a trend reversal, noting that growth has held at a steady 0.3% quarterly pace and that business expectations in manufacturing have improved.
The primary risk for the euro in March is that the Iran conflict-driven dollar strengthening puts renewed pressure on the EURUSD, potentially reversing some of the euro’s recent gains. The ECB’s previously noted concern about a strong euro undermining inflation targets may also resurface if EUR/USD holds near or above 1.20.
Key Levels
- EUR/USD: Higher – 1.1922, Lower – 1.1540
- EUR/GBP: Higher – 0.8800, Lower – 0.8650
British Pound (GBP)
Sterling declined in February and enters March under further pressure from domestic political uncertainty and a shifting interest rate outlook, alongside the significant geopolitical situation.
The Green Party won a by-election in Gorton and Denton, a seat previously considered a Labour stronghold and the result has been interpreted by markets as a sign of weakness for Prime Minister Keir Starmer, with ING analyst Francesco Pesole noting that anything seen as weakening Starmer’s position has weighed on the pound in recent weeks.
The prospect of a more left-leaning successor to Starmer has added to what ING describes as “concentration risks” for GBP.
ING has been bullish on EUR/GBP and sees conditions remaining in place for a move past the 0.880 level in the near term. GBP/USD may also struggle to sustain gains above the low-to-mid 1.37 range, which has acted as a ceiling in recent weeks.
Key Levels
- GBP/USD: Higher – 1.3700, Lower – 1.3340
- EUR/GBP: Higher – 0.8800, Lower – 0.8650
Japanese Yen (JPY)
After the February 8 general election temporarily dominated the currency’s direction, focus has now shifted to mounting uncertainty around the Bank of Japan’s policy path.
Reports of Prime Minister Takaichi’s concerns about further rate hikes, combined with the appointment of two considered-dovish BoJ members, Ayano Sato and Toichiro Asada, have weighed on the yen in recent sessions.
However, ING analyst Francesco Pesole cautions against reading too much into these developments, noting that one outgoing member, Noguchi, had been the most dovish voice at the BoJ. His base case remains a BoJ rate hike in June to bring the policy rate to 1%.
In the near term, improved risk sentiment has encouraged yen short-building, and any further dollar strength from Middle East risk aversion could push USD/JPY toward the 157.70–158.00 zone. A break above the February 9 high of 157.70 would bring FX intervention risk back into focus, though ING expects Japanese authorities are unlikely to act before the 160 level.
Key Levels
- USD/JPY: Higher – 157.70, Lower – 154.50
- EUR/JPY: Higher – 186.20, Lower – 182.00
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