Oil, CPI & Weak US Labour Market Cloud the Week.
Summary
The Middle East conflict continued to push energy prices higher last week, with both the ECB and Bank of England signalling that rate hikes could come as early as April as inflation risks mount
The UK's flash composite PMI fell to 51.0 in March from 53.9 in February, pointing to a clear loss of momentum across both manufacturing and services ahead of this week's final GDP reading
US nonfarm payrolls for March are released Friday, with forecasts pointing to a gain of only around 20,000 jobs following February's decline of 92,000, placing considerable pressure on the dollar heading into the end of the week
Currency markets last week were driven by the same theme that has dominated March: the ongoing conflict in the Middle East, rising energy costs, and what that combination means for central bank policy. The dollar strengthened through the second half of the week as markets moved to price out near-term Fed easing, with safe-haven demand and rate expectations reinforcing each other at the same time.
Sterling fell through the week and found little support from domestic data. The UK composite PMI dropped to 51.0 in March from 53.9 in February, with both manufacturing and services losing momentum. What makes the pound's position particularly uncomfortable is that markets are pricing in the possibility of Bank of England rate hikes driven by energy-led inflation, rather than any underlying strength in the economy. Tightening pressure without growth to support it is a difficult environment for sterling to hold ground.
The euro also came under pressure. At its March meeting, the ECB held rates at 2.0% but raised its 2026 inflation forecast sharply, citing the conflict as the primary driver. Markets have moved to price in ECB rate hikes as early as April, a significant shift from expectations that had pointed to rates on hold throughout the year. That repricing has been enough to generate meaningful volatility in the single currency even before any policy action has been taken, though the fragile growth backdrop across the Eurozone continues to limit how far the euro can benefit.
The dollar's own position is more complicated than last week's gains suggest. US nonfarm payrolls fell by 92,000 in February, and forecasts for Friday's March release point to a recovery of only around 20,000 jobs, with unemployment expected to rise to 4.5%. A labour market that continues to deteriorate makes the Fed's current stance progressively harder to maintain, and any soft reading on Friday would quickly bring the dollar's recent strength into question.
Events to Watch This Week
Tuesday 31 March: UK GDP Final (Q4) and Eurozone Flash CPI (March)
Wednesday 1 April: US ADP Employment Change and ISM Manufacturing PMI
Friday 3 April: US Nonfarm Payrolls and Unemployment Rate (March)
Friday's payrolls report is the most consequential release of the week. A soft reading would likely weigh on the dollar and offer relief for both sterling and the euro. A stronger number would extend dollar demand into the second quarter. As has been the case throughout March, developments in the Middle East remain capable of overriding any data release at short notice. Businesses with upcoming international payments should not leave their exposure unmanaged. Contact the Orbis dealing team to discuss your position ahead of a potentially volatile end to the week.
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