FX Weekly

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USD has scope to advance further

FX View:

The US dollar moves have been relatively orderly so far since the start of the conflict in the Middle East. That could well be about to change with the surge in crude oil prices – Brent hitting USD 119.50 before retracing on possible IEA/G7 emergency supply releases. Equity markets in Europe and Asia have been hit more severely and that could well spread to US markets as global investors reassess the corporate earnings outlook. The economic hit to growth will become increasingly more severe the longer the conflict lasts with the IMF estimating a 0.4ppt increase in global inflation for every USD 10 p/bl increase in crude oil prices. Growth will also be hit by the shift in market yields. The inflation risk has seen a dramatic shift in short-term rate expectations in Europe that will weigh on growth expectations and risk assets. US dollar gains are set to extend further over the short-term. Our analysis of past energy price shocks indicates EUR/USD should be lower based on the 50% jump in crude oil prices and the near 100% jump in TTF natural gas.

ENERGY PRICE SHOCK SEES BROAD USD STRENGTH, BAR CAD

Source: Bloomberg, close on 6th March 2026 (Weekly % Change vs. USD)

Trade Ideas:

We are establishing a short EUR/USD trade to reflect the scope for further declines based on energy price rises to-date.

IMM Positioning: 

The latest IMM weekly positioning data for the week ending 3rd March shows that Leveraged Funds cut back short USD positions triggered by Operation Epic Fury which started on 28th February.

Oil Shocks and G10 FX (Pre‑ vs Post U.S. Shale Era):

The EUR and CHF have weakened against the USD in line with FX market reactions to previous oil price shocks in the post-shale era. However, the scale of the sell-offs for EUR and CHF so far have been relatively modest compared to the size of the jump in the price of oil.

FX Views

USD: Energy price shock set to trigger broader risk-off

We are in the very early stages of the US-Iran conflict and the financial market moves have been relatively contained outside of energy, perhaps reflecting the scale of unknowns and uncertainties in regard to the scale of this conflict. Investors may not want to yet price a bad scenario given the unpredictability of President Trump and his capacity to suddenly change tack, by perhaps seeking an off-ramp to de-escalate more quickly than expected. One similarity between this conflict and the Russia invasion of Ukraine is that investors were not completely taken by surprise. There had been a build-up of Russian troops for months ahead of the invasion just like now there has been a steady build-up of US military in the Middle East. Hence, investors had been pricing the risk of a conflict well before the start and the crude oil chart below indicates a similar performance for crude oil in the months leading up to the start of the conflicts and the very early initial reactions. As it became clearer that Russian crude supplies would be sanctioned and that Russia would use natural gas as a weapon energy prices then surged. The deterioration in supply expectations over the weekend has now seen the crude oil price surge surpass the 2022 episode and this along with the surge in short-term rates in Europe means this will quickly translate to a growth shock.

Last week global investors were certainly pricing a scenario of energy supply disruption and perhaps for a number of more weeks – it is hard to be precise of course. But global investors may now be starting to price the prospect of supply destruction. Iran has shown its ability to attack crude oil and natural gas production facilities but the attacks have not been extensive but could now pick up after Israel’s attacks on production and storage facilities over the weekend. Iran upping attacks on production facilities would be hugely impactful and we would likely see significant further increases in crude oil and natural gas process. The dollar would advance further and equities would start to suffer more. As of now, Iran has not been too active in attacking production facilities. Based on our own information gathering we know two Qatar facilities (Ras Laffan & Mesaieed) were hit by drones. Saudi Arabia’s major oil refinery (Ras Tanura) was hit by debris from an intercepted drone and a drone struck a UAE fuel storage terminal. All those attacks were on Monday. There were a few other unspecified reports of attacks (not clear if referring to the specified attacks) but generally energy production attacks so far have been sporadic, likely showing Iran’s capability and willingness if it so chooses to shift to a supply destruction tactic.  

A pick-up in supply destruction concerns due to evidence of a shift in tactics from Iran would be significant for the markets. The current scenario is that risks to facilities have halted or reduced production as has the inability to use the Strait of Hormuz. Once conditions allow, production can gradually ramp back up. A scenario of supply destruction would be far worse in that the time taken for significant repairs would lengthen, potentially notably, the time to get production going again. Qatar’s Energy Minister, Saad al-Kaabi was quoted in the FT on Friday stating that production in Qatar will not restart until there is a “complete stop of hostilities”. Supply destruction concerns could be imminent with al-Kaabi also stating on Friday that all Gulf exporters could shut down production within days which could drive crude oil prices to USD 150 p/bl.

CRUDE OIL SHOCK NOW ALREADY LARGER THAN 2022

Source: Bloomberg, Macrobond & MUFG GMR

CRUDE OIL SHOCK NOW ALREADY LARGER THAN 2022

Source: Bloomberg, Macrobond & MUFG GMR

Europe and many countries in Asia would see a much more severe negative terms of trade shock. That reflects not just crude oil but natural gas supplies. The TTF front contract is 97% higher since the conflict began with the UK front contract up 103%. In contrast the US contract is a mere 17%. European countries have done a good job in diversifying their import sources of natural gas since the Russia-Ukraine conflict and Europe has always had less dependence on ME natural gas than Asia. Norway has become considerably more important for the EU and the UK – Norway accounts for 31% of EU’s natural gas imports and 43% of the UK’s. The US has also become a more important supplier to Europe. However, natural gas production capacity in Norway and the US is already quite tight so it seems unlikely that either country can ramp up production in order to offset the lost supply from the Middle East.

The market now has 40bps of hikes by the ECB priced by year-end. Whether delivered or not the inflation shock will be more severe in Europe than in the US. However, demand conditions now are very different to 2022 when most economies were experiencing a pent-up demand surge post-covid. But still, ECB analysis and our own estimate suggest the potential for a 1.0-1.5ppt increase in headline CPI in the euro-zone if crude oil prices remain around USD 100-110 p/bl. The IMF estimates that for every USD 10 p/bl increase in crude oil prices there is a 0.4ppt increase in global inflation. For the US if crude oil prices were to remain here at around USD 100 p/bl this would translate into a 45%-50% YoY increase in crude oil that could translate to at least a 1.0ppt to headline CPI. With inflation expectations less anchored than before, the tolerance amongst central banks not to hike is likely to be less.

It is hard to look beyond the very near-term risks of a further extension of US dollar strength. The scale of increase in energy prices with no obvious ‘off-ramp’ to allow for de-escalation will likely see yields remain high, hitting growth expectations and hence equities. A 20% correction in equities into bear-market territory is feasible which will likely see high-beta G10 FX suffer along with EUR and GBP. CAD, NOK and CHF look best placed to weather the financial market fallout. The scale of US dollar strength is more muted than expected with weak US fundamentals possibly playing a role.

-92K NFP ON FRIDAY MAY BE HOLDING USD GAINS BACK

Source: Bloomberg, Macrobond & MUFG GMR

HIGHER RATES ABROAD AS FED STILL SEEN CUTTING

Source: Bloomberg, CFTC, Macrobond & MUFG GMR

USD: Energy price shock to trigger FX carry trade unwind?  

The conflict in the Middle East is delivering a volatility shock to financial markets, primarily through the channel of higher energy prices. Brent crude has surged higher  by around 50%.  A move that is more than double in scale to the jump in oil prices following the US–Israeli strikes on Iran in June 2025. Operation “Midnight Hammer” proved relatively short‑lived, resulting in limited disruption to global oil supply, and the spike in prices reversed quickly within a couple of weeks. In contrast, market participants are now much more concerned about the risk of greater disruption to global energy supplies. These upside risks are also visible in measures of backwardation in the oil market: the front‑month Brent futures contract is trading at its largest premium over the three‑month contract over the last forty years. At the same time, oil‑market volatility has jumped to its highest level since Q2 2020, when the initial COVID shock hit markets. The longer the conflict drags on, the higher the risk of an even larger and more disruptive oil price spike. It has reportedly prompted G7 members to consider announcing today a joint release of oil reserves potentially totalling between 300 million to 400 millions barrels. That would offset around 2 to 3 weeks of normal Strait of Hormuz flows if it remains effectively closed.  

The energy price shock has begun to spill over into broader financial markets, triggering a deepening sell‑off in global bond and equity markets and contributing to a stronger USD. It threatens to bring an abrupt end to the stable financial market conditions seen at the start of this year, which had been conducive to greater risk‑taking among investors. So far, the pullback in developed market equities has been relatively modest compared with emerging‑market equities. MSCI’s ACWI (developed market) equity index has fallen by around 4% from record highs at the end of last week, whereas MSCI’s emerging market equity index has dropped by roughly 7%. This marks an abrupt reversal, given that emerging market equities had been significantly outperforming their developed market counterparts earlier in the year. Higher energy prices are also prompting a sell‑off in global bond markets, as investors price in a higher inflation risk premium and scale back expectations for additional central bank easing in 2026. However, volatility in equity and bond markets has so far remained more contained compared with the sharp jump in oil market volatility.

OIL SUPPLY FEARS TRIGGERING VOL SHOCK

Source: Bloomberg, Macrobond & MUFG GMR

EM HIT HARDER AFTER RECENT OUTPERFORMANCE

Source: Bloomberg, CFTC, Macrobond & MUFG GMR

It has been a similar story in the foreign exchange market. The USD has strengthened on the back of the energy price shock, although the dollar index remains within the 96.000 to 100.00 trading range that has been in place since Q2 of last year. The largest moves have occurred in emerging market currencies: the HUF has fallen by around 7.3% against the USD, the ZAR by 4.9%, the CLP by 4.3%, the MXN by 3.7%, and the PLN by 3.6%. In contrast, the sell‑off in G10 currencies has been more modest, with the SEK down about 2.3% and the EUR by around 2.0%. This divergence has resulted in a larger jump in EM FX volatility than in G10 FX volatility, although both are still relatively low by historical standards, leaving considerable scope for volatility to rise further.

The volatility shock stemming from the conflict in the Middle East is creating a more challenging backdrop for FX carry trades and could yet trigger a larger liquidation of popular carry trade positions. Bloomberg’s measure of FX carry trade performance had been performing strongly since April of last year. President Trump’s “Liberation Day” tariff announcement that month marked the peak in financial‑market volatility, and the subsequent decline in volatility encouraged investors to build up carry trade exposures. Looking at FX performance since volatility peaked on 11^th April last year, the best‑performing emerging‑market currencies prior to the outbreak of conflict in the Middle East were the ZAR, MXN, BRL, COP, HUF, CLP, CZK, and PLN. These currencies have begun to correct over the past week since the conflict began. The high‑yielding European currencies of the  HUF and PLN along with the CLP have experienced the sharpest declines relative to their earlier gains. For the HUF and PLN especially, the sell‑off has been reinforced by concerns that European economies will be hit harder by the negative terms‑of‑trade shock associated with higher energy prices.

FX CARRY PERFORMANCE VS. FX VOLS

Source: Bloomberg, Macrobond & MUFG GMR

VOL SHOCK TO TRIGGER FX CARRY TRADE UNWIND

Source: Bloomberg, Macrobond & MUFG GMR

On the other hand, funding currencies such as the JPY have not rebounded. The BoJ’s trade‑weighted JPY index remains close to year‑to‑date lows. The JPY strengthened on the last two occasions when FX volatility spiked, first in April 2025 and again in the summer of 2024. This price action highlights the risk that the JPY could stage a counter trend rally if the volatility shock from the conflict in the Middle East intensifies triggered by a squeeze of JPY‑funded carry positions that have been built up since the Ukraine conflict began in 2022. During the last major energy price shock in 2022, the JPY was one of the worst‑performing G10 currencies (alongside the SEK), as Japan was hit by a sharp negative terms‑of‑trade shock and the BoJ maintained a cautious stance, keeping rates on hold while the Fed and other major central banks lifted rates away from the zero bound. This policy divergence encouraged the build-up of JPY‑funded carry trades. The trade‑weighted JPY has weakened significantly since that 2022 energy shock by around 23%, with over half of those losses occurring after market volatility peaked in April 2025 when Trump announced his  Liberation Day tariffs. 

LAST 2 VOL SHOCKS TRIGGERED A STRONGER JPY BUT IT WEAKENED AFTER LAST ENERGY PRICE SHOCK

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• The main focus in the week ahead will be the latest geopolitical developments in the Middle East, which are likely to continue driving foreign exchange market performance. Higher energy prices and rising financial market volatility remain the key channels through which these developments are influencing FX markets. Heightened uncertainty over the duration of the conflict, and the scale and persistence of disruption to global energy supply will continue to be assessed in the week ahead.
• In contrast, the latest economic data releases are likely to have less market impact than usual while geopolitical risks remain elevated. The key data in the week ahead will be the US CPI and PCE deflator reports for February and January. Inflation picked up at the start of the year, with signs that businesses have been passing a greater share of tariff increases on to consumers. However, the upcoming inflation data is likely to be viewed as more backward‑looking than normal given the risk of another energy price shock. Our outlook for US inflation to slow in the second half of the year would be challenged if the energy price shock triggered by the Middle East conflict proves more persistent. For now, we are assuming the disruption to global energy supply will be temporary.
• Fixed‑income markets have been moving to price out further rate cuts from G10 central banks over the past week, reflecting heightened concerns over upside inflation risks. The upcoming week features a relatively light schedule of central bank speakers, limiting fresh insight into how policymakers’ views may be shifting in response to developments in the Middle East. There are no scheduled Fed speakers due to the communications blackout ahead of the FOMC meeting on 18^th In Europe, ECB Vice President Guindos and Executive Board member Schnabel are scheduled to speak on Wednesday.