It was one of those weeks where markets barely had time to catch their breath.
Currency traders began the week digesting the escalation in the Middle East following the joint US-Israeli strikes on Iran. Oil surged, natural gas prices spiked, and the Strait of Hormuz, one of the world’s most critical energy arteries, saw shipping grind close to a halt.
In a normal week, economic data would dominate the narrative. This week, geopolitics took centre stage.
Yet beneath the headlines, a familiar dynamic quietly reasserted itself. FX markets once again behaved as relative-value markets, with energy exposure, interest rate expectations, and global risk sentiment determining which currencies thrived and which struggled.
 

The most immediate market reaction came through energy prices.
Brent crude surged more than 20 percent over the week, while European natural gas prices exploded higher amid fears that supply disruptions could persist for weeks. With shipping through the Strait of Hormuz severely disrupted, traders were forced to rapidly reassess the global energy outlook.
The implications for inflation were immediate.
Higher oil and gas prices translate directly into higher input costs for businesses and consumers alike. That forced markets to reconsider how quickly central banks can cut interest rates.
In the UK, this repricing was particularly dramatic. Only a week ago, markets were expecting two Bank of England rate cuts this year. By Friday, that expectation had collapsed to just one.
The result was a sharp rise in UK bond yields and, somewhat surprisingly, a stronger pound.
 

Sterling’s performance was one of the more unexpected developments of the week.
Ordinarily, heightened geopolitical tension and falling equity markets would weigh on the pound. But this time, the shift in interest rate expectations provided a powerful counterbalance.
As investors reassessed the inflation outlook, UK yields climbed sharply. That increase in yield support helped propel GBP/EUR higher, with the pair climbing to around recent highs.
In fact, the move puts sterling on track for its strongest weekly advance against the euro since April 2025.
The underlying logic is straightforward.
Higher energy prices mean higher inflation. Higher inflation reduces the Bank of England’s ability to cut rates. And fewer rate cuts translate into stronger yields and a firmer currency.
That said, the situation remains highly fluid. If global risk sentiment deteriorates sharply, sterling’s traditional sensitivity to market stress could quickly re-emerge.
 

While the pound strengthened, the euro moved in the opposite direction.
The reason is structural. The Eurozone remains heavily dependent on imported energy, which makes the region particularly vulnerable to sudden price spikes.
This week provided a stark reminder of that vulnerability.
European natural gas prices surged dramatically, at one point jumping more than 40 percent as LNG flows were disrupted and shipments were redirected to Asia.
Rising energy costs create a difficult dilemma for the European Central Bank. Higher prices push inflation higher, which argues for tighter policy. But at the same time, higher import costs weaken economic growth and damage the region’s trade balance.
In short, it is a lose-lose scenario.
Even as markets began pricing the possibility of ECB rate hikes in 2026, the euro struggled. Investors appear far more concerned about the economic impact of another energy shock than about future policy tightening.
 

The US dollar spent most of the week oscillating between safe-haven demand and broader risk sentiment.
Geopolitical uncertainty typically supports the greenback, and this episode was no exception. Investors initially moved into the dollar as tensions escalated and global markets turned defensive.
However, the rally was measured rather than explosive.
The United States now benefits, at least partially, from higher energy prices due to its role as a major oil producer and exporter. That dynamic has somewhat altered the traditional relationship between oil shocks and the dollar.
Still, the broader trend remains clear. As long as geopolitical uncertainty persists, the dollar is likely to retain a modest upward bias.
 

Elsewhere in the G10 complex, currencies moved largely in line with their exposure to energy markets and global risk sentiment.
Energy exporters such as the Canadian dollar and Norwegian krone received support from the surge in oil prices. Meanwhile, energy-sensitive economies such as the euro area and parts of Asia struggled.
Safe-haven currencies also attracted flows. The Swiss franc strengthened notably during periods of market stress, reflecting its traditional role as a defensive asset during geopolitical crises.
Overall, the FX landscape this week was shaped less by domestic economic data and more by global developments. Traders were watching missile launches, shipping routes, and energy infrastructure as closely as they were watching central bank policy.
 

 
Q: Should businesses be worried about currency volatility right now?
A: Volatility has increased, but markets are not in panic mode. Currency moves are still largely orderly and driven by macro fundamentals rather than systemic stress.

Q: Why is the pound performing well despite global uncertainty?
A: The key driver is interest rates. Rising energy prices have reduced expectations for Bank of England rate cuts, pushing UK yields higher and supporting sterling.

Q: Why is the euro struggling despite expectations of higher ECB rates?
A: Energy exposure. The Eurozone imports large amounts of energy, so rising oil and gas prices tend to weaken the currency even if interest rate expectations move higher.

Q: What could change the outlook next week?
A: Two things. First, whether the conflict escalates further, particularly around energy infrastructure. Second, whether global stock markets remain stable or begin to sell off sharply.
 

This was a week where geopolitics dominated the financial landscape.
Energy markets surged, interest rate expectations shifted, and currencies moved accordingly. Yet despite the noise, FX markets behaved largely as expected. Energy exporters gained ground, energy importers struggled, and safe-haven currencies attracted defensive flows.
For businesses and finance teams, the message is simple.
Periods of uncertainty rarely last forever, but the opportunities they create rarely stay open for long.
Managing currency exposure proactively, rather than reactively, remains the most reliable strategy in markets like these.