Currency markets experienced a noticeable shift in tone yesterday, as the initial energy shock evolved into a broader wave of risk deleveraging amid rising cross-asset volatility. Such unwinds are typically brief but intense.
Before rebuilding positions, investors will likely need reassurance—either through a moderation in energy prices or signals that central banks have room to ease policy.
USD: Attention May Shift to U.S. Inflation and the Fed
FX market drivers evolved yesterday. While Monday’s price action centered on the impact of elevated energy prices on importing versus exporting currencies, Tuesday brought a broader wave of deleveraging as cross-asset volatility surged. Equities sold off sharply—particularly financials—reflecting crowded overweight positioning in that sector.
Concerns around private credit redemptions (including headlines tied to Blackstone and Blue Owl) appear secondary to the wider risk-off move, though they remain worth monitoring. More broadly, rising volatility and higher Value-at-Risk metrics have triggered position trimming across asset classes. In FX, this dynamic has supported the U.S. dollar, especially given that speculative positioning had been skewed short.
Some of the dramatic overnight headlines—such as a 12% drop in South Korea’s Kospi—should also be viewed in context, following a roughly 50% rally year-to-date through February.
Looking ahead, near-term risk sentiment will likely hinge on two variables: whether energy prices can ease—potentially if the Strait of Hormuz reopens more fully—and whether central banks can provide policy support rather than tighten further. Risk assets briefly stabilized after President Trump suggested naval convoy protection for shipping through the Strait and federal backing for maritime insurance. While constructive, markets will want tangible follow-through. For now, energy prices remain firm.
On monetary policy, the inflationary implications of the energy shock have pushed short-end rate expectations higher. That hawkish repricing paused during yesterday’s equity slide, but absent another major sell-off, tighter short-end pricing appears to be the prevailing theme—another tailwind for the dollar.
Today’s catalysts include the monthly ADP employment report; a reading near +50K would reinforce the view that labor market downside risks have diminished, supporting the Fed’s stance. Attention will also fall on the ISM services “prices paid” component—an elevated reading would bolster the dollar. Later, the Fed’s Beige Book ahead of the March 18 FOMC meeting could shape expectations further. Any signs of persistent price pressures may prompt markets to trim expectations for rate cuts. Currently, roughly 45 basis points of easing are priced in for the year.
The dollar has posted strong gains this week on these dynamics, with DXY reaching as high as 99.68 yesterday. While investors may hesitate to chase it through the 100.00–100.35 highs seen over the past eight months, meaningful improvement in the energy backdrop may be required before short-dollar positioning regains traction.
EUR: 1.1500 Could Mark the Floor of the Trading Range
Heavy long positioning in the euro—particularly among asset managers—left EUR/USD exposed to downside pressure yesterday, with the pair touching a low of 1.1530. It is currently being weighed down by two forces: deteriorating terms of trade and a broader wave of market deleveraging. Of the two, the terms-of-trade dynamic is likely to be the more decisive factor. How long the energy shock persists will determine whether EUR/USD needs to slide toward the 1.10–1.12 region or can stabilize closer to 1.15. Our central scenario favors the latter, assuming operational tensions ease in the coming week and the Strait of Hormuz gradually reopens.
Unless fresh headlines emerge from the Gulf today, market sentiment may begin to steady—equity futures are already pointing to a less negative open—and EUR/USD could establish support in the 1.1550–1.1575 range.
Sources: Chris Turner
THE ETERNAL SOVEREIGN 
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