Calmed by Uncertainty

The latest NatWest FX strategy chat highlights why the G10 foreign‑exchange market has been unusually placid while oil‑price shocks from the Iran‑Israel conflict roiled bond and rate markets. Strategists Brian Dangerfield and Paul Robson point to a paralysis of sentiment: traders cannot read U.S. versus Israeli objectives, and every session swings between hopes of de‑escalation and fears of further escalation. That uncertainty kept the dollar’s positioning moving from a short bias in March to a roughly neutral stance today, dampening any decisive directional move despite volatile energy headlines.

Sterling’s resilience surprised many observers. Even as the UK wrestles with weak growth, an ageing population and fiscal fragility, the pound benefited from expectations that the Bank of England would keep rates higher than peers, offsetting typical selling pressure. A relatively stable political environment under the Labour government and strong historical links with Middle‑East capital flows also cushioned the currency. Consequently, sterling has outperformed other major currencies, reinforcing the view that it behaves like a “fair‑weather” asset when global risk appetite remains modestly positive.

The yen, hovering near the psychologically important 160 per dollar mark, reflects a different set of dynamics. Japan’s fiscal agenda—tempered by a pledge to curb the cost‑of‑living crisis and a cautious approach to stimulus—faces headwinds from rising energy import bills and potential defence spending spikes. As oil and gas supplies stay disrupted, fiscal expansion appears likely to persist, creating a durable drag on the yen. Across the FX landscape, the interplay of energy price trajectories, sovereign fiscal policies and central‑bank rate paths will dictate which currencies gain strength as the world moves beyond the acute phase of the Middle‑East crisis.