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Economic Updates
FX Viewpoint: G8 currencies under three oil-price scenarios
Key takeaways
- Geopolitical developments in the Middle East remain the key FX driver.
- Since the conflict escalated, the USD-oil relationship has strengthened.
- If that relationship weakens, FX fundamentals may regain influence.
Middle East geopolitics remain the primary driver of FX markets, but the headlines are difficult to interpret as tensions can escalate and ease quickly. We believe market direction may hinge on a few practical indicators, notably the extent of shipping disruption through the Strait of Hormuz and the resulting path for oil prices. As geopolitical risk rises and falls, oil can move sharply, shifting market sentiment between “risk-off” and “risk-on”. The table below summarises potential G8 currency performance across three oil-price scenarios.
Source: HSBC
Since the conflict intensified, the USD and oil prices have moved more closely together, unlike in prior months. This appears to reflect both an energy supply shock and increased “safe haven” demand for the USD.
Beyond energy, second-order effects, particularly potential upside pressure on food prices, are also relevant. Disruptions to nitrogen and phosphate fertilizer exports matter because the Middle East represents c36% of global nitrogen trade and c23% of global phosphate exports (S&P Global, 19 March 2026), both essential inputs for food production. This dynamic could leave several Asian and European currencies more vulnerable.
Nonetheless, if the positive oil and USD relationship began to show signs of weakening, then it could be an early indication (like ships cross the Strait of Hormuz) of pre-conflict FX behaviours returning. For example, FX fundamentals may regain influence relative to simple energy-price tracking when assessing relative currency preferences. Additionally, as the Federal Reserve (Fed) is neither in a rate-hiking cycle nor has turned outright hawkish, there are underlying factors that may continue to limit broad-based USD strength.
https://www.hsbc.com.my/wealth/insights/fx-insights/g8-currencies-under-three-oil-price-scenarios/
