[MARKET ANALYSIS] G10s pressured across the board by a surging USD amid geopolitics

• DXY gains but trades off best levels as participants flock to the USD in light of the weekend geopolitics, with the initial US-Israel strike on Iran expanding throughout the Gulf and Middle East. Analysts at ING highlight three main channels that keeps the USD in demand: 1) the US is less dependent on imported energy vs Europe and most of Asia. Higher energy hurts importers (EUR, JPY), whilst European Nat Gas opened up around 25%. 2) Markets are scaling back expectations for rate cuts from the Fed, with higher energy also proving headwinds for disinflation. A “bearish flattening” in the US yield curve (short-end yields rising) supports the dollar. 3) Higher energy and reduced Fed easing expectations could reverse capital flows into EM, which would further support USD. DXY around the middle of a 97.768-98.566 range after hitting highs around an hour after the European cash open.
• GBP is the worst performer amid the RAF base in Cyprus being struck by an Iranian drone. The UK has confirmed it is not participating in offensive operations but is permitting defensive use of bases. GBP/USD slipped from a 1.3456 peak to a 1.3314 trough.
• EUR has been hit by the aforementioned surge in energy prices with EUR/USD slumping from near 1.1800 to lows of 1.1698 before trimming losses as the time of writing. ING suggests EUR/USD could slide back toward the 1.1575–1.1600 area if escalation continues.
• JPY and CHF are softer despite their haven appeals, with the USD sought after given its reduced dependency on energy imports. USD/JPY is +0.6% in a 156.04-157.25 range. USD/CHF trades +0.5% in a 0.7668-0.7742 parameter.
• Antipodeans also post losses amid their high-beta properties and sensitivity to risk. AUD/USD resides in a 0.7032-0.7117 range and NZD/USD in a 0.5928-0.5995 band.

The USD is gaining strength across the G10 currencies, primarily driven by rising geopolitical tensions in the Middle East and a reduction in expectations for Fed rate cuts. This environment is exacerbating energy price increases, particularly affecting the EUR and JPY, which are more reliant on imports. As capital flows pivot back to the USD amidst these pressures, look for potential continued weakness in high-beta currencies like the AUD and NZD as well.