February brought a more demanding backdrop for currency markets, with politics, policy expectations and energy security all moving closer to the centre of investor thinking. What began as a month shaped by domestic election outcomes and softer US data ended with a much broader reassessment of geopolitical risk, particularly after the escalation involving Iran and the resulting disruption to energy flows.
In Japan, the decisive election result for the ruling party initially appeared to strengthen the domestic policy outlook. A clearer parliamentary mandate increased expectations that the government would be better placed to advance investment-focused fiscal measures, reducing some of the uncertainty that had surrounded the administration. That combination helped support Japanese equities and, for a period, also gave the yen an unexpected lift.
As the month progressed, the yen gave back ground as the policy message shifted towards a preference for lower rates, while the international backdrop became markedly less supportive. Rising tensions involving Iran weakened broader risk sentiment, but the yen did not benefit in the way a traditional safe-haven currency might have done in a more straightforward risk-off episode. Japan’s sensitivity to higher imported energy costs became a more important part of the story, especially once the disruption to Middle East supply routes pushed oil prices sharply higher.
In the United States, the earlier run of dollar weakness extended into February as softer economic data and political disruption fed expectations of a more accommodative rates path. Although some labour market indicators surprised on the upside, the underlying picture still pointed to subdued hiring momentum, while easing inflation encouraged hopes for more policy cuts during 2026.
Later in the month, however, the US backdrop became more complicated again. Disappointing growth data and legal challenges to the administration’s trade policy introduced fresh questions over the durability of tariff measures and the wider fiscal position. Even where tariffs were reinstated through alternative means, the episode raised doubts about how much confidence markets and trade counterparties should place in future policy actions.
Europe entered this phase from a more exposed starting point. The region’s reduced access to Russian gas had already heightened sensitivity to any further energy disruption, and the worsening Middle East conflict intensified that concern. Currency moves across the region reflected these pressures unevenly. Sterling was notably weaker, with softer employment data reinforcing expectations of a potential rate cut and domestic political strains adding another layer of uncertainty.
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