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The sharpest jump in U.S. manufacturing input costs since March 2022 has collided with an Iranian war premium and a collapsing pound. EUR/USD is back at 1.17, GBP/USD is clinging to 1.34, and the Fed’s easing path just got a lot narrower.
Nobody on the trading floor was ready for 70.5. The consensus call for ISM Manufacturing Prices Paid in February sat around 58, give or take a point depending on whose survey you followed. What the Institute for Supply Management actually delivered on March 2 was an 11.5-point surge to 70.5, the highest reading since June 2022, back when headline inflation was still running above 9 percent. ISM Chair Susan Spence said she wouldn’t be surprised to see the index climb again in March. That is not the kind of forward guidance rate-cut bulls wanted to hear.
The Tariff Transmission Lag Hits the Data
Here is what matters for your positioning. The February ISM data was collected before the first bombs fell on Iran. It captures something different and, in many ways, more structural: the tariff pass-through from Section 122. After the Supreme Court struck down IEEPA-based tariffs on February 20 in its landmark Learning Resources, Inc. v. Trump ruling, the White House pivoted within hours to a 10 percent global import surcharge under Section 122 of the Trade Act of 1974, effective February 24. That surcharge stacks on top of existing Section 232 steel and aluminum duties. Multiple ISM respondents in the transportation equipment and machinery sectors flagged U.S.-produced steel and aluminum as now among the most expensive in the world, per the official ISM report. Supplier delivery times stretched to their highest since May. Order backlogs jumped five points to the highest since May 2022.
The headline PMI came in at 52.4, down a tick from January’s 52.6 but still beating the 51.8 forecast. Manufacturing is expanding for a second straight month after ten months in contraction. That’s the good news. The bad news is that factories are paying dramatically more to keep the lights on, and those costs haven’t hit the consumer yet. FinancialContent’s analysis flagged the historical pattern: when the ISM Prices Index crosses 70, CPI tends to spike three to six months later. If that holds, summer 2026 is when American households feel it.
Fed funds futures repriced immediately. Markets now assign a 53 percent probability of no cuts through June, according to FinancialContent’s post-ISM analysis. Just a week or two ago, traders were still pricing three 25-basis-point cuts for 2026. Now it’s two. Maybe. The gold rally that took XAU/USD above $5,400 on Monday morning was built partly on safe-haven demand and partly on the bet that real rates would fall as the Fed eased. That second leg just got kicked out from under it.
EUR/USD: Back to 1.17, and the ECB Can’t Help
The DXY punched through to 98.50 on Monday, a five-week high. The dollar is winning on two fronts at once: safe-haven flows from the Iran escalation and a hawkish repricing of the Fed path. That kind of double bid doesn’t fade easily.
EUR/USD opened the week below 1.1750 and slid toward 1.1700, per FXStreet. The pair had spent most of February consolidating above 1.18, buoyed by the narrative that Fed cuts would narrow the rate differential with the ECB, which has held its deposit rate at 2.00 percent since mid-2025. The February meeting kept policy unchanged, with staff projections placing eurozone inflation near 2 percent through 2028. That was supposed to be the euro’s friend. A central bank that didn’t need to cut while the Fed did.
Now flip the script. If the Fed doesn’t cut, or cuts once instead of three times, the gap between the Fed’s 3.50 to 3.75 percent range and the ECB’s 2.00 percent stays wide, at least 150 basis points. ECB Governing Council member Martin Kocher said on Monday that the central bank should be ready to move rates in either direction if uncertainty intensifies, per FXStreet’s recap. That’s not hawkish. It’s hedging. And it’s not enough to support EUR/USD when the greenback is bid on both inflation and geopolitics.
Wells Fargo’s Q1 forecast had EUR/USD at 1.18. Rabobank projected a modest climb to 1.18 over twelve months. Those calls assumed a cutting Fed and a stable ECB. One of those assumptions just got shredded by a single ISM print and a war nobody priced in two weeks ago.
GBP/USD: Starmer, the Greens, and a Bank That Can’t Wait
Sterling is having its worst stretch of 2026 and it’s only Tuesday.
GBP/USD dropped to 1.3314 on Monday, the lowest since December 17, before clawing back to 1.3420 by the Asian session close, per FXStreet. The pound is getting hit from three directions at once and none of them are letting up.
Start with politics. The Green Party won the Gorton and Denton by-election on February 27, overturning a 13,400-vote Labour majority and pushing Starmer’s party into third place behind Reform, according to the Guardian. It was the Greens’ first-ever Westminster by-election victory. Polymarket now prices roughly a coin-flip probability that Starmer leaves office by late June, as the Global Banking and Finance review noted. Scottish Labour leader Anas Sarwar called publicly for Starmer to resign as early as February 9. That kind of political fracture doesn’t go unpriced in FX. It adds a risk premium that compounds every other headwind.
Then there’s monetary policy. The Bank of England held at 3.75 percent in February on a tight 5-4 vote, with one member pushing for a cut. Governor Andrew Bailey told the Treasury Committee that a March decision was a “genuinely open question.” Money markets had priced an 81 percent probability of a March 19 cut before this week, per Prime Market Terminal. MPC member Alan Taylor went further, warning that the UK economy risks falling into “deficient demand,” which is about as dovish a signal as you’ll get from a sitting policymaker. When your central bank is the most likely among the G7 to cut next, your currency pays for it. Sterling’s slide below $1.36 last month after UK unemployment hit a five-year high was the first leg down. This is the second.
And now add oil. Brent’s 13 percent surge pushes the UK’s import bill higher, complicates the BoE’s inflation calculus, and forces Bailey into the same trap the Fed faces: cut to support growth, or hold to contain energy-driven price pressures. The difference is that Britain doesn’t produce enough crude to benefit from the spike the way America does.
What the Desk Is Watching
Three things matter this week. U.S. non-farm payrolls on Friday. If the labour market prints hot again, the March 17-18 FOMC meeting becomes a non-event and the first cut gets pushed to July at the earliest. The Bank of England’s March 19 decision. If Brent stays above $80, Bailey has cover to hold, but the unemployment data screams cut. And the Swiss National Bank. Bloomberg reported on March 2 that the SNB has hardened its tone and stands ready to intervene in FX markets as USD/CHF broke below 0.7800 and the trade-weighted franc pushed toward all-time highs. Switzerland’s inflation sits at 0.1 percent with rates at zero. If the SNB starts selling francs, it reshapes the flow picture for the entire European complex.
The ISM print is one number. But it landed in a market already priced for rate cuts, already rattled by a Gulf war, and already questioning whether the soft landing was ever real. Size your exposure accordingly.
