Dollar Falls on Lower Energy Prices

MACRO FRAME

Renewed geopolitical tensions add another layer of uncertainty to global markets, while February’s nonfarm payrolls report keeps the case for a summer Fed rate cut intact but offers limited clarity on the extent of easing.

STOCK INDEX FUTURES

Equity indexes edged lower ahead of the bell after reversing course on Monday following comments from President Trump, who said he thinks the war against Iran “is very complete” and that Washington was “very far ahead” of his initial four to five week estimated time frame. Trump also eyed potential easing of sanctions on Russia to alleviate supply-side pressures on energy prices. However, Iran state media reported that an oil tanker has exploded near Abu Dhabi, casting doubt on Trump’s comments over a sooner-than-expected end to the conflict.

On the corporate front, Oracle is scheduled to report after the market close on Tuesday, while Adobe is set to report on Thursday.

Watch point: Further escalation in the Middle East or a sustained move in oil above $90 could deepen the current risk-off tone across equities

CURRENCY FUTURES

US DOLLAR: The USD Index is 0.50% lower at 9.684, as news reports over a potential de-escalation in the Middle East pressured the dollar alongside a drop in energy prices. The dollar has been traders safe haven of choice amid the conflict in Iran and pursuing inflationary pressures, as the US, given it is a major oil producer, is better positioned to withstand energy price shocks.

Near-term price action is likely to remain headline-driven; any signs of de-escalation could weigh on the dollar as safe-haven demand fades, while continued fighting and tighter energy markets would likely reinforce dollar strength through higher inflation expectations.

Watch point: Dollar direction is likely to remain driven by geopolitical headlines and energy markets in the near term.

EURO: The euro slipped 0.07% to $1.1630 after rallying late Monday on comments from President Trump suggesting the conflict in Iran could end sooner than expected. Energy prices have eased from recent highs, providing some relief for the single currency, though they remain elevated and continue to weigh on the euro given Europe’s dependence on imported energy. The currency remains sensitive to geopolitical developments and moves in the greenback.

Macro conditions remain favorable to the euro – apart from the conflict in the Middle East. Labor market conditions remain firm, with the unemployment rate falling to a record low of 6.1% in January, while inflation data has surprised to the upside, with headline inflation rising to 1.9% year-over-year and core inflation reaching 2.4%, both above forecasts.

Watch point: Euro direction will likely remain sensitive to global risk sentiment and dollar dynamics.

BRITISH POUND: Sterling little changed against the dollar at $1.3435 as a comments from President Trump lifted the currency on Monday, but still-elevated energy prices capped gains. Market-implied odds for a rate cut from the Bank of England suggests no policy action from the BoE for the remainder of the year, though remain sensitive to the conflict in Iran. Market-implied odds were more favorable to a rate hike from the BoE on Monday, but have since shifted to now favor a cut in response to headlines over a potential de-escalation/early end to the conflict in Iran. GBP remains sensitive to energy price direction and headline trading regarding the conflict ahead of Friday’s GDP data, which is expected to show the economy expand 0.2% in January.

Watch point: Policy decisions from the Bank of England are now on hold with renewed geopolitical risks and a potential sustained rise in energy prices. We look for GBP/USD to weaken over 1H 2026.

JAPANESE YEN: The spot yen fell 0.10% to 157.83, while March contracts advanced over 0.30%. Comments from President Trump that the war in Iran could end earlier than expected, alongside talk of a potential reprieve in sanctions on Russia were supportive of the currency. However, until there is further clarity from the administration, gains are likely to face headwinds.

Revised GDP data out overnight showed Japan’s economy advanced at an annualized pace of 1.3% in Q4 2025, above forecasts of a 1.2% expansion and an initial estimate of 0.2%. The higher figure marks a rebound from a 2.6% contraction in Q3, supported by firmer domestic demand and government spending. Business investment also grew following a stagnant third-quarter.

However, the positive GDP revision did little to materially strengthen the yen after household spending data disappointed. January spending fell 1% year-over-year, missing expectations for a 2.5% increase and highlighting ongoing softness in consumer demand.

Data out earlier in the week showed real wages rose for the first time in 13 months, reinforcing the Bank of Japan’s case to continue normalizing monetary policy. Money markets continue to price in a July rate hike from the BoJ, while also favorable to a cut in June as well.

Watch point: A move beyond the ¥160 range would likely intensify intervention rhetoric, while sustained energy-driven inflation could keep tightening expectations intact despite political pressure.

AUSTRALIAN DOLLAR: The Aussie advanced 0.57% to $0.7117, as the relief in energy prices prompted risk-sensitive assets to gain. On the data front, surveys showed that consumer sentiment in Australia rose slightly in March after the rate hike last month, although the mood was steadily darkening as the conflict in the Middle East widened. Business sentiment turned negative for the first time in 11 months in February but conditions held steady and inflation measures showed price pressures were picking up.

Stronger-than-expected growth data and inflation readings have supported a tightening bias from the Reserve Bank of Australia. Australia’s economy expanded 0.8% in Q4 2025, lifting annual growth to 2.6%, the fastest pace since 2023. Markets currently imply around a 85% probability of a rate hike at the May meeting, while being fully priced in for two rate cuts in 2026.

Watch point: Wage figures, capacity utilization, PMI readings, and other signals on economic momentum will dictate market sentiment over future timing expectations.

TREASURY FUTURES

Treasury yields are lower at the front end and higher at the long end, with the 2/30 spread widening to 119.50 bps from 117.50 on Monday. Bonds reversed course on Monday following President Trumps comments regarding the conflict in Iran. Trading ranges today are likely to remain thinner ahead of Wednesday’s inflation data, which is expected to show prices rose 0.3% in February. Yields still remain elevated in response to higher energy prices and the conflict in Iran, though the 10-Year yield has found resistance at 4.20%, signaling that traders are finding it hard to sell at that level or strong dip-buying is taking place. The 10-Year 200-day MA is 4.204%.

February’s unexpected drop in hiring alongside building inflationary pressures from higher energy prices presents policymakers with a difficult balancing act. While weaker labor data supports the case for Fed easing later this year, rising oil prices risk pushing inflation higher and delaying rate cuts. The full impact of higher energy costs is unlikely to appear in the data until April, and by that point the conflict could potentially subside, easing inflation risks.

Wednesday’s February inflation report will provide markets with an important gauge of how price pressures were trending before the escalation of the Middle East conflict.

February’s payroll figures showed a clear cooling in job growth, though the decline was partly driven by temporary factors, particularly healthcare strike activity. The unemployment rate edged up to 4.4%, though remained largely stable suggesting the labor market remains broadly stable. However, a notable sign of weakness in the labor market is the rise in long-term unemployment, which rose to 1.9 million, up from 1.5 million a year ago. The figure suggests weak hiring conditions attributed to slowing labor demand. For the Fed, the question about how fast/slow labor demand is cooling is likely to be central to the timing of the next rate cut. Still, the figure does reinforce our base case that policy will remain unchanged into the summer.

Markets have shifted back to favor easing in the fall, with a September priced for a cut. Total easing for year-end has widened to 42 bps, above 38 bps seen on Monday.

Watch point: A weak headline NFP figure supports the case for Fed easing this year, but questions as to how slow labor demand is cooling will likely determine further policy at the Fed.

The spread between the two- and 10-year yields is 56.20 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.553%.

 

 

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