Current Market Narrative Continues

MACRO FRAME

Markets need evidence of material progress in de-escalation as a necessary precondition to sustain a move to the upside. Until then, investors favor dollar liquidity. PMI readings out of several countries have reflected a direct impact to business activity and increased price pressures as a result of the conflict in Iran.

STOCK INDEX FUTURES

US equity index futures are lower as oil prices rose. The Pentagon is considering sending up to 10,000 more ground troops to the region, the Wall Street Journal reported, further dimming investor hopes of a near-term end to the war. The prospect of renewed escalation remains the main concern for investors, even as President Trump extended another deadline over strikes on Iranian energy infrastructure. While the delay might reduce some of the immediate escalation risk, it offers no new visibility on the path towards resolution, given Iran’s denials over talks. Equities are likely to struggle for direction until investors get a better sense of when the war will end.

Watch point: Material signs of de-escalation will support equities, though the conflict presents real risks to future gains in the absence of certainty.

CURRENCY FUTURES

US DOLLAR: The USD is 0.20% higher at 101.10, as safe haven flows and rising hawkish Fed expectations continue to underpin the dollar. Markets are pricing close to a 50% chance of a rate hike from the Fed in December. Iran’s foreign minister said the country was reviewing the US proposal to end the war but did not intend to hold talks to end the widening Middle East conflict. FX markets remain caught in limbo as traders await further clarity on US-Iran negotiations.

Watch point: Any confirmation that the Fed share of the global hawkish pivot is hardening, via speeches or further repricing in front‑end rates, would likely re‑anchor DXY toward recent highs despite cross‑currents from EUR and GBP.

EURO: The euro slipped 0.10% to $1.1517 as markets weighed the latest in US-Iran developments, including a 10-day extension of President Trump’s deadline. German Foreign Minister Johann Wadephul confirmed indirect contacts and upcoming direct talks in Pakistan, though the muted market reaction suggests skepticism that a breakthrough is imminent.

Recent PMI data from Germany, France, and the eurozone pointed to rising stagflation risks, with higher inflation ahead not subject to the energy sector alone resulting from higher input costs and supply chain disruptions. The PMI readings underscore the broader inflationary fears that have gripped markets and shifted ECB policy expectations. As of Thursday’s close, rate markets have priced in three 25 bps rate hikes from the ECB, with hikes priced in for June, July, and December.

Despite the hawkish backdrop, the conflict in Iran has led investors to favor dollar liquidity as the safe haven of choice, as Europe’s lack of energy independence makes the currency particularly vulnerable to the economic impact of higher energy prices.

Watch point: The sustainability of EUR strength will hinge on whether risk sentiment stabilizes and energy prices avoid another leg higher.

BRITISH POUND: Sterling is 0.37% lower at $1.3281. Data overnight showed that retail sales fell less than expected in February, though consumer confidence hit a one-year low in March, reflecting growing uncertainty over the conflict’s impact on economic growth. Markets are fully priced in for three rate hikes from the Bank of England this year.

The UK’s PMI data was on theme with other readings in Europe – higher input prices for manufacturers resulting in increased output prices and souring business sentiment as a result of the Iran conflict. The data also revealed that payrolls fell for the 18^th consecutive month, highlighting the UK’s fragile economic position of stagnating growth and growing inflation risks on top of already persistently high prices. March’s PMI’s confirm that the conflict has already begun to raise inflationary pressures in the economy, which are likely to negatively impact GDP growth.

Watch point: Signs of de-escalation between the US and Iran are likely to provide short-term support to GBP, but evidence of an increase in inflation present a downside to growth and will put the BoE in a bind.

JAPANESE YEN: The yen is little changed against the dollar at 159.90. Traders continue to see the 160 level as a possible trigger for intervention from government authorities to support the currency. The yen has also come under pressure from another jump in Japanese bond yields after the Bank of Japan published new estimates for its neutral rate that signaled policymakers are prepared to raise rates to counter inflation. Japan’s heavy reliance on imported energy leaves it more exposed to higher prices than many other major economies.

The BoJ’s minutes from its January policy meeting revealed that many policymakers saw the need to keep raising interest rates. Some policymakers called for timely action on rising inflationary pressures, highlighting a hawkish bias ahead of the rise in energy prices. Still, money markets are unchanged in their expectations of a July rate hike, though are favorable to action in June.

Watch point: A confirmed April hike could pull USD/JPY below 155, particularly if US yields stabilize; however, renewed US dollar strength or further escalation in the Middle East could limit yen gains despite BoJ normalization.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6884. The currency has lost around 2% since the start of the war, making it the second-worst performer among major currencies as rising energy costs have pressured the currency over their impact on the country’s economic outlook. While Australia is a major exporter of liquefied natural gas and coal, it imports most of its petrol, fertilizer and other refined products. Petrol prices alone look set to climb around 30% over March and there have been several reports of dry petrol stations and rationing in the country.

Inflation was unchanged in February, brining the annual pace of inflation down to 3.7% from 3.8% in January. Core inflation came in a tick below forecasts at 3.3%, but stayed stubbornly above the Reserve Bank of Australia’s target range of 2% to 3%. Rising energy costs are almost certain to drive CPI inflation up in March. Markets imply a near 66% chance the RBA will lift the 4.1% cash rate at its next meeting on May 5, and could take rates as high as 4.75% by year-end. Outside of the rise in energy prices, domestic data has proven inflationary and supportive of the RBA’s tightening bias in 2026.

TREASURY FUTURES

Yields are higher across the curve, tracking the move upwards in oil price. The conflict in Iran is set to have a sustained impact on consumer prices. As a result, front-end inflation pricing remains firm, with one-year inflation swaps remaining above 3.0%, pointing to a market that is pricing sustained near-term CPI upside risk. Markets are now pricing nearly a 50% chance of a December rate hike, a sharp reversal from earlier in the week when markets were expecting no policy action. However, the Fed looks more likely to cut rates than to raise them given its dual mandate and the possibility of the bank looking through an energy price shock in an effort to support the labor market.

Tuesday’s PMI data has also reinforced the inflation narrative, with the survey’s revealing the rise in energy prices and other commodities were already being passed onto consumers. Input and output costs rose at their sharpest pace in nearly four years. The longer supply chain disruptions and energy prices remain elevated, the more likely business will pass additional costs onto consumers in the face of the conflict. Unlike the dynamic of tariffs, which were partially absorbed by businesses, the increase in energy prices and other materials will be too much burden for business to face on top of existing temporary tariffs, making it likely those impacts will be felt by consumers.

Watch point: Tuesday’s PMI data serves as the first economic indicator to confirm the speculation that higher energy prices will drive up broader inflation. Markets will now look to see if the rise in prices will be sustained, potentially prompting a Fed rethink.

The spread between the two- and 10-year yields is 47.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is 4.00 %.

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