Written Commentary
MACRO FRAME
Markets are looking past the conflict and pricing a settlement between the US and Iran, leaving earnings season to play a more dominant role in determining risk sentiment.
STOCK INDEX FUTURES
US equity index futures were higher overnight as oil prices dropped. Iran’s foreign minister told news outlets that in line with the ceasefire in Lebanon, the passage for all commercial vessels through the Strait of Hormuz is declared completely open for the remaining period of the ceasefire. Iran’s non-action remains the daily bullish catalyst for the indexes under current conditions. A separate Israel-Lebanon ceasefire that began at midnight Friday local time; President Trump said an Iran deal could come “pretty soon” and a second round of direct talks may resume this weekend in Islamabad, reinforcing the growing confidence among investors that the US and Iran will return to the negotiating table in the coming days. That belief has spurred the recent rally, which saw the S&P close above 7,000 for the first time ever, while the Nasdaq has notched 12 straight gains. The market is operating under the assumption that the worst of the conflict is over. The blockade signals a shift in US strategy away from warfare to economic countermeasures. A sign yet that the US and Iran have entered negotiating phase and that the war is winding down.
Q1 earnings season continues, f the 32 S&P 500 companies that have reported through mid-week, total earnings are up 30.5% YoY on 13.2% revenue growth, with 78% beating EPS estimates and a notably high 84% topping revenue forecasts, well above historical averages. Financials have been the early-season standout, with the sector posting 18.3% earnings growth and a 90% EPS beat rate. FactSet estimates the blended S&P 500 growth rate could finish near 19% once all beats are tallied, which would mark the strongest quarter since Q4 2021.
Watch point: The ceasefire has reduced geopolitical tail risk and spurred optimism that the US and Iran will meet at the negotiating table again, providing markets with a bullish catalyst.
CURRENCY FUTURES
US DOLLAR: The USD index is 0.22% lower at 99.99, as oil prices fell overnight on market belief that the US and Iran will either reach a deal this weekend or extend the current ceasefire. The main catalyst for USD remains the direction of oil prices and developments between the US and Iran. As evidenced by previous moves, any signs of de-escalation and diplomatic off-ramps will renew pressure on the dollar, while any escalation points towards more safe haven demand.
Underlying fundamentals make the case for a resumption of the dollar’s downward trend once hostilities in the Middle East are officially over. Despite rising inflationary pressures driven by energy prices, the dollar has lost its interest rate differential support it once drew from hawkish Fed expectations, support that has since been repriced away. With the labor market softening materially, the underlying case for a Fed rate cut later in the year remains intact.
Watch point: A move up from the Fed is out of the picture as the Fed is well positioned in its policy rate for the time being, though a weak labor market leaves the door open for easing.
EURO: The euro is up 0.21% to $1.1808 overnight. Developments regarding the ceasefire between the US and Iran remain the dominant factor in price direction for the euro. European Central Bank President Christine Lagarde on Tuesday said the euro zone’s economy is somewhere between the ECB’s baseline and adverse scenarios, adding the central bank would be “agile” when setting interest rates. Markets are fully priced for a rate hike at the June meeting and see one more rate hike by year end. The path to tightening from the ECB will hinge on the effectiveness of the two-week ceasefire and whether it brings lasting peace. The critical risk factor is the persistence of the energy shock.
Watch point: March’s inflation data confirmed that headline inflation was dragged higher by rising energy prices, while other components were reassuring to the broader inflationary picture. A rate hike at the ECB’s April meeting is unlikely, while the case for tightening depends on the effectiveness of the ceasefire and duration of the rise in energy prices.
BRITISH POUND: Sterling is 0.37% higher at $1.3578. British Prime Minister Keir Starmer faced renewed calls for his resignation from his political opponents after it was revealed his former ambassador to the United States failed security vetting but was still allowed to take up the job. Data on Thursday showed that UK real GDP grew by 0.5% MoM in February, and by 0.5% in the three months to February compared with the three months to November 2025. Price direction in FX markets continues to be dominated by developments from the US-Iran conflict, mainly oil prices given Britain’s dependence on energy imports and the economy’s sensitivity to higher energy costs.
Markets continue to expect an upward move in BoE policy, with a rate hike by September fully priced in. However, expectations for year-end policy have fallen dramatically in recent days, markets are now pricing 35 bps of tightening, down from 51 bps on Monday and well below over 75 bps of tightening priced at the onset of the conflict. The weakness of the UK economy remains a limiting factor for potential tightening as market-implied odds had overshot realistic BoE policy at the beginning of the conflict.
Watch point: Signs of a diplomatic route between the US and Iran and friendly to the pound, though pre-war macroeconomic factors could resume their pressure on the currency if hostilities find a quick end.
JAPANESE YEN: The yen is strengthened 0.50% to 158.46 yen per dollar. Bank of Japan Governor Kazuo Ueda on Thursday steered clear of signaling a rate hike was on the cards this month, heightening the chance it will hold fire at least until June. Meanwhile, Japan’s finance minister said Japan and the US agreed to intensify communication on exchange rates after her meeting with Treasury Secretary Scott Bessent on Wednesday. Markets continue to scale back pricing for a rate hike this month by the Bank of Japan, though remain favorable to a hike at the bank’s July meeting. The Yen has failed to hold a depreciation past the 160 level, as expectations of government intervention and eventual policy tightening offer support. The yen’s near-term trajectory remains hostage to geopolitical developments, a durable ceasefire could quickly unwind oil-driven inflation expectations and reduce urgency for BoJ action, though the bank is set to maintain its tightening bias.
Watch point: An April rate hike could pull USD/JPY closer to 155, though the odds of such happening appear unlikely at the time being.
AUSTRALIAN DOLLAR: The Aussie is 0.70% higher to$0.7211, as risk sentiment returns to markets. Labor data on Thursday showed employment rose in March, while the jobless rate remained low, firming support for a May rate hike. Meanwhile, market optimism that the US and Iran will return to the negotiating table is also likely to support risk sentiment and the AUD. Markets imply a 72% chance of another quarter-point rise in May, and see rates at 4.63% by year-end (+53 bps). While a durable ceasefire would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.
Watch point: The RBA is likely to maintain its tightening bias amid persistent inflationary pressures.
TREASURY FUTURES
Yields are lower across the curve following news that Iran will open the Strait to commercial shipping. The bond market appears to have priced out geopolitical risk and are lowering near-term inflation expectations. The 10-year yield is 7.5 bps lower to 4.23%; it touched a local high of 4.44% in late March. Longer-run inflation expectations at the time-being offer resistance to higher yields as the Fed should remain biased towards policy-easing given weakness in the labor market. The 1/2-year inflation swap spread rose to 37.63 bps, in line with expectations that markets are expecting the impact of higher energy prices to be short-lived. Longer-run inflation expectations remain central to Fed policy, meaning that anchored expectations will support the case for policy easing later in the year. With 2-year swaps near 2.75% and no evidence of sharp rises in longer-horizon measures, markets are not pricing a scenario that requires a policy response from the Fed. We maintain our outlook for one Fed rate cut in 2026.
Watch point: Following March’s labor and inflation data, an immediate case for a change in Fed policy remains unlikely, while a path to loosening remains open.
The spread between the two- and 10-year yields is 52.40 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.712%.
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