FX in Tight Range Ahead of Talks

MACRO FRAME

Markets head remain focused on peace talks between the US and Iran after a rise in tensions this weekend. Meanwhile, earnings season continues, opening the door for further volatility.

STOCK INDEX FUTURES

US equity index futures moved higher overnight ahead of the expiration of the two-week ceasefire between the US and Iran. Vice President JD Vance is set to lead the US delegation in Pakistan again, while Tehran is also reportedly sending representatives after earlier indications that it would not participate in further talks. Market participants appear to be pricing in a ceasefire extension, leaving prices vulnerable to downside should negotiations fail to produce a deal.

On the corporate front, tech stocks were firmly higher pre-market as lack of escalation overnight reignited pivots into speculative sectors. On top of that, Amazon gained over 3% after pledging to invest over $20 billion on Anthropic. In turn, GE Aerospace and UnitedHealth both gained after reporting optimistic results. Lastly, Apple was flat after announcing hardware-focused John Ternus as its new CEO to replace Tim Cook in December.

Through Friday, 10% of the S&P 500 has reported Q1 results, and the early read is notably strong: 88% have beaten EPS estimates (vs. the 5-year average of 78%) and 84% have topped revenue forecasts (vs. the 5-year average of 70%). The blended earnings growth rate has ticked up to 13.2% YoY, on track for the sixth consecutive quarter of double-digit growth, and FactSet’s projection, based on historical beat patterns, suggests actual growth could land near 19% by the time all reports are in. Revenue growth is running at 9.9% YoY, poised to be the highest top-line growth since Q3 2022, with all eleven sectors reporting positive revenue growth. This week, 93 S&P 500 companies will report.

Watch point: Round two of peace talks serve as the most important event for markets in 2026, with massive up and downside risks on the table for markets.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.10% higher to 98.19 ahead of the expiration of the two-week ceasefire between the US and Iran. Today’s geopolitical backdrop is poised to keep a tight grip on currency markets; a ceasefire extension or deal between the US and Iran is likely to put the dollar on the backfoot, while the opposite should also hold true.

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 0.25% lower to $1.1759. Traders are still pricing in two European Central Bank rate hikes by the year’s end but ECB President Christine Lagarde said the bank needs more information before drawing firm policy conclusions. The risk of a prolonged rise in energy prices makes a more appeal case for a hike at the June meeting.

Developments between the US and Iran remain the dominant factor in price direction for the euro. So far, the restrained moves in the FX market point to lingering optimism that a resolution between the two warring countries is still on the table. If talks collapse and oil spikes back toward $100+, the euro faces two opposing forces: higher ECB hike odds  vs. crushing growth headwinds from energy costs. If a deal framework emerges, DXY drops, EUR/USD likely pushes toward 1.19.

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 down 0.13% to $1.3514. Data out overnight showed the UK’s labor market cooled only slightly in three months to February with earnings growth easing by less than forecast and the jobless rate falling unexpectedly although that drop reflected rising numbers of students not looking for work rather than rising employment. Average weekly earnings, excluding bonuses, fell to 3.6% in annual terms over the three months to February from 3.8% in the three months to January, while the unemployment rate fell to 4.9% from 5.2%. Wage data is carefully watched by the Bank of England for a gauge on inflation pressures. Market-implied rate expectations were little changed in response to the data, reinforcing the view that the drop in unemployment overstated the health of the labor market.

Price direction remains heavily impacted by the geopolitical bid between the US and Iran, while domestic political pressures also present downside risks for the pound. Prime Minister Keir Starmer on Monday laid the blame on foreign ministry officials over the appointment of a US ambassador, saying they had kept him in the dark.

Watch point: Wednesday’s inflation data is expected to show prices rise 3.3% YoY, while core prices are expected to hold steady at 3.2%. An upside surprise (>3.3% headline, or sticky services >4.5%) would reinforce rate-hike pricing and offer firmer support for the pound.

JAPANESE YEN: The yen fell 0.23% to 159.16 yen per dollar. The Bank of Japan is likely to hold off raising interest rates next week, as prospects of a near-term end to the Middle East war keep the country’s economic and price outlook uncertain. Markets have scaled back timing of a rate hike by the BoJ to September.

The Yen has failed to hold a depreciation past the 160 level, as expectations of government intervention and eventual policy tightening offer support. However, a lack of policy-tightening at the bank’s meeting next week could see the yen routinely test the 160 level. 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: While an April rate hike is unlikely, confirmation of a near-term move upwards in policy could bring USD/JPY closer to 155, though geopolitical factors remain the main obstacle to appreciation against the dollar.

AUSTRALIAN DOLLAR: The Aussie fell 0.26% to $0.7157. Market implied odds are placing a 75% chance that the Reserve Bank of Australia will deliver a third straight rate hike in May, with rates seen peaking at 4.6% by the end of the year. Analysts at Commonwealth Bank of Australia have tempered their bearish view on the currency, now forecasting it to fall to $0.69 by the end of June, instead of $0.67 previously. The Australian calendar is light this week, so the Aussie’s movements are likely to be dictated by headlines from the Middle East.

Labor data last week showed employment rose in March, while the jobless rate remained low, firming support for a May rate hike. 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 higher in a curve-flattening move and markets respond to this weekend’s developments out of the Middle East. The 10-year yield is little changed at 4.27%. March retail sales jumped +1.7% MoM (vs +1.3% consensus), but the beat was almost entirely driven by gasoline stations surging +15.5% MoM and +18.1% YoY on the Iran war pump-price shock, this is nominal, not inflation-adjusted, so it’s price passthrough and not consumer strength.

For the time-being, longer-run inflation expectations are offering resistance to higher yields as the Fed should remain biased towards policy-easing given weakness in the labor market. Additionally, the restrained moves in the bond market reflect lingering optimism that a deal between the US and Iran is still on the table. Longer-run inflation expectations remain central to Fed policy, meaning that anchored expectations will support the case for policy easing later in the year. 2-year inflation swaps remain near 2.75% and alongside no sharp rises in longer-horizon inflation measures, markets are not pricing a scenario that requires a policy response from the Fed.

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 50.30 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.767%.

 

 

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