Hawkish Rate Repricing

MACRO FRAME

US markets are dominated by a hawkish repricing of rate expectations, a post‑FOMC bond sell‑off and a strong USD on safe‑haven demand amid Middle East escalation and fresh inflation worries from energy.

STOCK INDEX FUTURES

US equity futures extended losses from Wednesday following another jump in energy prices overnight and a hawkish repricing of monetary policy expectations out of the Fed. Overall, equity markets are entering today with a cautious tone as investors weigh the prospect of fewer 2026 cuts and the possibility of late‑year hikes if inflation drifts back toward or above 3%. The key driver for equities remains the interaction between the Middle East shock and the Fed’s reaction function. Collapsing expectations for Fed cuts this year offers headwinds to prices, while the geopolitical escalation sours risk sentiment.

Weekly initial jobless claims came in below expectations at 205,000, moving the four-week MA down to 210,000.

Watch point: Whether incoming US data confirm the Fed’s stronger‑growth, higher‑inflation narrative will be important for equity futures; a sustained move higher in real yields would likely challenge the current attempt at consolidation.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed at 100.12, supported by higher US yields and safe‑haven demand tied to Middle East escalation. Stronger‑than‑expected US PPI and the hawkish shift in the Fed’s projections have led markets to price out possible rate cuts this year toward the possibility of late‑year hikes, reinforcing rate‑differential support for the USD. Near‑term, dollar direction is likely to remain driven by the interplay between energy‑driven inflation risks and Fed communication. The move higher in US yields and risk‑off impulses from the Middle East are positive for the USD

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

EURO: The euro is 0.30% higher at $1.1486. The Fed’s shift has sharpened focus on how far the European Central Bank can diverge; with Euro‑area inflation still close to target and relatively solid growth, the rise in energy has led money markets to favor a rate hike from the ECB. That said, the ECB left interest unchanged at its meeting today, leaving focus on remarks from President Lagarde and other policymakers for clues on how rates could move in the future.

Money markets are favorable to a rate hike by July, as the fallout from the conflict in Iran has shifted monetary expectations hawkish as inflation expectations rise. The ZEW Indicator of Economic Sentiment for the Euro Area showed inflation expectations surged 78.9 points to a reading of 79. The impact of higher energy prices raises upside risks to price pressures and also raises concerns that economic growth could falter. The ultimate impact will depend on the duration of the conflict, while most analysts are doubtful that a quick resolution is likely.

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

BRITISH POUND: Sterling is 0.35% higher to $1.3298, as the Bank of England left interest rates unchanged, with investors looking for clues from policymakers about the impact of the Iran war. The central bank’s Monetary Policy Committee voted unanimously to keep borrowing costs on hold, with some noting the prospect of raising rates. The decision was widely expected, while the MPC said inflation could rise to as high as 3.5% over the next two calendar quarters, according to BoE staff forecasts.

However, the larger question is how long the British economy can weather higher rates. Slow economic growth and rising unemployment raise the possibility of a dovish BoE stance in the later future. Data published earlier on Thursday showed that British wages, excluding bonuses, rose at their slowest pace since late 2020 in the three months to January. However, the figures did show that unemployment steadied at 5.2%.

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.

JAPANESE YEN: The yen strengthened 0.60% to 158.90, after Bank of Japan Governor Kazuo Ueda left the door open to an April rate hike. The BOJ on Thursday kept its rate at 0.75% and maintained its assessment that the economy was recovering moderately. Market’s took Ueda’s remarks as hawkish after he said the central bank will study various data before raising rates, and that the BOJ will introduce new measures for CPI data. Markets are pricing a 52% chance of a hike in April, while July’s meeting has been fully priced in.

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 fell back 0.25% to $0.7006 as copper and other commodity prices fell, overshadowing a mixed bag of economic data. Australian employment jumped a strong 48,900 in February, but the unemployment rate rose to 4.3%. Most of the jobs gains were from part-time work, while more people went looking for work. Still, labor market conditions remain tight and supports the Reserve Bank of Australia’s future tightening bias. The central bank raised rates by 25  bps on Monday, while warning of “material” risks to inflation.

Middle East conflict aside, domestic data alone has proven inflationary enough to justify the case for monetary tightening, while the rise in energy prices only adds to that. Inflation risks in the country remain firmly skewed to the upside, as a result of excess demand and higher energy prices. The RBA’s latest February forecasts already penciled in headline inflation reaching 4.2% by mid-year before the war unleashed a fresh global oil shock.

Markets currently imply an additional 59 bps of additional tightening by year-end, pricing in a second rate hike by September.

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 continued higher as markets absorb a more hawkish Fed and reassess the trajectory of 2026 policy. Powell delivered a cautiously hawkish hold: inflation is improving but too slowly, geopolitical risks are adding upside uncertainty, and while hikes aren’t expected, rate cuts require clearer disinflation—keeping policy restrictive for longer. Money markets now price an 75% chance rates remain unchanged through the end of the year. Data on Wednesday also showed US producer prices rose more than expected in February, while oil prices climbed further following attacks on energy infrastructure in the Middle East as the Iran conflict continues.

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, while a prolonged conflict in Iran is likely to limit the amount of easing in policy.

The spread between the two- and 10-year yields is 42.30 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.866%.

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