Inflation Held Steady in February

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 are lower as attacks on shipping vessels in the Strait of Hormuz have weighed on sentiment, while February’s CPI print did little to change the outlook for the Fed. Energy prices rose following reports that three vessels came under fire in the Strait of Hormuz Wednesday morning. Meanwhile, the US Navy denied it was escorting ships through the Strait, news that it was had briefly lifted markets on Tuesday.

February’s CPI report showed inflation held steady at 2.4% before the Middle East conflict, with cooling core prices and slowing shelter inflation supporting the case for Fed easing later this year. However, the subsequent surge in energy prices introduces new upside risks to inflation that could delay the timing of rate cuts.

On the corporate front, Oracle shares surged after the tech giant posted an upbeat earnings report and outlook. Meanwhile, higher Treasury yields have pressured credit-sensitive stocks as the surge in energy prices has limited expectations over the amount of easing from the Fed this year.

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 0.23% higher at 99.055, as investors continued to favor dollar liquidity amid geopolitical uncertainty and rising energy prices. February’s CPI report showed inflation pressures remained contained prior to the recent escalation in the Middle East, with headline prices rising 0.3% month-over-month and core inflation increasing 0.2%. While the data supports the case for Fed easing later this year, the recent surge in oil prices has complicated the outlook for policy by raising the risk that inflation pressures could reaccelerate if energy costs remain elevated.

 

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 0.22% to $1.1586, as demand for the dollar weighs on the currency amid reports that shipping vessels in the Strait of Hormuz have been attacked. On the monetary policy front, market pricing favors a rate hike by the European Central Bank by its September meeting. On Tuesday, Christine Lagarde reiterated that the ECB is committed to taking all necessary measures to keep inflation under control, despite the current surge in energy prices.

Persistent concerns over a prolonged Middle East conflict continue to weigh on the euro, as any escalation is likely to drive investors toward dollar liquidity rather than risk-sensitive currencies.

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 is 0.13% lower at $1.3398. Beyond the hit from higher oil prices, the pound has also been weakened by subdued economic data and domestic political turbulence in recent weeks. The May local elections present a renewed domestic risk for the pound in political uncertainty, with focus on Prime Minister Starmer’s Labour party potentially facing a leadership crisis if the party cedes too many votes.

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. 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.

JAPANESE YEN: The yen fell 0.36% to 158.60, remaining under pressure as heightened uncertainty over the Middle East conflict continued to support the dollar. Revised GDP data 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. However, household spending data disappointed, with January spending falling 1% year-over-year, missing expectations for a 2.5% increase and highlighting ongoing softness in consumer demand to start the year.

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 hike 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 0.356% to $0.7145, as strong expectations for a March rate hike from the Reserve Bank of Australia lifted the currency. Stronger-than-expected growth data and inflation readings have supported a tightening bias from the RBA. Markets currently imply around a 73% probability of a rate hike at the bank’s next meeting, and are pricing another cut by August. Odds have shifted dramatically from earlier in the week, where markets were pricing below a 30% chance of a hike at the March meeting. Currently, the headline inflation sits at 3.8% and is expected to surpass 4% as petrol prices continue to climb, while core inflation remains elevated at 3.4%, well above the RBA’s 2–3% target band. Elsewhere, markets remained on edge amid conflicting reports and mounting uncertainty surrounding the Middle East war.

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 higher following February’s CPI print, which showed price pressures remained relatively contained ahead of the recent escalation in the Middle East. Headline CPI rose 0.3% on the month and 2.4% year-over-year, while core prices increased 0.2% on the month and 2.5% annually, indicating that the broader disinflation trend remained largely intact before the recent rise in energy prices. Shelter continued to be the largest contributor to the monthly increase, though the pace of rent growth slowed to its smallest increase since early 2021.

The bulk of February’s price pressures came from shelter, food, and energy components. Shelter rose 0.2% and remained the largest contributor to the monthly increase, while food prices climbed 0.4%. Energy prices also rose modestly by 0.6% during the month, though gasoline prices remained lower on a year-over-year basis, highlighting that the latest surge in oil prices tied to the Middle East conflict had not yet filtered into consumer inflation data.

From a policy perspective, the report likely does little to materially shift the Fed’s outlook. Core inflation continued to moderate modestly, supporting the case for eventual easing later this year. However, the recent rise in oil prices and the potential for energy-driven inflation may complicate the path for rate cuts, particularly if higher fuel costs begin feeding through into broader price pressures in coming months.

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.

Markets have shifted back to favor easing in the fall, with September no longer fully priced for a cut in favor of October. Total easing for year-end has fallen to 33 bps from 42 bps on Tuesday.

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 57.40 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.609%.

 

 

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