Yen Holds Strength Post-Intervention

MACRO FRAME

Friday marks another week without material progress on the US-Iran conflict, underscoring that global energy prices are likely to remain elevated.

STOCK INDEX FUTURES

Equity index futures are mostly higher in a relatively muted overnight session following a relatively strong batch of earnings this week and as traders assess the US-Iran ceasefire deadline. Treasury yields have moved sharply higher in recent days as investors reassess the inflation outlook in light of the Iran conflict, yet US equities continue to grind higher on the back of resilient earnings expectations and an assumption that the growth impact will be contained. Prediction markets around the Strait of Hormuz point to a drawn‑out resolution, suggesting that elevated energy prices may remain a feature rather than a bug through mid‑year. The prevailing narrative is that sustained but not runaway energy prices will keep inflation elevated at the margin, complicating the path for policy but stopping short of derailing US growth. As long as the conflict is viewed as finite and largely contained, markets appear willing to look through near‑term volatility and lean on earnings strength to justify higher equity prices. Still, geopolitical risk remains a clear downside catalyst for risk assets, with the oil complex likely to dictate the direction and severity of any correction. On the data front, ISM’s Manufacturing PMI survey will be released later in the morning and is expected to show solid growth in the sector alongside a substantial increase in price pressures.

The VIX is at 16.74, down 0.15 points (−0.89%) from Thursday’s close of 16.89, extending this week’s slide and printing near multi-week lows. The sub-17 handle signals a continued risk-on backdrop with hedging demand subdued as equity futures grind higher into Friday’s ISM data.

June S&P is trading at 7,265.75, +22.00 points (+0.30%) versus Thursday’s settlement of 7,243.75, with an overnight range of 7,246.25–7,270.00. The S&P 500 cash index ($SPX) closed Thursday at 7,209.01, holding well above its 50-day SMA of 6,808.97 (+5.87%) and 200-day SMA of 6,725.21 (+7.19%).

June Nasdaq is essentially flat at 27,598.25, +2.25 points (+0.01%) versus the prior settlement of 27,596.00, with an overnight range of 27,536.25–27,674.50. The Nasdaq 100 cash ($IUXX) closed Thursday at 27,452.12, sitting +9.28% above its 50-day SMA (25,120.77) and +10.69% above its 200-day SMA (24,799.73).

June Dow is at 50,054, +219 points (+0.44%) versus Thursday’s settle of 49,835, with an overnight range of 49,860–50,092. The DJIA cash ($DOWI) closed Thursday at 49,652.14, holding +3.75% above its 50-day SMA (47,857.99) and +5.23% above its 200-day SMA (47,181.95).

Watch point: Equities remain vulnerable to any sustained upside surprise in crude. However, a solid earnings backdrop remains friendly to prices as long as investors feel US equities are absent from the economic impact of the conflict.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.20% lower at 97.87 in a thinner liquidity session as most European markets are close for holiday. Ongoing geopolitical tensions and higher oil prices are likely to offer the dollar support through safe-haven flows, though this week’s rally has evidenced that risk-off moves have been moderately unwound. Today’s ISM data is likely to support a move to the upside if evidence of stronger price pressures are marking their way into the broader economy appears. Underlying fundamentals make the case for a resumption of the dollar’s downward trend once hostilities between the US and Iran are over. Despite rising inflationary pressures and modestly tighter Fed policy expectations, the dollar has lost its interest rate differential support compared to major peers.

Watch point: Higher oil prices and an escalation between the US and Iran will offer the dollar safe haven support. However, underlying macroeconomic fundamentals make the case for a resumption of the dollar’s downtrend when hostilities are over.

EURO: The euro is 0.23% stronger at $1.1759. The euro is trading with a firmer tone after the European Central Bank held rates steady but clearly signaled a likely June hike in response to a fresh inflation overshoot. Headline inflation has jumped to 3% on the back of Iran‑related energy shocks, pushing price growth further above target even as euro area activity and business sentiment soften, a mix that leaves the ECB focused on credibility and inflation expectations rather than near‑term growth. With officials openly framing June as the point for “policy action” and market pricing already embedding at least two hikes, rate differentials should offer some medium‑term support for the euro even if any ECB cycle is expected to be more measured than 2022. The euro is likely to continue trading opposite of big moves in oil prices. Positive developments out of the US-Iran conflict will be supportive of the currency, while safe-haven demand would see flows to the dollar.

BRITISH POUND: Sterling is 0.21% higher at $1.3326. The Bank of England kept Bank Rate at 3.75% but replaced its usual forecast with three Iran‑war scenarios, ranging from a benign path that needs only a “less restrictive” stance to a severe case that would demand “forceful” tightening as inflation could peak around 6.2% and remain above target for years. Governor Bailey stressed that policy over coming months will be a “difficult judgement call,” with markets now pricing a smaller 2026 hiking cycle and officials viewing Scenario B, where inflation rises to a little over 3.5% before gradually returning towards 2%, as the most likely outcome.

However, downside risks to growth and the labor market would appear to be of greater concern to policymakers. Against this backdrop, we expect Bank Rate to remain on hold through 2026, with some scope for cuts later in the year if the Strait of Hormuz reopens and energy prices retreat, limiting upside inflation risks and easing pressure on the pound.

Watch point: Despite the pound’s recent rise and nearing levels of our initial weakening call, macro factors are likely to keep the pound under pressure, as the BoE cannot meaningfully tighten policy.

JAPANESE YEN: The yen strengthened 0.10% overnight to 156.47 yen per dollar following yesterday’s early morning currency intervention from the Japanese government. Japan’s top currency diplomat Atsushi Mimura on Friday said speculative positions remained in the markets, keeping traders on notice of possible further interventions. Central bank data published on Friday showed Japan may have spent as much as 5.48 trillion yen ($35 billion) in the intervention, just shy of the $36.8 billion last spent in July 2024.

While government intervention provides the yen with some short-term support, especially as it highlights to 160 level as a pain threshold for the government, intervention without firm central bank policy support will likely not be enough to keep the currency propped up. Geopolitical factors and the resulting sustained rise in energy prices are likely to create a challenging environment for the yen.

Data on Friday showed Japan’s core inflation slowed to 1.5% in April as government subsidies blunted the effect of energy prices. However, price gains are expecting to rise, keeping pressure on the central bank to hike rates. Given the elevated inflation pressures and expectations, it is likely the bank will need to raise rates in the near-term. Money markets now see a 50% chance of a rate hike come June and a 66% chance of a hike at the July meeting.

Watch point: Geopolitical factors/oil prices remain the main obstacle to appreciation against the dollar, even despite policymakers commitment to raise rates.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7202. The Aussie is having its best month in three and a half years as global stocks rallied to record highs in April and Japan’s intervention in currency markets pressured the dollar. The Reserve Bank of Australia is expected to raise rates next Tuesday to a 4.1% cash rate. Markets are pricing an 85% chance of a hike. A further move to 4.60% is fully priced for September.

Data on Wednesday showed core inflation rose a little less than expected in the first quarter, although the ongoing impact of surging energy costs still has traders anticipating further interest-rate hikes. Australia’s key trimmed-mean measure of core inflation, rose 0.8% in the first quarter, slightly below market expectations of 0.9% or higher. The annual pace still nudged up to 3.5%, and further away from the Reserve Bank of Australia’s target band of 2%-3%, while consumer price inflation for March accelerated to 4.6%.

Watch point: 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.

TREASURY FUTURES

Yields are little changed across the curve in quiet trade ahead of today’s ISM data as markets continue to digest the Fed hold and yesterday’s GDP/PCE double-header. Current levels: 3M 3.672% (−0.3 bps), 2Y 3.886% (flat), 5Y 4.021% (−0.2 bps), 10Y 4.384% (−0.6 bps), 30Y 4.977% (−0.9 bps). The 2/10 spread stands at 49.40 bps (essentially flat from 51 bps prior session), the 5/30 spread is at 96 bps (flat from 96 bps), and the 3M/10Y spread is at 71 bps (uninverted, flat from 72 bps). The move reflects mild bull flattening, long end rallying faster than the front, consistent with consolidation of yesterday’s bull-steepening reaction to the soft 2.0% Q1 GDP advance and in-line +0.3% core PCE / +3.2% YoY. The 3M/10Y remains near cycle-wide at 71 bps, keeping near-term recession pricing subdued; the day’s directional driver is now squarely in ISM’s hands.

While only one member voted against the rate decision, three members voted to remove the easing bias language in the monetary policy statement, a signal that there is growing worry on the board over the rise in inflation and a potential hurdle to future policy-easing this year. Yields are approaching their local highs reached in late March and alongside a hawkish change in Fed rate expectations, market participants are signaling they are expecting inflation to stay elevated in the near term and prevent any sort of downward policy-action from the Fed as evident in one- and two-year inflation swaps.

However, longer-term inflation expectations have only shown a mild increase. TIPS markets show the 5-year breakeven at 2.67%, the 10-year breakeven at 2.46%, and the 5y5y forward rate at 2.25%. The spread between the 5-year and 10-year breakevens of +21 bps (5Y above 10Y) confirms that markets continue to view the inflation rise as front-loaded and consistent with the 11.6% energy-goods spike that drove yesterday’s hot headline PCE, rather than broadening into longer-horizon expectations. With the 5y5y forward stable at 2.25%, well below the 2.5% de-anchoring threshold and actually slightly off its mid-week peak, the Fed retains optionality to treat the near-term CPI/PCE acceleration as transitory, underscoring the FOMC’s hawkish hold while not forcing a more aggressive pivot.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while also supporting the case for Fed easing later in the year.

 

 

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