Iran Conflict Continues to Weigh on Sentiment

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 the conflict in Iran continues to weigh on risk sentiment as oil prices remain above $100 a barrel. The Financial Times reported that G7 finance ministers plan to discuss a possible release of petroleum from reserves, which has offer some support to market moves. The conflict has already led to the suspension of around one fifth of global crude and natural gas supplies, as Tehran targets ships in the Strait of Hormuz, while attacks on energy infrastructure across the region continue. Qatar’s energy minister told the Financial Times on Friday he expects all Gulf energy producers to shut down exports within weeks; a move he said could drive oil to $150 a barrel.

February’s weak payroll report added to selling pressure. Nonfarm payrolls declined by 92,000, with December and January revised lower by a combined 69,000 jobs. The headline figure points to a cooling in job growth, though part of the decline reflects temporary factors, including healthcare strike activity. The unemployment rate edged up to 4.4% but remains broadly consistent with a stable labor market. The negative reading reinforces a broader risk-off backdrop for equities, as oil prices remain elevated, heightening concerns that the conflict could add to inflationary pressures. Inflation data on February will be closely watched by markets.

Watch point: Further escalation in the Middle East or a sustained move in oil above $100 could deepen the current risk-off tone across equities.

CURRENCY FUTURES

US DOLLAR: The USD Index is 0.30% higher to 99.282, supported by dollar liquidity demand, while the rise in oil prices continues to stoke inflationary fears and push back market expectations of monetary easing from the Fed. The dollar has recovered its losses on Friday from February’s weak hiring numbers, suggesting that safe haven demand is outweighing the dovish figures. The dollar is likely to continue to find support from a prolonged conflict and a higher energy prices – as long as those dynamics reflect higher energy prices and stir inflation worries. Demand for the dollar is also likely to remain firm amid the conflict in Iran.

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 fell 0.46% to $1.1567 as the conflict in Iran continued to drive safe-haven flows into the dollar, while rising energy prices pushed European bond yields higher. Additional pressure came from weak German factory data, which showed orders plunging 11.1% in January, far worse than forecasts for a 4.3% decline, while December’s figure was revised lower. The drop was partly driven by a sharp fall in metal products orders following unusually strong demand the previous month, though broader demand indicators were also weak, with both foreign and domestic orders declining.

The eurozone’s Q4 GDP reading was also revised lower last week, which showed the eurozone economy expanded just 0.2% in the quarter, below the earlier estimate of 0.3%. Annual growth was revised down to 1.2% from an initial 1.3%, marking the slowest pace of expansion in a year as spending growth softened across all major categories. Despite the weaker revision, the figure is unlikely to materially alter the European Central Bank’s outlook, with the ECB projecting growth of 1.2% in 2026 and 1.4% in 2027.

Other data has otherwise been supportive for the currency, while macro conditions remain favorable – 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 0.46% lower at $1.3351 as flows to the dollar and the rise in oil prices weigh on the currency. British government bonds are also trading substantially lower, while market-implied odds for a rate cut from the Bank of England this year have dropped significantly. Market pricing now suggests no policy action from the BoE for the remainder of the year. However, the energy price shock is likely to outweigh any support for sterling from the central bank delaying rate cuts. Market-implied odds are now more favorable to a rate hike from the central bank than a rate cut for the remainder of the year, highlighting the impact of higher energy prices on the country and the UK’s vulnerability as a net energy importer.

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 0.37% to 158.38 as safe haven demand for the dollar and the rise in energy prices weigh on the currency. Markets will look to Q4 GDP data out later in the evening, which is expected to show that Japan’s economy grew 0.1% during the quarter, supported by higher capital spending. The central question for the yen and the broader currency market is how long energy prices stay elevated. The longer energy prices remain higher, the greater risk of impacts to the economy and potential economic fallout as a result.

Bank of Japan Governor Kazuo Ueda warned that the Middle East conflict could significantly affect Japan’s economy, signaling the central bank is likely to keep rates steady for an extended period. Finance Minister Satsuki Katayama said authorities are monitoring markets with an “extremely strong sense of urgency” and reiterated that Japan maintains an understanding with the US regarding currency stability, keeping intervention risk in focus.

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 0.18% to $0.7020, in what is to be a quiet week of data on the economic calendar for the country, leaving focus on the conflict in Iran. Stronger-than-expected growth data and inflation readings have supported a tightening bias from the Reserve Bank of Australia. Australia’s economy expanded 0.8% in Q4 2025, lifting annual growth to 2.6%, the fastest pace since 2023. Markets currently imply around a 25% probability of a rate hike at the March meeting, while a quarter-point increase is fully priced for May and again in November.

RBA Governor Michele Bullock said the March meeting would be “live” for a potential rate increase, marking a shift from her recent patient tone. She warned that an oil price shock linked to Middle East tensions could reignite domestic inflation pressures, underscoring the sensitivity of the outlook to global developments.

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 across the curve, with the 10-year yield up 4 bps to 4.173%, its highest level since mid-November. Higher yields continue to find support from higher energy prices as a result of the conflict in Iran, while February’s jobs data has reignited concerns over how the Fed’s policy decision should play out. The unexpected drop in hiring alongside building inflationary pressures presents policymakers with a difficult balancing act. Inflation data for February on Wednesday will provide markets with gauge on how price pressures were trending ahead of the breakout in conflict in the Middle East.

February’s payroll figures showed payroll declined by 92,000, while December and January saw a combined downward revision of 69,000 jobs. The headline figure marks a clear cooling in job growth, though the decline was partly driven by temporary factors, particularly healthcare strike activity. The unemployment rate edged up to 4.4%, though remained largely stable suggesting the labor market remains broadly stable.

The labor force participation rate and employment-population ratio were unchanged, while wage growth remained firm. However, a notable sign of weakness in the labor market is the rise in long-term unemployment, which rose to 1.9 million, up from 1.5 million a year ago. The figure suggests weak hiring conditions attributed to slowing labor demand. For the Fed, the question about how fast/slow labor demand is cooling is likely to be central to the timing of the next rate cut.

Markets have shifted back to favor easing in the fall, with a September priced favorably. Total easing for year-end has slipped to 38 bps, below 46 bps seen last week.

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 56.90 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.604%.

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