Focus on Global Central Bank Meetings, Iran

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 higher as hopes rise for a partial reopening of the Strait of Hormuz following reports that the Trump administration is looking to build a coalition of allied powers to escort ships through the Strait. Selected tankers carrying liquified petroleum gas crossed the Strait of Hormuz over the weekend to suggest that the Iranian regime has a degree of leniency with energy exports to allied countries, limiting concerns of a prolonged shortage.

The impact of elevated energy prices on inflation is in focus ahead of the Fed’s meeting this week. Uncertainty around the fallout from the Iran war is seen as potentially deepening divisions with the central bank over the path forward on interest rates, though officials are expected to leave rates unchanged on Wednesday.

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 fell 0.42% to 99.93 as reports that the Trump administration is building a coalition of countries to escort ships through the Strait of Hormuz reduced demand for the safe-haven currency. Still, the dollar index remains near its highest levels in ten months as rising energy costs continue to present upside risks to inflation. Expectations that the Fed will cut rates remain dull, with money markets seeing just one cut this year. The Fed is widely expected to hold rates steady this week in what would be Chair Powell’s second-to-last meeting. While recent data supports the case for Fed easing later in the year, the recent surge in oil prices has complicated the outlook for policy as upside risks to energy prices remain elevated and are likely to make their way into the broader economy if the rise in prices is sustained.

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 gained 0.52% to $1.1476, as the dollar pulled back ahead of the European Central Bank’s meeting later in the week, where focus will center around on the rise in energy prices implications on monetary policy. The meeting should provide important insights into what would be required to trigger a change in policy rates from the ECB. The bank is expected to issue a statement that it is ready to adjust to risks on policy, rather than signal an imminent rate move.  Market pricing for a rate hike from the ECB is favorable to a hike in July and is fully priced in a hike at the September meeting, after initially expecting no change in policy for 2026 at the beginning of the year. Expectations for tightening in monetary policy have arisen from the conflict in Iran. However, uncertainty surrounding the conflict in Iran likely warrants no action from the ECB in the near-term, while a sustained and prolonged conflict raises upside risks to inflation and consequently would support the case for policy tightening.

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

BRITISH POUND: Sterling is 0.42%  higher at $1.3282, as markets focus on the conflict in Iran ahead of the Bank of England’s policy decision later in the week. Markets are close to pricing in one rate hike by the end of the year, while focus at this week’s meeting will be on how well those expectations align with Governor Andrew Bailey’s and other policymakers. UK jobs data later this week could help to shape expectations for the longer-term outlook for BoE policy. Employment is softening and wage growth, which has proven particularly resilient, has also started to show signs of abating.

GDP growth stagnated in January, missing forecasts for 0.2% growth.  The services sector recorded no growth, despite recent upbeat PMI. Industrial production declined by 0.1%, while manufacturing production rose 0.1%, both missing forecasts. Despite the disappointing GDP data, money markets are now pricing in a roughly 86% chance of a Bank of England rate hike by the end of 2026 due to rising inflation risks as a result of the conflict in Iran.

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 is 0.38% higher against the dollar at 159.14. The Bank of Japan is expected to keep its policy rate steady on Thursday, while market focus will be on how the bank could respond to changes in energy prices. BoJ Governor Kazuo Ueda has said that the central bank will keep an eye on the situation, and continue to raise rates as needed. The yen has fallen for four straight weeks as the Iran war and surging oil prices weigh on Japan’s oil-importing economy. Finance Minister Satsuki Katayama said the government is monitoring currency movements closely and is prepared to act with strong measures if needed. Markets remain alert to concerns that breaching the key 160 level could prompt foreign exchange market intervention by authorities.

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 gained 1% to $0.7053, as risk sentiment turned higher following reports of a possible US-led coalition to reopen the Strait of Hormuz. On Tuesday, the Reserve Bank of Australia is expected to raise interest rates as growing concerns over inflation and the impact of higher energy prices have firmed market bets for multiple adjustments to policy this year. The RBA’s message is expected to point to the potential for further hikes, with headline inflation forecast by some economists to soon approach 5.0% on year, twice the rate targeted by the central bank.  Markets currently imply around a 70 bps of total easing by year-end, pricing in a second rate hike by August.

Stronger-than-expected growth data and inflation readings have supported a tightening bias from the RBA. 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.

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 lower across the curve, following a drop in energy prices, with the 10-year note trading at 4.226% ahead of the Fed’s meeting this week. Expectations are that the central bank will leave rates on hold. However, the key question for markets will be what signals the bank sends on the prospects for further easing this year. Fed Chair Powell is expected to highlight two-sided risks to the economy, stemming from the conflict. His statement, however, is not expected to offer a clear signal about the implications on monetary policy. The Fed will also release updated projections for the economy and its “dot-plot” forecasts for interest rates.

GDP data last week showed the economy grew at an annualized rate of 0.7% in Q4 2025 to mark 2.1% growth for the year, below the initial estimate of 2.2% and down from 2.8% in 2024. Meanwhile, PCE data showed the prices remained sticky in January. Money market pricing is no longer fully priced in for a rate cut this year from the Fed, though favorable to a cut in December. Markets are pricing in a total of 25 bps of easing by year end. Oil will likely continue to be the main driver for sentiment and yields, with the risk of a prolonged conflict likely to further shape Fed policy toward a halt in policy for the remainder of the year.

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 54.60 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.680%.

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