Inflation Rising More Broadly

MACRO FRAME

The US-Iran deadlock has shaped expectations that a stalemate between the two countries is the new status quo, leaving April’s hot CPI and PPI to challenge the market’s prior assumption that the conflict would remain largely contained from a US macro standpoint. While tech/AI leadership may continue to provide a floor, the combination of firmer energy-driven inflation, more constrained Fed easing expectations, and rising geopolitical risk leaves risk sentiment vulnerable to the Trump-Xi meeting.

STOCK INDEX FUTURES

Equity index futures are higher as the Nasdaq and S&P made new highs the previous session despite the macro headwinds. Today’s main event is Nvidia’s CEO and a host of other US tech leaders meeting with Chinese officials, with markets pricing in potential chip-sector concessions that could narrow Chinese tech advantages. However, the hype and speculation over the meeting does leave room for the downside if any developments disappoint. Strong tech sentiment, mainly related to the AI space continues to underpin broader index performance, S&P futures positioning only recently flipping from net short to net long, suggesting remaining speculative fuel. The NASDAQ is flagged as the leading indicator to watch, with RSI readings above 70 and stochastics in overbought territory signaling potential for elevated volatility ahead.

Watch point: Trump’s rejection of Iran’s peace proposal and April’s CPI and PPI prints have lead traders to reprice Fed policy expectations, affirming no action for the remainder of the year. However, bullish AI sentiment has lifted the indexes despite the obvious macro headwinds.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed at 98.56. The bias for the dollar is higher amid the inflationary backdrop, safe-haven demand, and economic momentum relative to the rest of the world. With the recent CPI and pipeline inflation data, markets have priced out any chance of a rate cut from the Fed this year and have shifted expectations modestly to the hawkish side; odds of a December rate hike are currently 26.5%.  Alongside last week’s labor data, which did reveal notable spots of weakness, the underlying narrative is that the Fed will keep a hold on rates. Given such dynamics, the dollar is likely to find solid underlying support amid the continuation of the deadlock in negotiations.

Watch point: Stalled optimism around a US–Iran resolution will continue to offer safe-haven support for the dollar. Fed policy expectations are likely to reinforce near-term dollar strength.

EURO: The euro is little changed at $1.1703. For the euro, the status quo remains the same: the ongoing stalemate between US-Iran negotiators and resulting and closure of the Hormuz continue to pressure the euro. US Treasury yield differentials are also offering further support to the dollar against the euro despite expectations that the European Central Bank will begin hiking rates in June. Markets are pricing a 84% chance of a hike at the June meeting and are nearly priced for two additional rate hikes by year-end. However, the ECB maintains a well-positioned stance on policy and it could be too early to justify a rate hike without further evidence of oil-induced inflation pressures across the broader economy. Inflation data out of the US underscores the impact of higher energy prices and supply chain disruptions on broader prices, leaving expectations that inflation in the currency area is likely to continue upwards.

Watch point: While a June rate hike remains the expected move from the ECB, a well-positioned policy stance could lead to a hold. However, recent inflation data out of the US likely underscores expectations that policy will move moving upwards in the near-future.

BRITISH POUND: Sterling slipped lower to $1.3511 as the political landscape pressures the currency and gilts following the resignation of the Health Minister, which has in turn ramped up pressure on Prime Minister Starmer. Multiple MPs have called for Prime Minister Starmer to resign following heavy losses for the Labour party in local elections last week. For now, Starmer has resisted calls to resign, which is likely to offer some calm to FX markets. Political uncertainty is likely to play a major theme in price action for the pound in the coming months. For markets, the question is what direction is fiscal policy heading. Investors are largely worried that a new Labour leader will increase fiscal stimulus and raise gilt issuance, weighing on the pound. The Sterling is likely to remain under pressure as long as political uncertainty persists.

As for the Bank of England, money markets are pricing a 37% chance of a hike at its June meeting. However, weakness in the UK economy, is expected to act as a limiting factor to overall tightening from the BoE. Still, GDP data out this morning showed that the UK posted its strongest quarterly growth in a year, with GDP expanding 0.6% QoQ in Q1 2026, matching market expectations and following an upwardly revised 0.2% gain in Q4 2025. On an annual basis, GDP rose 1.1% YoY, beating the 0.8% consensus forecast — a notable positive surprise. For March alone, monthly GDP grew 0.3% MoM and 1.2% YoY, also beating estimates that had anticipated a 0.2% decline. The Bank of England will likely view the stronger-than-expected growth as reinforcing a cautious, gradual approach to any further rate moves.

JAPANESE YEN: The yen slipped overnight to 157.97 yen per dollar, though did find some support following comments by Bank of Japan board member Kazuyuki Masu, who said interest rates should rise promptly if there are no clear signs of an economic slowdown. For the yen, intervention alone is likely not going to be sufficient enough to strengthen the currency given Japan’s vulnerabilities to higher energy prices. The dollar has recovered 50% of its losses against the yen since officials stepped in to prop up the yen. Recent interventions from the Japanese government alongside repeated verbal warnings from officials are keeping the yen in a tighter range and limiting selling pressure against the currency with the 160 level acting as a level of support. Markets now pricing a 73% chance of a hike come June.

AUSTRALIAN DOLLAR: The Aussie fell 0.30% to $0.7236, reversing strong overnight moves, though the currency remains near multi year highs against the yen and euro. The Aussie finds support in the inflationary and yield backdrop with the Reserve Bank of Australia’s cash rate well above most G10 countries and elevated inflation pressures, which were present before the outbreak of conflict in Iran. Australia’s 2026-2027 budget was in line with market expectations, leaving inflationary risks mainly up to the RBA. Markets still imply around a 22% chance of a June hike to the 4.35% cash rate, but the probability of an August hike to 4.60% moved further downwards to 65% from 80% earlier in the week. However, a reopening of the Strait this month would likely result in the board holding on rates. The main downside risk for the Aussie in the near term remains the geopolitical bid.

Watch point: While a durable end to the war 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 lower across the curve following yesterday’s red-hot PPI reading, which saw producer prices rising +1.4% month-over-month, the highest since April 2022. The 30-year Treasury auction broke out to a yield of 5.046%, the highest since 2007, and the notes are in deeply oversold technical territory. Rising yields are a common theme in the global marketplace currently. UK long-dated gilt yields hit their highest since 1998, while Bunds are also elevated. The bearish sentiment in the market is underscored by the largest net speculative short positions in bonds since December 2023. Even if fuel prices are ignored, the median and the trimmed mean inflation components are rising. Sticky prices have ticked back up above 3%, while the Fed’s supercore (services inflation minus shelter) broke above 3%. The readings indicate that there is more inflation than the first-order effects from the oil shock.

Watch point: Fed policy is poised to stand pat for the time-being, while a path to loosening gradually fades. Inflation expectations previously offered resistance to higher yields but are now coming under pressure.

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