Market Overview
Geopolitical tensions in the Middle East remain the dominant fundamental driver shaping financial markets this week, with market participants cautiously hoping for a near-term resolution even as the risk of further escalation looms large. The divergence between near-term and longer-dated crude oil contracts signals that traders are pricing in the possibility of continued disruption, while equity markets have begun to stabilize and bond yields have eased. The week ahead starts slowly with many trading centers observing Easter Monday, but several key data releases and central bank decisions will command attention from professional investors and traders.
United States
The dollar’s trajectory remains intimately tied to the Middle East conflict and evolving expectations around Federal Reserve policy. The Dollar Index closed last week above the 100.00 level for the second consecutive week, having reached a high near 100.65 last Tuesday—its strongest level since May of the prior year. However, momentum indicators failed to confirm this peak, suggesting that the risk of further geopolitical escalation may be limiting downside selling pressure more than genuine bullish conviction is supporting the greenback. A convincing break below the 99.00 level would be required to establish more confidence that a meaningful top has been established.
Market pricing for Federal Reserve policy has shifted dramatically in recent days. The futures market is currently discounting approximately a 30% probability of a rate cut occurring sometime this year. This represents a sharp reversal from the extreme pessimism recorded on March 26, when the market was pricing in nearly a 58% chance of a rate hike. Before the Middle East conflict began, the two-year Treasury yield had settled below the 3.40% mark for the first time in several years. However, one month into the conflict, that yield had climbed to around 4.03%. As of last week’s close, following the March jobs report, the two-year yield had moderated to approximately 3.82%, reflecting the market’s recalibration of rate-cut expectations amid ongoing geopolitical uncertainty.
The economic calendar for the coming week will provide crucial data points for assessing the conflict’s impact on the world’s largest economy. The March ISM services index is likely to begin capturing the disruption caused by the war, with activity expected to slow and pricing pressures to intensify. February durable goods orders and a second look at fourth-quarter GDP growth will be of secondary importance to most traders. February personal income, consumption, and price deflators will offer a valuable baseline for comparison and help quantify the war’s economic footprint. The March Consumer Price Index, due at week’s end, will attract significant attention despite ongoing questions about the Bureau of Labor Statistics’ increased reliance on “imputation” methodology. The base effects present a headwind for headline comparisons, as March of the prior year saw headline CPI unchanged and core CPI rising by just 0.1%. The FOMC meeting minutes from earlier this month may also provide insight into official thinking approximately two weeks into the conflict, offering clues about the Committee’s assessment of economic resilience and inflation dynamics.
Eurozone
The euro has endured a severe selloff amid position adjustments related to the war and anticipated economic shocks to the European economy. The common currency reached a low near $1.1400 around mid-March but has recovered considerably as optimism about a relatively short conflict has taken hold. The premium of US two-year yields over German two-year yields has collapsed to a five-year low near 118 basis points, down sharply from the year’s peak in January of almost 153 basis points. This compression reflects reduced expectations for a significant divergence in monetary policy trajectories between the Federal Reserve and the European Central Bank. The interest rate swaps market is currently pricing in approximately a 50% probability of a rate hike at the end of this month, a substantial decline from the roughly 85% chance that was being priced at the peak of hawkish expectations.
The eurozone economic data calendar is unlikely to exert much market impact in the near term. The final March services and composite Purchasing Managers’ Index readings may soften further relative to the preliminary estimates, but they will likely be overshadowed by geopolitical developments. February retail sales and Producer Price Index data are unlikely to be significant factors when the ECB meets later this month, nor will they materially influence risk appetite, which continues to be driven primarily by the war’s disruptive effects on supply chains and energy markets.
The euro has spent most of the past several weeks trading within a relatively narrow band between $1.1400 and slightly above $1.1600. The momentum indicators bottomed around mid-March when the euro was approaching the lower end of this range, but they have not yet generated strong directional signals. The five- and twenty-day moving averages have converged around the $1.5350-1.5450 level. Should markets identify a clear off-ramp to the geopolitical crisis, this broadly sideways price action could mark the establishment of a meaningful technical base for recovery.
United Kingdom
Sterling remains heavily influenced by the broad direction of the US dollar, with a rolling thirty-day correlation between sterling and the Dollar Index reaching approximately negative 0.85—one of the most extreme inverse relationships observed this year. Last October, this correlation briefly exceeded negative 0.90, which represented the most extreme reading since April 2024. The relationship is remarkably straightforward: the thirty-day correlation between sterling and euro movements stands at approximately 0.88, the highest since mid-2025, indicating that sterling is moving largely in tandem with broader euro dynamics rather than responding to UK-specific factors.
The final March services and composite PMI readings, along with the March construction PMI, appear to be of secondary importance to the Bank of England, which is scheduled to meet on April 30. The interest rate swaps market is currently pricing in slightly more than a 50% probability of a rate hike at that meeting, with approximately an 80% probability of at least one additional hike before year-end.
Sterling appears to be trading with considerable weakness. At the end of March, cable recorded a new low since November near $1.3160. The currency recovered a couple of cents on optimism regarding a potential war resolution, but when that optimism faded, sterling was pressed back below the $1.3200 level. The momentum indicators are stretched to the downside but show no persuasive signs of preparing to reverse higher. Should geopolitical escalation intensify, sterling could approach the $1.3000-1.3040 technical target. Additional downward pressure on sterling is emanating from the cross-rate against the euro. During the first two weeks of the conflict, the euro fell approximately 2% against sterling, but since mid-March, the euro has recouped roughly 1.5% of those losses and appears poised to continue outperforming sterling.
China
Beijing has demonstrated considerable restraint in managing the yuan, declining to take advantage of broad US dollar strength to engineer a depreciation of the currency. Most notably, the People’s Bank of China set the yuan’s daily fixing against the dollar at its highest level in several years last week, with the CNY6.8880 level representing this strength. China, as the world’s largest importer of crude oil, faces significant challenges from elevated energy prices and disruptions across multiple industries. However, higher energy prices are also likely to boost demand for electric vehicles and solar panels, potentially offsetting some of the negative impacts on the broader economy.
The offshore yuan has remained range-bound since the Middle East conflict began, trading between approximately CNH6.86 and CNH6.9435. Last week’s high near CNH6.9270 represented the strongest level since March 9. A noteworthy development worth monitoring is the fact that the onshore yuan has been trading stronger than the offshore yuan with some exceptions since the war began, reversing a trend of onshore weakness relative to offshore that had persisted since late November. This shift bolsters conviction in an underlying trend of yuan strength.
China may report lending figures in the coming days, but it can be counted on to publish March consumer and producer prices at week’s end. Although oil from Iran continues to make its way to China, the US-Israel military operations are likely to create disruptions across multiple supply chains. Even before the conflict began, China was emerging from consumer deflation. The Consumer Price Index rose 1.3% year-over-year in February, marking the most significant increase in three years. Producer price deflation had lessened in six of the seven months through February, and at negative 0.9%, it represented the least deflationary reading since January 2023. The median forecasts in Bloomberg’s survey anticipate the PPI emerging from deflation with a reading of positive 0.5%, while the CPI is expected to remain largely unchanged at 1.2%.
Japan
The yen exhibits considerable sensitivity to the broad direction of the US dollar, with the thirty-day rolling correlation between dollar-yen changes and Dollar Index movements standing at approximately 0.72, not far from the level recorded on the eve of the Middle East conflict. This correlation bottomed in mid-March below 0.60 and hit its yearly low in the third week of January around 0.52. The dollar-yen thirty-day correlation with changes in the US ten-year yield stands near 0.60, at the upper end of the range observed since last October. In January, this correlation had fallen to almost 0.10, representing the lowest level since May 2025.
Counter-intuitively, over the past thirty trading sessions, changes in dollar-yen and Japan’s two-year yield are positively correlated by the most in two months. This unusual dynamic means that rising Japanese short-term yields are associated with a stronger dollar rather than a stronger yen. Notably, changes in dollar-yen and the S&P 500 over the past thirty sessions are inversely correlated at approximately negative 0.35, the most extreme relationship since last October. This inverse correlation indicates that the dollar tends to move higher against the yen when US equities decline, reflecting a classic risk-off dynamic.
Most of Japan’s economic data is for February, before the US-Israel military operations commenced. These releases include household spending, labor income, and the current account, which has improved sequentially for the past twenty years in February without exception. March producer prices are due ahead of the weekend. The market is currently discounting approximately a 70% probability of a Bank of Japan rate hike when it meets on April 28, with approximately a 60% probability of another hike occurring in the fourth quarter.
The dollar is trading choppily but remains mostly confined to a JPY158-JPY160 trading range. Both sides of this range have been violated by 0.4-0.5 yen on a couple of occasions since mid-March. While Japanese officials have continued to issue warnings about one-way markets and speculation, current conditions have not yet met their threshold for material intervention. The dollar settled lower in three of last week’s five sessions, and the yen finished the week stronger. Over the past three weeks, the yen has been alternating between advances and declines. One-month implied volatility eased every day last week and currently stands at approximately 8.9%, the lowest level since the conflict began.
Canada
The relationship between the US dollar-Canadian dollar exchange rate and crude oil prices is less straightforward than conventional market wisdom suggests. Over the past thirty sessions, the correlation between USD/CAD and oil prices has been slightly positive, meaning the Canadian dollar is more likely to weaken when oil prices rise rather than strengthen. While this relationship is not statistically significant (the correlation coefficient is less than 0.15), the sign is notable and represents the strongest positive reading since last September. The correlation between the greenback and the Canadian dollar versus the Dollar Index stands at slightly above 0.60, down from the peak near 0.85 recorded last month, which was the highest level since May 2024.
The employment data due at week’s end is considerably more important for investors and policymakers than the survey results, which include the services and composite PMI as well as the IVEY purchasing managers’ index. Canada experienced a significant employment contraction in February, losing a substantial 108,400 full-time positions while the unemployment rate rose from 6.5% to 6.7%. Another disappointing employment report would likely weigh materially on the Canadian dollar. The interest rate swaps market is pricing in less than a 10% probability of a rate hike at the April 29 meeting and does not have a hike fully discounted until the fourth quarter. In recent days, the swaps market has pulled back from the two or more rate hikes per year that it had been mulling in late March.
The US dollar reached just beyond CAD1.3965 last week, establishing a new marginal high since December of the prior year. The pullback toward CAD1.3870 may provide the greenback with a running start toward the next technical target in the CAD1.4000-1.4015 area. The momentum indicators are stretched following the greenback’s rally of approximately 3.25% since the March 9 low. This suggests that the expected next leg higher will likely complete this upward move. Professional traders will be especially attentive to reversal price patterns that could signal exhaustion.
Australia
The Australian dollar exhibits considerable sensitivity to the overall US dollar environment, with the thirty-day correlation between AUD/USD and the Dollar Index standing near negative 0.75. This represents one of the most extreme inverse relationships since the second quarter of 2024. The Australian dollar also displays sensitivity to the broader risk environment. The thirty-session correlation with the S&P 500 reached above 0.70 last month, rising from approximately 0.20 in early February, and currently stands near 0.62. The correlation with gold peaked around 0.80 last month, the highest level since 2022, but fell to the yearly low near 0.30 in late March and now stands around 0.45.
The final March services and composite PMI will be of passing interest to market participants. February household spending may attract more attention, as the Reserve Bank of Australia appeared to have responded to the surge in fourth-quarter spending (which averaged slightly more than 0.6% monthly, matching the strongest quarterly performance since the third quarter of 2023) with two rate hikes implemented before the conflict began. The futures market is currently pricing in almost an 80% probability of a third consecutive rate hike.
The Australian dollar fell to two-month lows last week near $0.6835. The daily momentum indicators are oversold and appear poised to turn higher. However, the price action has not been sufficiently persuasive to confirm that an important low has been established. There remains potential for one additional leg down to approximately $0.6800 before a more convincing recovery can be confirmed.
Emerging Markets
The Mexican peso appears to be driven by two dominant factors at present. The first is the general direction of the US dollar. Changes in the US dollar against the Mexican peso and the Dollar Index are correlated at 0.70 over the past thirty sessions, marking the strongest relationship since last October. The second driver is the broader risk appetite environment. Changes in the US dollar against the Mexican peso and the S&P 500 are inversely correlated at approximately negative 0.80, the most extreme relationship since 2020.
The Bank of Mexico’s rate cut in late March, combined with signals that additional cuts may follow, appears to have diminished the market impact of the March CPI report due Thursday. Both headline and core inflation remain above the upper end of the central bank’s 2%-4% target range. However, most central bank officials appear more concerned about economic growth. The economy was already struggling before the conflict began. At week’s end, Mexico will report February industrial output data. Industrial production slumped 1.1% in January, more than offsetting increases recorded in November and December 2025, and represented the largest decline in slightly more than a year.
The peso appreciated by approximately 1.4% last week, marking its largest weekly gain since late January and making it the second-strongest currency in the region after the Brazilian real, which gained roughly 1.6%. The dollar has been trapped in a narrow range, hugging the twenty-day moving average for the past three sessions around the MXN17.8250 level. The daily momentum indicators are turning lower after the greenback rallied more than 5.5% since the conflict began. The dollar reached almost MXN18.1645 last week, establishing a new high for the year, but stalled in front of the two-hundred-day moving average.
India’s central bank announced capital controls last week that restrict the size of banks’ foreign exchange positions and barred their activity in the non-deliverable forward market to defend the rupee. This policy shift may complicate the hedging of Indian bonds by international asset managers and could have broader implications for capital flows into Indian fixed-income markets. The Reserve Bank of India is widely expected to maintain its repo rate at 5.25%, with all economists surveyed by Bloomberg expecting no change. Additionally, all two dozen economists in Bloomberg’s survey expect Poland’s central bank to maintain its reference rate at 3.75%.
Global Markets
The S&P 500 rose for the first time in six weeks, signaling a potential stabilization in global risk sentiment despite ongoing geopolitical tensions. Benchmark ten-year Treasury yields in both the United States and Europe have eased from their recent peaks, reflecting the market’s reassessment of near-term rate-cut probabilities. However, the firing of three US Army generals and new attacks on Middle East infrastructure serve as stark reminders that further escalation appears likely before any meaningful de-escalation materializes.
Crude oil markets present a particularly revealing picture of market expectations regarding the conflict’s duration and intensity. The May West Texas Intermediate contract settled near $111.55 last week, a level that appears to build in the risk of near-term escalation. The June contract, however, settled close to $98, while the September contract trades below $78. This steep contango structure—where near-term prices command a significant premium to longer-dated contracts—reflects trader conviction that the disruption will be temporary and that normal supply dynamics will reassert themselves within a few months.
The Reserve Bank of New Zealand is the only Group of Ten central bank meeting this week and is most likely to maintain its policy rate unchanged. The convergence of monetary policy expectations across developed economies reflects the common shock of geopolitical disruption and elevated energy prices, which are affecting growth and inflation trajectories broadly across the developed world. Gold has benefited from the flight-to-safety bid, while silver has exhibited more volatility given its dual nature as both a precious metal and an industrial commodity sensitive to economic growth expectations. Brent crude oil has tracked WTI relatively closely, reflecting the global nature of the supply disruption concerns emanating from the Middle East.
Asian equity markets have shown resilience following initial weakness, while European bourses have stabilized after sharp declines in the early stages of the conflict. US equity index futures have begun to recover, suggesting that the initial panic selling may be exhausting itself as investors reassess the likely duration and economic impact of the disruption. The broad recovery in risk assets reflects a market that is pricing in a relatively contained conflict rather than a prolonged regional war that could fundamentally reshape global energy markets and supply chains.
Sovereign bond markets across developed economies have experienced a repricing as rate-cut expectations have shifted lower in response to the conflict. The inversion of the US yield curve has become less pronounced, and the term premium has expanded as investors demand additional compensation for duration risk in an environment of geopolitical uncertainty. German Bund yields have risen alongside US Treasuries, and UK gilt yields have followed a similar pattern, though the magnitude of moves has been somewhat muted by the flight-to-quality bid that typically accompanies geopolitical crises.
