Market Overview
Geopolitical optimism surrounding potential resolutions to Middle East tensions has ignited a broad risk-on sentiment across global markets, lifting equities to fresh records while simultaneously pressuring the US dollar to multi-week lows. The confluence of reduced safe-haven demand and shifting rate expectations has created a challenging environment for the greenback, with the Dollar Index posting its longest losing streak in 15 years and posting losses for nine of the past ten sessions. This repricing of risk and monetary policy expectations is reshaping currency dynamics across all major pairs.
United States
The greenback faced considerable headwinds throughout the week as market participants reassessed the probability of near-term Federal Reserve rate cuts. The Dollar Index fell for eight consecutive sessions through April 15, matching its longest losing streak in 15 years, declining through the critical level of 97.65—the lowest point since the Middle East conflict commenced. This represented a penetration of the 50% retracement of the rally from the year’s low recorded in late January around 95.55. Although the index recovered through most of the North American session before the weekend, reaching almost 98.25, momentum indicators remain over-extended. A move above 98.40-50 would be required to suggest that a near-term bottom is in place. The rolling 30-day inverse correlation between changes in the Dollar Index and the Nasdaq stands at negative 0.60, representing the most extreme reading since the end of 2023, underscoring the pronounced inverse relationship between dollar strength and equity market performance.
Fed funds futures markets are now discounting almost a 65% probability of a rate cut before year-end, the highest probability recorded in the past month. This represents a significant shift in expectations as geopolitical tensions ease and investors reassess the inflation trajectory. The prospect of Middle East peace has substantially boosted risk appetite and weighted against the US currency. The Dollar Index has now fallen for the third consecutive week, matching its longest losing streak in a year.
On the economic data front, stronger auto sales and a dramatic rise in gasoline prices likely provided support to March retail sales figures. Excluding autos and gasoline, retail sales are expected to have edged up by 0.1-0.2%. Beyond retail sales, other high-frequency US data releases are primarily survey-based. April Fed surveys including the Philadelphia non-manufacturing survey and the Kansas City Fed’s manufacturing and non-manufacturing indices, along with the preliminary April PMI, will likely capture some disruption stemming from Middle East developments. Fourth quarter 2025 GDP was initially reported at 1.4% annualized, subsequently revised downward to 0.7%, and then revised again to 0.5% in the second revision—a concerning deceleration that has prompted fresh scrutiny of economic momentum. The Atlanta Fed nowcast for first quarter 2026 stands at 1.3% and will be updated following the release of retail sales and business inventories data on Tuesday.
Kevin Warsh’s confirmation hearing as Federal Reserve Chair is scheduled for next week, though postponement remains possible. Ongoing investigations into the Federal Reserve appear to command sufficient opposition on the Senate Banking Committee to potentially block confirmation. Our assessment suggests that if a successor has not been confirmed by the end of Jerome Powell’s term as chair on May 15, he would likely be selected by the board to continue in that post. Given that his term as governor does not expire until 2028, and considering what appears to be a strong conviction regarding the Federal Reserve’s institutional independence, the odds favor his continuation in the role.
Eurozone
The euro benefited substantially from broader risk appetite and the general pullback in the dollar rather than from any particular European development. At its peak on March 24, the swaps market had discounted three rate hikes fully by the European Central Bank for this year, with approximately a 25% probability assigned to a fourth hike. This pricing has been dramatically scaled back, with the market now discounting only two hikes and assigning less than a 10% probability to a third hike—a repricing that still appears excessive given underlying economic conditions. At its most extreme point last month, the swaps market had assigned an 85% probability to an April rate hike; this probability has been reduced to approximately 12%.
European two-year yields fell by 20-25 basis points during the past week, substantially outpacing the more modest 7-8 basis point decline recorded in US two-year yields. This differential reflects the pronounced repricing of ECB policy expectations as geopolitical risks have receded.
The preliminary April PMI represents the highlight of the upcoming eurozone data calendar. The composite output index had demonstrated strength from June through November of the previous year, but has since slowed in three of the four months through March. This general pattern of deceleration is evident in both services and manufacturing components. Given the disruptive channels through which Middle East developments operate across the economy, it would be surprising if March data fully captured the impact of these geopolitical tensions. Germany’s ZEW and IFO April surveys, also due this week, will provide additional insight into business sentiment and economic expectations.
The euro has risen in nine of the past ten sessions, demonstrating impressive momentum. Ahead of the weekend, it penetrated the high set before the war began, slightly below $1.1830, before subsequently selling off to around $1.1760. This price action constitutes a potential key reversal pattern that, despite rising momentum indicators, suggests the euro’s four-cent rally over the past month may have exhausted itself. Should this reversal prove decisive, the first corrective target may emerge in the $1.1675-$1.1700 area, representing a meaningful pullback from recent highs.
United Kingdom
Sterling has benefited substantially from the weaker dollar environment. The rolling 30-day inverse correlation between changes in sterling and the Dollar Index stands at almost negative 0.90, representing the most extreme reading in six months. Sterling’s correlation with changes in the US two-year yield is negative 0.33, reflecting the intuitive relationship whereby higher US rates typically weigh on sterling. Interestingly, the correlation between sterling and changes in the two-year UK yield is also inverse, though more modest at negative 0.12. Over the past two years, this rolling 30-day correlation has spent more time in inverted than positive territory.
The upcoming week represents an important period for UK economic data releases. While these data feed into the Bank of England’s policy assessment, the bar for a policy change at next week’s meeting appears elevated. Updates on the labor market, retail sales, and inflation are scheduled for release. The United Kingdom is currently experiencing among the strongest CPI increases coupled with one of the weakest growth rates among major developed economies—a challenging combination for policymakers. The preliminary April PMI is also due. In March, the composite index dropped to 50.3, its lowest level since April of the previous year when it briefly dipped below the 50 boom/bust threshold in a statistical quirk before rebounding sharply the following month. These data are unlikely to alter the consensus expectation that the BOE will maintain policy unchanged, though the possibility of a dissenting vote in favor of a hike cannot be excluded. Recall that the March decision to leave policy unchanged represented the first unanimous decision in 4.5 years.
Cable stalled around $1.36 last week as some frustrated late longs appear to have exited positions, sending sterling back to slightly below $1.3515 in late dealings before the weekend. By settling 1/100 of a cent below the previous day’s range, sterling posted a potentially key reversal pattern. The pair recorded a four-month low at the end of March near $1.3160, and last week’s advance brought it to the 61.8% Fibonacci retracement of the losses from nearly $1.3670—the high set in late January since September 2021. Momentum indicators are over-extended; while they have not yet turned lower, the month’s advance appears long in the tooth. A break of $1.3500 could signal scope for another cent of downside.
China
The People’s Bank of China has maintained its campaign—initiated last May or June—to engineer appreciation of the yuan. The central bank has consistently been lowering the dollar’s reference rate and has now reached a three-year low, suggesting the campaign remains active even though its ultimate endpoint is not clearly defined. Based on several bank recommendations, portfolio flows appear supportive of continued yuan strength. The increased utilization of China’s International Payments System (CIPS) to settle and clear international transactions would seem to diminish the relevance, when considered in isolation, of the yuan’s share on the SWIFT global payment system. On SWIFT, the yuan’s share of payments peaked in July 2024 near 4.75%, but has since declined to approximately 2.75% as of February.
Chinese banks will establish their loan prime rates on April 20. The one-year rate currently stands at 3.0% while the five-year rate is at 3.50%. Prior to the Middle East conflict, expectations for additional monetary easing appeared reasonable; however, these expectations have become less certain in the current environment. Regardless, a clearer signal from the PBOC may prove necessary to prompt any adjustment to loan prime rates.
The PBOC has continued to permit gradual appreciation of the yuan. In the offshore market, the currency rose to its best level since February 2023, with the market encouraged by the central bank’s guidance through the daily reference rate setting. The reference rate was set at its highest level against the dollar since April 2023 during the past week. The greenback found support near CNH6.80, while the CNH6.85-CNH6.86 area may offer a nearby cap on further appreciation.
Japan
Three significant influences operate on the dollar-yen exchange rate. The first is the general direction of the dollar itself, with the rolling 30-day correlation between changes in the dollar-yen and the Dollar Index standing at 0.75. The second influence is the change in the 10-year US yield, which exhibits a correlation of approximately 0.65 with the exchange rate—the highest reading since last October. Third, there exists a risk element affecting the yen, with the rolling 30-day correlation between changes in the exchange rate and the S&P 500 reaching around negative 0.55, representing the most extreme level since late 2022.
While Japan maintains a busy calendar of high-frequency economic reports, these releases will likely exert minimal impact on expectations for the Bank of Japan meeting. National March CPI figures, for example, have already been anticipated by Tokyo readings released several weeks prior. Tokyo’s year-over-year headline and core CPI measures each edged 0.1% lower. The BOJ targets the core CPI rate, which stood at 1.6% in February—the first instance since March 2022 that it fell below the 2% target. One of the few propositions that international economists might broadly agree upon is that the Japanese yen is undervalued. Yet paradoxically, Japan has not recorded an annual trade surplus since 2020. The deficit is gradually shrinking; in the first two months of the year, Japan’s trade deficit was approximately half the size of the shortfall recorded in January-February 2025. Nevertheless, the terms of trade—as measured by export and import price indices—appear to be moving against Japan.
The preliminary March PMI is due, though the market does not typically respond materially to this release. The February tertiary industry index will assist economists in forecasting GDP, though growth this quarter appears on par with fourth quarter 2025’s 1.3% annualized rate. Bank of Japan Governor Ueda’s recent comments proved insufficiently strong to arrest the decline in expectations for a rate hike at the end of the month. Over the past two weeks, the odds of a hike in the swaps market have declined from approximately 67% to less than 17%. While our prior assessment favored a higher probability, we recognize that the Bank of Japan will most likely avoid surprising markets.
After the dollar was turned back from its approach toward JPY160 at the start of last week, it reached JPY157.60 by week’s end. Ahead of the weekend, the greenback posted an outside down day by trading on both sides of the previous day’s range, though it did not settle below its low of approximately JPY158.25, neutralizing the technical signal. Momentum indicators are falling and the dollar appears soft. The fact that the dollar fell for the third consecutive week against the yen underscores the argument that despite the finance minister’s comments about willingness to take “bold action,” the conditions for material intervention are not present.
Canada
The rolling 30-day correlation between changes in the US dollar-Canadian dollar exchange rate and the Dollar Index is more than twice as high as the correlation between the exchange rate and oil prices. The correlation with the Dollar Index stands at approximately 0.65, gradually rising from the late March low near 0.56. In the first quarter, the correlation reached nearly 0.85, representing the highest level since May 2024. Counter-intuitively, since around the middle of last month, the US dollar has tended to appreciate against the Canadian dollar when oil prices are rising. The 30-day rolling correlation jumped to 0.47 last week, the highest reading since last August. There is also a risk element present, with the rolling 30-day inverse correlation to changes in the S&P 500 at approximately negative 0.36, the most extreme in four months.
Canada will report March CPI and February retail sales data. Before the Middle East conflict commenced, Canada’s headline CPI stood at 1.8% with core CPI at 2.0%. Prices are expected to have risen in March, with the median forecast in Bloomberg’s survey suggesting the headline rate will jump to 2.6% and core rates will edge upward. The March jobs report proved uninspiring, and the market recognizes that the central bank may remain on the sidelines for the next several months. Before the war began, the swaps market was discounting approximately a 40% probability of another cut following the target rate reduction of 275 basis points over the past two years. At the peak on March 20, swaps market pricing was consistent with a little more than three hikes; currently, it discounts one hike fully and almost a 10% probability of a second hike.
The Canadian dollar has been on a notable run, having risen in nine of the past ten sessions for an almost 2% gain. To appreciate the magnitude of this move, consider that the one-month implied volatility stands at approximately 4.5% annualized. The US dollar reached CAD1.3650 before the weekend, a one-month low, before stalling and recovering to almost CAD1.3690. The greenback is descending from around CAD1.3965 at the end of March, and the move appears advanced. The risk-reward dynamic may be shifting against chasing the Canadian dollar higher, with the risks of a greenback bounce appearing to increase.
Australia
The broad movement in the US dollar appears to represent the more important driver of the Australian dollar’s exchange rate. The rolling 30-day inverse correlation of changes in the Aussie and the Dollar Index stands at approximately negative 0.75, near the most extreme level since last September. The currency is positively correlated with the S&P 500 at approximately 0.65 over the past 30 sessions, having spent little time above 0.70 since last November. Changes in the Aussie and oil exhibit a correlation around negative 0.40, the most extreme since last September. Counter-intuitively, the Aussie is inversely correlated with changes in Australia’s two-year yield, currently near this year’s low at approximately negative 0.22.
The only data of notable importance in the coming days is the preliminary PMI. Recall that in March, the manufacturing, services, and composite readings all fell below the 50 boom/bust threshold. The disruption from the Middle East war likely exerted greater impact than the two rate hikes, with the second occurring after the conflict commenced. The composite PMI plummeted to 46.6, the lowest level since late 2023, down sharply from 52.5 in February and representing the first sub-50 reading since September 2024. Ironically, the manufacturing sector demonstrated greater resilience than services. The manufacturing PMI fell for the second consecutive month, with March’s 49.8 representing the weakest reading since last October. The services PMI had peaked in January at 56.3, fell sharply in February to 52.8, and then declined nearly twice as much in March to 46.3, signaling the deepest contraction since November 2023. The Reserve Bank of Australia meets on May 5. The futures market is discounting almost an 80% probability of another hike. Our prior assessment leaned against a third consecutive rate hike, but the prospects of an end to Middle East conflict and hawkish official comments have forced a re-evaluation.
The Australian dollar reached its best level since mid-2022 at the end of last week, poking above $0.7220 to culminate a three-week rally of a little more than 4.5%. It frayed the upper Bollinger Band at approximately $0.7215 before pulling back to settle around $0.7175. Initial support may be found in the $0.7130 area, and a break of this level could signal a corrective phase that could extend toward $0.7000.
Emerging Markets
The Mexican peso appears most sensitive to the risk environment overall. The correlation between changes in the dollar-peso exchange rate and the S&P 500 stands at approximately negative 0.80, representing the most extreme relationship since 2020. Ironically, the correlation between changes in the USD against the peso and changes in the Australian dollar is almost negative 0.80 as well. The correlation of the exchange rate and the Dollar Index is approximately 0.75, the most extreme since last September. Rising oil prices provide no support for the peso. The rolling 30-day correlation of changes in WTI and the dollar-peso exchange rate stands a little below 0.50, a four-year high.
Mexico’s February retail sales data are too dated to exert much impact on the central bank’s decision early next month, making it difficult to envision sustained momentum following the 1% surge in January. The February IGAE economic activity report may similarly prove unhelpful given the disruption from Middle East developments. Mexico will also report March unemployment, which stood at 2.59% in February. It recorded last year’s low at 2.22% in March, a record under the current time series that began in 1994. However, it bears remembering that over half of Mexican workers operate in the informal economy.
The dollar initially was sold to a new low since the Middle East war began ahead of the weekend, reaching almost MXN17.1275. However, it reversed sharply higher and closed above Thursday’s high of approximately MXN17.2960. This represents the type of price action traders observe at the end of a sustained move. The MXN17.45-50 area may offer initial resistance to further peso weakness.
Global Markets
Equities across global markets have responded positively to the geopolitical optimism surrounding potential Middle East resolutions. The US S&P 500 and Nasdaq reached new record highs with multi-week rallies in progress. Asian equity markets have similarly participated in the risk-on environment, while European bourses have advanced in tandem with the broader risk appetite. US equity futures point to continued strength, though some consolidation would not be unexpected following the sharp rallies of recent sessions.
Sovereign bond markets have experienced significant repricing as rate cut expectations have shifted. European two-year yields fell substantially by 20-25 basis points during the past week, far exceeding the more modest 7-8 basis point decline in US two-year yields. This differential reflects the more pronounced repricing of European Central Bank policy expectations relative to Federal Reserve expectations. Japanese two-year yields slipped almost three basis points, though a more dramatic move occurred in the swaps market, which dramatically adjusted the odds of a Bank of Japan rate hike later this month to less than 20% from approximately 55% a week ago. Benchmark 10-year yields across major developed markets have generally drifted lower in sympathy with the broader shift toward risk-on positioning and reduced real rate expectations.
Energy markets have experienced notable weakness as geopolitical risk premiums have compressed. June WTI crude oil tumbled 7.6% last week, following an 8.6% decline the previous week. The contract briefly traded below $79 per barrel, down substantially from the peak recorded on March 9 at approximately $104.35. This represents a decline of over 25% from the geopolitical peak, reflecting the pronounced repricing of supply risks as the prospect of Middle East conflict resolution has improved. Brent crude has similarly declined, though the spread between WTI and Brent has reflected the specific dynamics of US crude export policy and global refining demand patterns.
Precious metals have exhibited mixed performance in the current environment. Gold has faced headwinds from the combination of rising real rates and reduced safe-haven demand as risk appetite has improved. Silver has similarly faced pressure from the broader shift away from defensive positioning, though industrial demand considerations continue to support the metal. The precious metals complex will likely remain sensitive to shifts in real rate expectations and risk sentiment as markets digest the implications of potential geopolitical resolution.
The development in the Middle East may ultimately prove more important than high-frequency economic data in determining near-term market direction. The risk remains that markets are getting ahead of themselves, and clarification of the situation is likely over the coming days. US earnings season features technology and airline companies prominently next week, providing investors with concrete evidence of corporate profitability in the current environment. The intersection of geopolitical developments, monetary policy repricing, and corporate earnings will likely establish the tone for equity and currency markets throughout the coming sessions.
