United States
The announcement of a potential ceasefire in the Middle East conflict has fundamentally reshaped near-term expectations for both the dollar and US monetary policy. Risk sentiment has improved materially, reversing the safe-haven bid that had supported the greenback throughout the escalation phase. The Dollar Index gapped lower in the middle of last week, with that technical gap—positioned between approximately 99.18 and 99.51—now serving as a critical reference point from a technical perspective. The index found support around the 200-day moving average, located near 98.50, but momentum indicators have deteriorated. The five-day moving average has fallen below the 20-day moving average for the first time since February 18, signaling weakening upside momentum. We anticipate the 97.50 area could be tested in the coming sessions.
The derivatives market has dramatically repriced Federal Reserve expectations following the ceasefire news. The odds of a rate cut this year have risen to approximately 33 percent, up from a period when markets were briefly discounting a small probability of a hike. This represents a significant shift in how traders are positioning for Fed policy, with the market now viewing the central bank as the most dovish of the major central banks. The near-term calendar is dense with economic releases. The Empire State Manufacturing Survey and the Philadelphia Federal Reserve’s manufacturing gauge may prove most relevant given market participants’ desire for real-time insight into the war’s economic impact. The Fed’s Beige Book and its anecdotal reports could similarly serve this purpose, though there is virtually no doubt the FOMC will maintain its current stance when it convenes later this month. Other high-frequency reports are expected throughout the coming days, though we suspect most will have limited market impact given the current focus on geopolitical developments and their implications for growth and inflation.
Eurozone
The euro has staged a notable recovery following the ceasefire announcement, though the path higher had appeared stalled until the latest developments. The single currency bottomed in the middle of March, and the consolidation of the past couple of sessions appears constructive from a technical standpoint. The five-day moving average has moved above the 20-day moving average, and momentum indicators suggest scope for additional near-term appreciation. The ceasefire news has reset expectations for European Central Bank policy. Initial expectations for at least three rate hikes this year have been pared back to two, with approximately a 40 percent probability attached to a third hike occurring. This recalibration reflects the market’s reassessment of eurozone growth and inflation dynamics in light of improved risk sentiment.
The US two-year yield premium over German equivalents has experienced significant volatility. Before the war escalation, this spread stood around 138 basis points. As geopolitical tensions intensified and President Trump threatened action against Iran, the premium collapsed to approximately 108 basis points. The ceasefire announcement triggered a recovery to almost 130 basis points, though it finished last week closer to 123 basis points, still well above the trough but below pre-war levels. Regarding upcoming data, several large eurozone members have already reported February industrial output figures—Germany posted 0.5 percent, France declined 0.7 percent, and Spain advanced 0.2 percent—suggesting the aggregate eurozone figure may attract limited attention. Trade and current account data are similarly expected to draw muted response. The median Bloomberg forecast for first and second quarter 2025 growth of 0.3 percent appears slightly exaggerated given the ECB’s March projections of 0.9 percent annual growth and a current account surplus of 1.7 percent of GDP (expected to reach 1.9 percent in 2025), alongside a larger projected budget deficit of 3.4 percent of GDP compared to 3.0 percent in 2025.
From a technical perspective, the euro has forged what appears to be a solid base during the second half of March. Nearby resistance is identified around the $1.1745-1.1750 area, but we suspect initial potential could extend toward $1.1825, which represents the high from the final day of February before the war began. A breakthrough in Russia-Ukraine negotiations combined with a potential defeat of Hungary’s Viktor Orban—who has served as prime minister for 16 years across two separate terms (1998-2002 and 2010-present) and faces polls suggesting he could lose the popular vote on April 12—would likely provide additional support for euro appreciation.
United Kingdom
Sterling has demonstrated remarkable inverse correlation with the Dollar Index, with the 30-day rolling correlation standing at almost negative 0.87. This represents one of the most extreme readings since early fourth quarter 2025. The correlation between sterling and changes in two-year US yields stands around negative 0.35, while the correlation with two-year UK yields is near negative 0.10. Meanwhile, sterling’s correlation with the S&P 500 sits slightly below 0.57, positioning it at the upper end of the range observed since late 2022. This suggests cable is increasingly sensitive to broader risk appetite dynamics.
Ahead of the weekend, sterling settled at its best level since the war began, though it failed to break above the intraday March highs positioned around $1.3480-1.3485. The momentum indicators remain constructive, and the five-day moving average has pushed above the 20-day moving average. Above the March highs lies the $1.3515 area, which represents the halfway mark of the losses accumulated since the January 27 four-year high near $1.3670 was reached. A note of caution is warranted, however, as the upper Bollinger Band sits slightly below $1.3500, potentially capping near-term upside. The Bank of England’s policy trajectory remains a key consideration, particularly given the upcoming data calendar. At the end of the week, the UK reports February GDP and supporting details. Although monthly figures do not translate into quarterly reports in an intuitive manner, markets have historically been sensitive to these releases. January GDP unexpectedly stagnated, disappointing against the Bloomberg median forecast of 0.2 percent growth. Another disappointment would likely trigger sterling sales and force a reconsideration of the BOE’s likely policy path. The central bank projects 0.9 percent growth for the full year, while the Office for Budget Responsibility forecasts 1.1 percent. Both estimates may prove optimistic given current economic momentum.
China
Beijing continues to signal its endorsement of yuan appreciation, a policy stance that remains front and center in currency markets. Last week, the People’s Bank of China set the dollar’s reference rate at its lowest level in three years, lowering the fix by approximately 0.30 percent—the largest weekly decline in two months. This sustained effort to support currency appreciation reflects official policy preferences and suggests Chinese authorities are comfortable with gradual renminbi strength.
The economic calendar ahead is substantial. By the end of the coming week, Beijing will have released its estimate of first quarter GDP and comprehensive March macro details, including trade figures, retail sales, industrial production, investment, and house prices. The median Bloomberg forecast suggests the economy grew at a slightly faster pace in the first quarter than in the fourth quarter of 2024, with expectations for 1.2 percent growth. The composition and momentum of these releases will be closely monitored by markets seeking evidence of whether Beijing’s recent policy support is gaining traction.
From a technical perspective, the dollar posted its lowest close against the offshore yuan since March 2023 ahead of the weekend. A break of CNH6.8200 could signal a move toward CNH6.80, with potential extending toward the 2023 low, which sat slightly below CNH6.70. It is difficult to discern the precise intent of Chinese officials, but their demonstrated embrace of gradual yuan appreciation suggests that a move toward CNY6.60-CNY6.70 may fall within acceptable parameters for policymakers.
Japan
The dollar-yen exchange rate continues to be shaped by the elevated correlation with US yields. The 30-day correlation between changes in the USD/JPY rate and the 10-year US yield continues to hover above 0.60, representing the highest level since last September. This correlation had bottomed in early February at slightly below 0.15, the lowest reading since May 2024. The 30-day correlation between USD/JPY movements and the Dollar Index sits slightly above 0.75. At the end of February this stood near 0.73, but fell below 0.60 in mid-March. It has not exceeded 0.80 since last October, suggesting some decoupling from broad dollar dynamics.
Japan’s economic data has painted a mixed picture. After a robust 4.3 percent month-over-month surge in industrial production in January—the largest gain since June 2022—the pace slowed by almost half in February. This February figure is subject to revision in the coming week and bears close monitoring. While the Japanese economy appears sufficiently strong and price pressures remain persistent enough to support a Bank of Japan rate hike later this month, one concerning development has been weakness in private sector machinery orders, a key capex indicator. These orders fell by 5.5 percent in January, with the February report due on April 15. This potential softening in business investment intentions warrants attention as the BOJ calibrates its policy stance.
Regarding price action, the market tested the JPY160 level early last week, but ceasefire news saw the dollar retreat to support near JPY158.00. While the market does not appear to have abandoned efforts to probe the pain threshold of Japanese officials, daily momentum indicators are falling and the five-day moving average is threatening to fall through the 20-day moving average for the first time since February 20. That said, a convincing break of JPY157.50 would suggest a meaningful high has been established. Japanese officials have demonstrated sensitivity to rapid yen appreciation, and the intervention risk remains a material consideration for traders positioning in this pair.
Canada
The correlation dynamics between the Canadian dollar and the Dollar Index have shifted notably. Around mid-March, the 30-day correlation of changes in USD/CAD and the Dollar Index rose above 0.85, marking its highest level since mid-2024. This correlation has since moderated to near 0.65, still at the upper end of last year’s range. The correlation between USD/CAD changes and the S&P 500 stands around negative 0.28, while the correlation with changes in US two-year yields is slightly lower, though near the highs observed since last October.
The Canadian economic backdrop presents mixed signals. While housing data typically fails to capture market attention, international transactions may warrant closer examination. After a weak first half of 2025, foreign demand for Canadian stocks and bonds picked up during the second half of 2025 and continued into January. In fact, January’s portfolio capital inflows exceeded twice the fourth quarter 2025 average, suggesting renewed investor interest. However, the trade balance may be deteriorating. The January-February deficit of almost C$10 billion ranks among the largest Canada has ever recorded, and the rolling 12-month averaged shortfall of C$3.675 billion represents a record high. This deterioration in trade dynamics could weigh on the loonie if it persists.
Before the weekend, despite a milquetoast jobs report that saw full-time positions lost for the second consecutive month, the Canadian dollar rose to its best level in nearly two and a half weeks. The greenback was pushed below CAD1.38 and settled below both the 20-day and 200-day moving averages, which had converged around CAD1.3820. Momentum indicators have turned down, suggesting potential for additional weakness. The next technical target is positioned around CAD1.3750, with possible extension toward CAD1.37.
Australia
Changes in the Australian dollar and the Dollar Index exhibit the most inverse correlation on a 30-day basis since last October, with the reading near negative 0.78. The correlation between the Australian dollar and the S&P 600 stands around 0.64, down from the peak observed last month near 0.73, though still elevated relative to last year’s high closer to 0.87. The Aussie’s correlation with gold peaked in February slightly above 0.80, fell to almost 0.30 in March, and has since recovered to almost 0.50, reflecting the complex interplay between risk sentiment, safe-haven flows, and commodity dynamics.
At the end of the week, Australia reports March jobs data, which will be closely monitored given recent employment trends. In February, the almost 49,000 increase in employment was fueled exclusively by part-time positions, with 30,500 fewer full-time jobs created. However, this followed two solid months in which full-time posts rose by nearly 110,000. The unemployment rate stands at 4.3 percent. It has spent only one month higher since the end of 2021—the anomalous jump to 4.5 percent last September, with a return to 4.3 percent in October. The Reserve Bank of Australia meets next on May 5, with the futures market pricing approximately a 65 percent probability of a rate hike. We question whether three consecutive hikes represent an appropriately aggressive stance given the uncertainty unleashed by Middle East developments and their potential implications for global growth.
The Australian dollar is knocking on the $0.7100 area, which it last traded above on March 19. Following the second rate hike of the year, the Aussie reached slightly beyond $0.7185 on March 13, its best level since mid-2022. Momentum indicators have turned higher from oversold conditions, and the five-day moving average crossed back above the 20-day moving average last week. Initial resistance above $0.7100 is positioned near $0.7125.
Emerging Markets
The Mexican peso has demonstrated significant sensitivity to both the Dollar Index and risk sentiment. The rolling 30-day correlation of changes in USD/MXN and the Dollar Index stands above 0.75 for the first time since last October, which also marked the high in 2025. The peso is equally sensitive to the risk environment, with the USD/MXN exchange rate showing an inverse correlation to S&P 500 changes of almost negative 0.80, the most extreme reading since July 2020. The correlation between USD/MXN changes and US two-year yields is near 0.45, the highest since last September.
Wage dynamics in Mexico warrant attention, though the large informal economy—accounting for slightly over half of the workforce according to some estimates—complicates interpretation. Nominal wage increases have been trending lower, with March figures due this week. The rolling six-month moving average stood slightly above 6.35 percent in February, the smallest reading since first quarter 2022. This moderation in wage growth may support the central bank’s inflation management efforts.
The Mexican peso appreciated by approximately 3.3 percent against the US dollar last week, its best weekly performance since September 2024. The dollar settled near MXN17.2270 on the eve of the Middle East war and peaked in late March around MXN18.1645, slightly shy of the 200-day moving average. At the end of last week, it tested the MXN17.25 area, the lowest level since March 2. Momentum indicators are falling, and the five-day moving average fell below the 20-day moving average last week for the first time since early March. However, the move has been so rapid that the greenback has settled for the past three sessions below the lower Bollinger Band, positioned near MXN17.36 before the weekend, suggesting potential for some consolidation or pullback after such a sharp move.
Global Markets
Equity markets have rallied broadly on ceasefire hopes, with risk appetite flowing through to riskier assets and away from safe havens. The JP Morgan Emerging Market Currency Index rose by slightly more than 2 percent, posting its best week since March 2018. This broad-based strength in emerging market currencies reflects the improved risk environment and reduced demand for dollar safety. Negotiations are scheduled to take place over the weekend, with market participants hopeful that discussions could lead to a more sustained end to hostilities. However, complications persist, stemming from lack of trust between parties and the ongoing Israel-Lebanon conflict. Ceasefires are rarely immaculate, and traders should remain vigilant to the possibility of unexpected developments that could reverse the recent risk-on momentum.
Beyond the Middle East, two other potential watershed developments are emerging. First, encouraging reports have surfaced regarding a potential agreement between Russia and Ukraine, which could have significant implications for energy markets, growth expectations, and geopolitical risk premiums. Second, Hungary’s political landscape is shifting, with long-serving Prime Minister Viktor Orban facing electoral headwinds. Having served for 16 years across two separate terms (1998-2002 and 2010-present), polls suggest he could lose the popular vote on April 12. A change in Hungarian leadership could have implications for EU policy cohesion and eurozone dynamics.
Crude oil markets have reflected the improved risk sentiment. May WTI and June Brent both fell by nearly 11.5 percent as the ceasefire announcement reduced geopolitical premium and improved sentiment regarding energy demand. The dollar fell against all G10 currencies, as well as the Antipodean and Scandinavian currencies, which appear most sensitive to growth prospects and the risk environment. This broad dollar weakness has been consistent with the reduction in safe-haven demand and the repricing of US monetary policy expectations lower.
Sovereign bond markets have adjusted to the new risk environment. The US two-year yield premium over German equivalents has recovered from its trough but remains below pre-war levels, reflecting a recalibration of both growth and monetary policy expectations. Equity markets across Asia, Europe, and US futures have participated in the broad rally, though traders should monitor for signs that the ceasefire optimism may be overdone or that negotiations encounter setbacks. Gold and other precious metals have likely experienced selling pressure as risk appetite has improved and safe-haven demand has diminished. The broad improvement in risk sentiment, combined with reduced inflation concerns from lower oil prices, has created a favorable environment for risk assets while pressuring traditional safe havens and the defensive dollar.
