BOJ Holds on Rates

MACRO FRAME

Equity markets continue to remain sensitive to changes in oil prices and news flow ahead of a busy week of earnings. The Fed, European Central Bank, Bank of Japan, and Bank of England will all hold policy meetings, all are expected to maintain their respective policy rate.

STOCK INDEX FUTURES

US equity indexes are mixed as a sharp rise in oil prices overnight dampened sentiment. Five of the magnificent seven report this week (MSFT, META, GOOGL, AAPL, AMZN) representing roughly $15 trillion in market cap. Focus around the earnings calls will also center around the outlook for capex, cloud growth, and demand from China. The path of least resistance is if cloud growth holds and capex guides are maintained. The tail is to the downside, is a miss on cloud growth, which could trigger a sharp drawdown in the Nasdaq and S&P given their weighting. The geopolitical factor remains the dominant driver of prices for now, with equity prices likely to remain sensitive to oil. The VIX is trading at 19.26, up 1.24 points (+6.9%) from Monday’s close of 18.02, reflecting a sharp pickup in hedging demand as AI-related concerns weigh on Nasdaq futures ahead of a heavy mega-cap earnings docket and the FOMC decision tomorrow. The reading is back in the upper end of the moderate 15–20 band and pressing toward elevated territory, indicating renewed tail-risk pricing and supporting a near-term defensive posture into the cash open.

The June S&P is trading at 7,155.50, down 0.70% from Monday’s settlement of 7,206.00, within an overnight range of 7,155.25 to 7,223.25 — with the overnight high marking a fresh 52-week high before reversing. Near-term support is seen at 7,155.25 (overnight low / current price), then the 7,100 round number, with initial resistance at 7,206.00 (prior settlement) and the 7,223.25 overnight/52-week high. SPX cash remains well above its 50-day moving average of 6,791.02 and above the 200-day at 6,711.67.

E-mini Nasdaq 100 (NQM26): The June Nasdaq is trading at 27,073.75, down 1.34% from Monday’s settlement of 27,440.50, within an overnight range of 27,073.00 to 27,512.00. Near-term support sits at 27,073.00 (overnight low / current price) and the 27,000 psychological round number, with initial resistance at 27,440.50 (prior settlement), 27,512.00 (overnight high), and the 27,542.50 52-week high. NDX cash remains comfortably above its 50-day moving average of 24,974.07 and above the 200-day at 24,734.00, leaving a substantial technical cushion despite the pre-market drop.

E-mini Dow (YMM26): The June Dow is trading at 49,409, up 0.14% from Monday’s settlement of 49,342, within an overnight range of 49,320 to 49,549 — the only major contract bid pre-market. Near-term support is seen at 49,320 (overnight low), then the 49,000 round number, with initial resistance at 49,549 (overnight high), the 50,000 psychological level, and the 52-week high of 50,937. DJIA cash remains above its 50-day moving average of 47,878.81 and above the 200-day at 47,107.94.

Watch point: Five members of the mag seven report earnings this week, setting up a momentum test for markets amid the Hormuz disruption and likely bringing fundamentals back into price action. However, the US-Iran conflict will continue to dominate overall sentiment.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.35% higher at 98.83 following a rise in oil prices overnight. The Fed is likely to hold rates steady this week and signal that rates may need to stay higher for longer, a scenario that would be mildly positive for the dollar. However, money markets have already priced in no policy action for 2026 out of the Fed. While safe-haven demand and ongoing geopolitical developments are poised to keep the dollar supported, positive developments regarding US-Iran negotiations are likely to put the dollar on the backfoot. Underlying fundamentals make the case for a resumption of the dollar’s downward trend once hostilities between the US and Iran are officially over. Despite rising inflationary pressures driven by energy prices, the dollar has lost its interest rate differential support it once drew from hawkish Fed expectations, support that has since been repriced away. With the labor market softening materially, the underlying case for a Fed rate cut later in the year remains intact.

Watch point: The dollar continues to find safe haven support and trade in line with oil prices. However, underlying macroeconomic fundamentals make the case for a resumption of the dollar’s downtrend when hostilities are over.

EURO: The euro moved 0.20% lower to $1.169 as the rise in oil prices weighed on the currency. No new data out overnight will leave moves subject to broader risk sentiment, which is to be continued to be driven by the US-Iran conflict. The European Central Bank’s policy decision on Thursday is likely to be the key event for the euro zone this week, with the bank expected to leave rates on hold while policymakers assess the impact of higher energy prices on the economy. Money markets are currently priced for two rate hikes this year, while a Reuters poll of economists showed that over half of the respondents expect the bank to raise rates at its June meeting, in line with market-implied odds of a 61% chance of a hike. The euro is likely to continue trading opposite oil prices. Positive developments out of the US-Iran conflict will be supportive of the currency, while safe-haven demand would see flows to the dollar.

Watch point: A rate hike at the ECB’s April meeting is unlikely, while the case for tightening depends on the effectiveness of the ceasefire and duration of the rise in energy prices.

BRITISH POUND: Sterling is 0.30% lower at $1.3491. Alongside the rise in oil prices, the move lower by the pound was in part, driven by headlines that UK MPs were set to vote on whether PM Keir Starmer should be referred to the Privileges Committee, about whether he misled MPs on the vetting process to appoint Peter Mandelson as US Ambassador. The Bank of England is widely expected to leave interest rates unchanged at its meeting on Thursday, leaving attention centered around the voting composition and the tone of the bank’s communication. Markets are currently pricing in two rate hikes from the BoE, though any indication of limited support for hikes at this meeting among policymakers could shift expectations toward just one additional increase.

Slowing wage growth remains a key factor which could limit the BoE to one rate hike, against market expectations. The critical watchpoint, however, is whether higher energy costs begin to feed into wage demands. While an April rate hike is unlikely, policymakers will be closely monitoring whether energy price strength is translating into broader wage pressure. Rate-hike timing expectations remain subject to the evolving conflict in Iran, and the situation continues to develop. Elsewhere, politics remain in focus for the currency as Prime Minister Keir Starmer continues to face growing scrutiny for his US ambassador appointment.

Watch point: While an April rate hike is unlikely, policymakers are likely to monitor data on whether higher energy prices are leading to bigger wages demands.

JAPANESE YEN: The yen is 0.20% weaker at 159.79 yen per dollar. The yen initially firmed after the Bank of Japan held rates steady, but moved lower during Governor Ueda’s comments, which were not as hawkish as expected. Despite the decision to hold on rates, three of its nine-member board voted for rate hikes, while the bank also sharply revised up its price forecasts and stressed the risk of an inflation overshoot. The BoJ revised inflation higher to 2.7% for 2026 and cut growth to 0.5% from 1.0%. The outlook also flags “rising prices in Japan currently outweigh risks of an economic downturn.” The three dissenting votes on the board highlight growing tensions at the BoJ to raise rates in response to inflation as it was the most dissents the board has seen since January 2016. Given the elevated inflation pressures and expectations, it is likely the bank will need to raise rates in the near-term. Money markets now see a 50% chance of a rate hike come June.

The Yen has failed to hold a depreciation past the 160 level, as expectations of government intervention and eventual policy tightening offer support. However, given the lack of policy-tightening, the yen could routinely test the 160 level, with rises in oil prices. Japanese Finance Minister Satsuki Katayama said on Tuesday that the government was standing by around the clock and ready to take action against foreign exchange volatility while closely coordinating with the US.

Watch point: Geopolitical factors/oil prices remain the main obstacle to appreciation against the dollar, even despite policymakers commitment to raise rates.

AUSTRALIAN DOLLAR: The Aussie is 0.33% lower to $0.7192 following the rise in oil prices overnight. Focus will center around this week’s first-quarter inflation data on Wednesday. The economy was already near capacity before the conflict in the Middle East, wage growth continues to advance, and inflation expectations have risen modestly, setting up inflationary conditions ahead of Wednesday’s release. A modest upside surprise could be enough for the Reserve Bank of Australia to deliver a third interest rate increase this year.

Markets are pricing an 87% chance that the RBA will hike rates for a third time this year to 4.35% in May. Recent labor data showed employment rose in March, while the jobless rate remained low, firming support for a May rate hike. While a durable ceasefire 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.

Watch point: The RBA is likely to maintain its tightening bias amid persistent inflationary pressures.

TREASURY FUTURES

Yields are higher across the curve alongside the rise in oil prices, continuing with the sell-off after Monday’s auction concession carried through the close. Current levels: 3M 3.681% (+0.2 bps), 2Y 3.840% (+3.5 bps), 5Y 3.986% (+3.4 bps), 10Y 4.366% (+3.1 bps), 30Y 4.963% (+2.1 bps). The 2/10 spread stands at 52.40 bps (essentially flat from 53 bps prior session), the 5/30 spread is at 98 bps (1 bp narrower from 99 bps), and the 3M/10Y spread is at 69 bps (uninverted, 3 bps wider from 66 bps). The move reflects classic bear flattening/parallel shift higher — front-end and belly leading with the 30Y lagging — consistent with concession-building ahead of today’s $44B 7Y supply, the FOMC tomorrow, and Thursday’s GDP/PCE double-header. The 3M/10Y remains uninverted and steepened, keeping near-term recession pricing subdued, but the magnitude of the front-end/belly back-up signals dealers are demanding meaningful concession into the policy window.

For the time being, longer-run inflation expectations are helping to cap yields below their late-March highs, contributing to a more contained trading range. While the Fed remains biased toward eventual policy easing amid softening labor market conditions, inflation expectations continue to act as a counterweight to further downside in bond prices. Market expectations for Fed easing have been pushed further out, though the broader policy outlook remains dovish. Markets are no longer pricing in cuts for 2026 and assign roughly a 30% probability to a first move in July 2027, down from 44% on Monday.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while also supporting the case for Fed easing later in the year.

 

 

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