First Material Signs of De-escalation?

MACRO FRAME

Global markets are digesting a synchronized hawkish shift across major central banks resulting from the Middle East conflict and persistent energy‑driven inflation risks. This combination has driven a sharp repricing in rate expectations: OIS now prices the first full Fed cut only in mid‑2027, while European markets have swung from discounting cuts to pricing one to two ECB hikes next year.

STOCK INDEX FUTURES

US equity index futures got a lift following comments from President Trump that he had asked the Department of Defense to postpone military strikes against Iranian power plants and energy infrastructure for five days. Trump made the announcement on Truth Social just hours before a deadline he had set for Tehran to “fully open” the Strait of Hormuz, threatening to destroy Iranian power plants in a further escalation in a conflict now in its fourth week. However, Iran’s Fars news agency said after Trump’s post that there was no direct communication with the US or through intermediaries.

The comments lifted risk sentiment across markets as they mark the first clear positive development between the two sides with the first material sign of de-escalation between the two sides since the conflict began. However, while positive, the closure of the Strait of Hormuz and broader conflict still present downside risks to equity markets, while upside risks to inflation remain.

Watch point: Material signs of de-escalation will support equities, though the conflict still presents real risks to future gains in the absence of certainty.

CURRENCY FUTURES

US DOLLAR: The USD is lower at 99.56 after a steep drop earlier in the session following President Trump’s comments that he issued a five day halt in military strikes against Iranian power plants and energy infrastructure. Oil prices dropped sharply following the announcement, with WTI falling more than 9% below $90 per barrel and Brent sliding over 13% to under $97. Despite the pullback, earlier gains in energy costs have continued to fuel inflation concerns, reducing expectations for near term Fed rate cuts and prompting some traders to price in a potential hike later this year.

Watch point: Any confirmation that the Fed share of the global hawkish pivot is hardening, via speeches or further repricing in front‑end rates, would likely re‑anchor DXY toward recent highs despite cross‑currents from EUR and GBP.

EURO: The euro is little changed at $1.1568, getting a boost following the de-escalatory comments from President Trump. Provisional PMI readings for March from France, Germany, and the eurozone on Tuesday will be the highlight of the week on the economic calendar for the euro. The figures mark the first data points to cover the period since the conflict in Iran began, providing a key gauge on how the war has impacted business sentiment and activity amid a hawkish-shift in market expectations of monetary policy from the ECB and other global central banks.

Watch point: The sustainability of EUR strength will hinge on whether risk sentiment stabilizes and energy prices avoid another leg higher.

BRITISH POUND: Sterling is 0.3% higher to $1.3388, also getting a lift from President Trump’s comments. Market expectations regarding Bank of England policy have shifted the most dramatically among major G10 central banks since the beginning of the conflict in Iran, with markets pricing in three rate hikes this year. CPI data for February will be released on Wednesday and will provide a snapshot on how progress on inflation was trending before the conflict broke out. While the data will not reflect any of the increased price pressures from higher energy prices, any material signs of deflation are likely to add to bets of easing from the BoE if the conflict in Iran were to cease within a couple of weeks.

Watch point: Signs of de-escalation between the US and Iran are likely to provide short-term support to GBP, but evidence of progress on inflation present a downside risk to the currency – if the conflict in Iran subsides soon.

JAPANESE YEN: The yen strengthened 0.4% to 158.65 on the back of President Trump’s comments. Also supportive of the currency is news that Japan’s largest trade union group reported that Japanese firms have agreed to raise wages by more than 5%. The rise in wages reflects a third-consecutive yearly increase and supports the Bank of Japan’s path to monetary tightening. Governor Ueda had consistently repeated that increases in wages are a necessary precondition to monetary tightening. Despite large increases in nominal pay in recent years, real wages have struggled to turn positive, depressing household purchasing power as inflation has outpaced pay gains.

Watch point: A confirmed April hike could pull USD/JPY below 155, particularly if US yields stabilize; however, renewed US dollar strength or further escalation in the Middle East could limit yen gains despite BoJ normalization.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7031. Middle East aside, traders will await February inflation data due Tuesday evening, which is expected to show annual inflation to hover around 3.8% in February. While that reading would be unchanged from January, it would still rest well above levels the Reserve Bank of Australia feels comfortable with. Markets are currently pricing in over 60 bps of additional easing by year-end from the RBA, with hikes priced in for August and November. Outside of the rise in energy prices, domestic data has proven inflationary and supportive of the RBA’s tightening bias in 2026.

Watch point: Wage figures, capacity utilization, PMI readings, and other signals on economic momentum will dictate market sentiment over future timing expectations.

TREASURY FUTURES

Yields are lower across the curve, following President Tump’s comments and a subsequent drop in energy prices. The Two-year yield is down 2.5 bps to 3.869%, while the 10-year yield is 2.4 bps lower at 4.370%. Inflation swaps, a gauge of the outlook for future consumer prices, have eased from a six-month peak of roughly 3.3% to 3.17% in one-year maturities. Suggesting that investors believe that the consumer price index will average more than 3% over the next 12 months, higher than the 2.4% year-on-year CPI reading for February.

While Trump’s comments mark the first signs of de-escalation since the conflict began, energy prices remain elevated and still present material upside risks to inflation. Fed repricing is particularly stark, with markets not pricing in any policy change from the central bank for the rest of 2026. However, the Fed is more likely to cut rates than to raise them given its dual mandate and the possibility of the bank looking through an energy price shock in an effort to support the labor market.

Watch point: The durability of last week’s hawkish repricing will hinge on whether upcoming inflation and growth data validate central‑bank concerns; for now, higher real yields and a longer‑dated easing timeline remain headwinds for duration and a key macro constraint for risk assets.

The spread between the two- and 10-year yields is 49.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.869%.

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