SIFs Kickoff Week Higher

MACRO FRAME

Markets need evidence of material progress in de-escalation as a necessary precondition to sustain a move to the upside. Until then, investors favor dollar liquidity. This week’s heavy data calendar is likely to significantly impact Fed rate expectations.

STOCK INDEX FUTURES

US equity index futures are higher as markets head into a holiday-shortened week that holds key labor data. President Trump said that Iran’s new leaders have been “very reasonable” in a social media post Monday morning, as more US troops arrived in the region, while Tehran warned it will not accept humiliation. Meanwhile, Iran-backed Houthi militants in Yemen joined the conflict after targeting Israel over the weekend. Recent history suggests that the indexes will struggle to maintain their gains, given oil prices are higher. With no clear sign of an end to the conflict, investors remain fearful about a fresh escalation in hostilities, heightening the market impact of the conflict.

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

CURRENCY FUTURES

US DOLLAR: The USD is 0.17% higher at 100.23, alongside a rise in oil prices overnight. Safe haven flows and hawkish Fed expectations continue to underpin the dollar, though market pricing of a December rate hike has fallen from a 50% chance of a hike to 11%. March’s jobs data on Friday will be closely watched for clarity on how hiring has held up in the face of higher energy prices after last month’s poor hiring figures. Elsewhere, JOLTS and ADP figures are also likely to impact Fed expectations. Weak labor figures this week could nullify any market expectations of Fed tightening despite the impact to inflation from higher energy prices. Meanwhile, FX markets remain caught in limbo as traders await further clarity on US-Iran negotiations.

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 slipped 0.20% to $1.1484. German inflation figures came in as expected, with prices rising 1.2% on the month and 2.8% on the year to mark the highest level since January 2024, driven by a 7.2% spike in energy prices. Inflation data from France, Italy, and the eurozone will be released on Tuesday. Money markets are pricing just over 70 bps of tightening from the European Central Bank by year-end, falling slightly from Friday, but nonetheless reflective of the rise in energy prices impact on inflation expectations. French central bank chief François Villeroy de Galhau stressed the ECB’s resolve to contain energy-driven inflation, though he cautioned it was “too early” to discuss specific timing for rate increases. Despite the hawkish backdrop, the conflict in Iran has led investors to favor dollar liquidity as the safe haven of choice, as Europe’s lack of energy independence makes the currency particularly vulnerable to the economic impact of higher energy prices.

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 0.16% lower at $1.3238 as markets head into a thin week of data on the UK economic calendar. Money markets are pricing 68 bps of tightening by year-end, with a 59% chance of a hike at the April 30 meeting. Economic data showed last week British business activity has grown at the slowest pace in six months and manufacturers’ input costs accelerated at the fastest rate since 1992, while retail sales fell. The conflict in Iran has taken UK politics out of the spotlight, though local elections in early May create further risk of volatility. Keir Starmer’s governing Labour Party is trailing the populist Reform UK and the left-wing Green Party. Looking ahead, revised Q4 GDP data on Tuesday should add some granularity on how the economy was performing heading into 2026.

Watch point: Signs of de-escalation between the US and Iran are likely to provide short-term support to GBP, but evidence of an increase in inflation presents a downside to growth and will put the BoE in a bind.

JAPANESE YEN: The yen strengthened 0.54% against the dollar to 159.47 as the government has geared up its threat of yen intervention, while the Bank of Japan has signaled that further depreciation could justify a rate hike in the near future. Japan’s top currency diplomat Atsushi Mimura said on Monday authorities may need to take “decisive” steps if speculative moves persist in the currency market. The remark marked an escalation from past verbal warnings as it was the first time Mimura, who oversees Japan’s currency policy, used the term “decisive” – language traders typically read as a signal of authorities’ readiness to intervene. Soaring oil prices from the conflict have added to inflationary pressures from the weak yen, which pushed up import costs. Japan’s heavy reliance on imported energy leaves it more exposed to higher prices than many other major economies.

Separately, Bank of Japan Governor Kazuo Ueda said the central bank would closely watch yen moves as they affect the economy and prices, suggesting inflationary pressures from a weak currency could justify raising interest rates in the coming months. While the BOJ kept rates steady in March, its policymakers debated further rate hikes with some flagging the chance of steady or faster-than-expected increases, the meeting’s summary showed on Monday.

Watch point: A confirmed April hike could pull USD/JPY closer to 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 slipped 0.15% $0.6862 ahead of the Reserve Bank of Australia’s release of its meeting minutes on Tuesday from its latest policy meeting. The RBA raised rates in a 5-4 vote, though Governor Michelle Bullock said the split in votes was less a disagreement on policy direction but on timing. Much attention will be on how board members balance the risks of inflation and economic growth as a fuel shortage has gripped some parts of the country. Analysts at HSBC now expect Australia’s economy to contract in the second quarter after two rate hikes this year, and higher fuel prices to weaken consumer spending.

TREASURY FUTURES

Yields are lower across the curve, with the 10-Year yield down 8 bps to 4.360%. Notably, unlike most sessions since the conflict began, this morning’s rise in energy prices has not driven yields higher. Still, front-end inflation pricing remains firm, with one-year inflation swaps closing at 3.15% on Friday. Markets have dialed back bets on Fed rate hikes this year, with odds of a hike at December’s meeting falling from 50% to 11%. Still, the Fed should be 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: Last week’s PMI data served as the first economic indicator to confirm the speculation that higher energy prices will drive up broader inflation. Markets will now look to this week’s labor data, which if poor, could nullify any expectation of Fed tightening this year.

The spread between the two- and 10-year yields is 50.60 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.852%.

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