SIFs Move Higher on WH Reports

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 ahead of today’s JOLTS Job Opening report for February, while reports that President Trump told aides he was willing to end the war in Iran even if the Strait of Hormuz remained closed lifted sentiment. The markets reaction to the news signals that investors are looking to avoid a further escalation in conflict, regardless of the resulting impact to oil prices. Still, markets appear to be underpricing the risks associated with the conflict as oil prices remain above $100 a barrel.

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 0.25% lower to 100.25, as risk sentiment returned to markets following reports that President Trump could be looking to wind down the conflict in Iran. Meanwhile, Fed expectations have shifted further to the dovish side, reversing last week’s hawkish rotation. Market pricing of a December rate hike has fallen to just over 1% from a 50% on Friday. 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 rose 0.37% to $1.1508 as a risk-on sentiment gripped markets overnight. On the data front, eurozone inflation figures showed CPI rose 2.5% YoY in March, below forecasts of a rise to 2.6%. The reading marks the highest rate of inflation since January 2025, as energy costs rose 4.9%, driven by the conflict in Iran. Meanwhile, price pressures eased in other sectors, while core inflation eased to 2.3%. The figures did little to move the currency and energy prices aside, were reflective of an environment where the ECB’s 2% mandate is achieved.

Money markets are pricing 70 bps of tightening from the European Central Bank by year-end. 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 0.45% higher at $1.3243 as risk sentiment returns to markets. UK GDP growth was confirmed at 1% YoY in the Q4 2025, to mark the smallest growth since Q1 2024. Money markets are pricing 60 bps of tightening by year-end, with a 50% 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.

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 0.22% against the dollar to 159.39 as threats of intervention from Tokyo have limited selling pressure on the yen. Finance Minister Satsuki Katayama on Tuesday repeated Tokyo’s readiness to respond “on all fronts” against volatile moves, saying they were seeing “speculative moves heightening in the currency market,” as well as in the oil futures market.

These comments come after the Bank of Japan signaled that further depreciation could justify a rate hike in the near future and after 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. 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.

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 rose 0.36% $0.6878. Minutes from the Reserve Bank of Australia’s March meeting signaled some uncertainty on the future path for interest rates. The hawks argued the war-driven spike in energy costs meant an immediate hike was needed, while the other four thought the threat to economic growth warranted a delay. 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. 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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