Geopolitical Headlines Drive Trading

MACRO FRAME

The renewed geopolitical risk backdrop adds another layer of uncertainty heading into Friday’s jobs report, with markets watching whether labor data alters expectations for the Federal Reserve’s policy path.

STOCK INDEX FUTURES

Equity indexes are higher, supported by a report that Iran’s Ministry of Intelligence signaled to the US Central Intelligence Agency openness to talks on ending the war. Focus on the data front will shift to ISM’s services PMI reading out later in the morning for signals on economic momentum and price pressures in the services industry. ISM’s manufacturing print proved stronger than expected and revealed the sector was grappling with elevated price pressures. Manufacturing PMI was 52.4, above forecasts and marking a second consecutive month of expansion, while the prices-paid index surged to 70.5 from 59, its highest level since June 2022.

The indexes rebounded from session lows on Monday, with the Dow trimming losses from roughly 1,000 to 363 points as markets reacted to signs of a potential stabilization in energy prices. Sentiment improved after President Trump said the US had significantly degraded Iranian military capabilities, and announced measures aimed at stabilizing energy markets, including directing the US International Development Finance Corporation to provide political risk insurance and financial guarantees for maritime trade in the Gulf. Trump added that the US Navy could escort oil tankers through the Strait of Hormuz if necessary, one of the most assertive steps yet to contain rising oil prices and mitigate shipping risks through the critical waterway.

Fundamentally, the earnings backdrop remains supportive. S&P 500 fourth-quarter earnings are tracking near 14% year-over-year growth, driven largely by the Magnificent Seven (excluding Tesla) and strong technology and semiconductor results following NVIDIA’s outsized performance. Forward earnings estimates have edged higher since January, and with Industrials and other cyclical sectors also delivering solid growth, corporate fundamentals continue to provide resilience despite ongoing AI-related uncertainty and geopolitical volatility.

Tariff-related uncertainty continues to amplify volatility following February’s Supreme Court ruling, adding another layer of policy risk to an already fragile sentiment backdrop.

CURRENCY FUTURES

US DOLLAR: The USD Index fell 0.23% to 98.82 but remained well above its 18-day moving average at 97.51. A report in the New York Times on Wednesday that cited officials briefed on the matter saying Iran’s Ministry of Intelligence signaled to the US Central Intelligence Agency openness to talks on ending the war, which pressured the dollar. The dollar has benefited from safe-haven flows amid the conflict in Iran, while currencies more exposed to potential energy supply disruptions have come under pressure. As both a major oil producer and issuer of the world’s reserve currency, the US remains a natural destination for defensive capital.

Near-term price action is likely to remain headline-driven. Any signs of de-escalation could pressure the dollar lower as safe-haven demand fades, while continued fighting and tighter energy markets would likely reinforce dollar strength by pushing inflation expectations higher.

From a macro standpoint, resilient domestic demand and persistent services inflation continue to provide modest support to the dollar. Friday’s labor data is not expected to materially alter Fed policy expectations.

Watch point: A sustained spike in crude prices would reinforce the dollar’s safe-haven bid, while any de-escalation in regional tensions could prompt a partial unwind of defensive positioning.

EURO: The euro rose 0.21% to $1.1637 after earlier touching its lowest level since November. Positioning in options markets shows traders are increasingly bearish on the currency, with the premium for options to sell the euro against the dollar over the next three months reaching its widest level since March of last year, according to LSEG data.

The conflict in Iran has amplified concerns over rising energy prices and highlighted Europe’s reliance on imported crude, a dynamic that continues to weigh on the currency. Deutsche Bank estimates that a combined 10% rise in Brent crude and European natural gas prices typically corresponds with roughly a 0.8% decline in the euro.

Providing some support, eurozone inflation surprised to the upside. February’s data showed headline inflation rising to 1.9% year-over-year while core inflation reached 2.4%, both above forecasts. Services inflation strengthened further, while non-energy industrial goods prices also picked up. European Central Bank President Christine Lagarde reiterated last week that inflation is expected to approach the 2% target over the medium term, though geopolitical tensions introduce additional uncertainty to the outlook. Money markets continue to price no policy change from the ECB in 2026.

With European Central Bank policy expected to remain on hold for the rest of the year, dollar dynamics will play an outsized role in price direction as the conflict in the Middle East continues.

Watch point: A sustained rise in oil prices would disproportionately pressure the euro via terms-of-trade effects, while stabilization in energy markets could allow inflation dynamics to regain influence over policy expectations.

BRITISH POUND: Sterling was little changed against the dollar at $1.3360, as investor attention remained focused on the US–Israeli conflict with Iran and the resulting surge in global energy prices. UK markets showed limited reaction to Finance Minister Rachel Reeves’ budget update on Tuesday, which disappointed investors and underscored the country’s modest growth outlook.

Reeves said the economy is projected to grow 1.1% this year, according to updated Office for Budget Responsibility forecasts, highlighting a subdued growth backdrop that leaves the pound sensitive to both energy dynamics and monetary policy expectations. The outlook remains fragile amid ongoing political uncertainty and soft economic momentum.

Rising oil prices have also shifted rate expectations. Traders now price roughly a 29% probability of a rate cut at the Bank of England’s upcoming meeting, down sharply from 75% last week, as higher energy costs risk complicating the disinflation narrative. Markets, however, still expect the BoE to begin easing by July.

Watch point: A March rate cut is now in question with renewed geopolitical risks and a potential sustained rise in energy prices.

JAPANESE YEN: The yen rose 0.26% to 157.34 as a reprieve in the energy price rally and news of a potential de-escalation in the conflict in Iran pressured the dollar. Japan’s vulnerability as a major energy importer has pressured the currency amid the surge in prices. Safe-haven flows have favored the USD, given concerns over Japan’s terms-of-trade exposure.

Bank of Japan Governor Kazuo Ueda warned that the Middle East conflict could significantly affect Japan’s economy, signaling the central bank is likely to keep rates steady for an extended period. Finance Minister Satsuki Katayama said authorities are monitoring markets with an “extremely strong sense of urgency” and reiterated that Japan maintains an understanding with the US regarding currency stability, keeping intervention risk in focus. Meanwhile, Bank of Japan Deputy Governor Ryozo Himino reaffirmed that the central bank will continue raising rates, though without committing to a timeline.

Last week’s nomination of two reflation-leaning academics to the BoJ board, along with reports that Prime Minister Takaichi has expressed reservations about additional tightening, has added uncertainty to the policy outlook. Money markets continue to price a rate hike by July.

Watch point: A move beyond the ¥160 range would likely intensify intervention rhetoric, while sustained energy-driven inflation could keep tightening expectations intact despite political pressure.

AUSTRALIAN DOLLAR: The Aussie rose 0.33% to $0.7058 following stronger-than-expected growth data. Australia’s economy expanded 0.8% in Q4 2025, lifting annual growth to 2.6%, the fastest pace since 2023. Growth was supported by household consumption and private investment, while government spending also contributed. Net trade was a drag as imports rose 1.8%, outpacing the 1.4% increase in exports. The household savings ratio climbed to its highest level since Q3 2022.

The data reinforced expectations that the Reserve Bank of Australia will maintain a tightening bias. Markets currently imply around a 30% probability of a rate hike at the March meeting, while a quarter-point increase to 4.10% remains fully priced for May.

RBA Governor Michele Bullock said the March meeting would be “live” for a potential rate increase, marking a shift from her recent patient tone. She warned that an oil price shock linked to Middle East tensions could reignite domestic inflation pressures, underscoring the sensitivity of the outlook to global developments.

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

TREASURY FUTURES

Treasury yields moved higher across the curve alongside a slight rally in global equities following the report that Iranian officials had reached out to CIA officials to discuss an offramp to the conflict. The conflict has fueled concerns that rising energy prices could keep inflation elevated and delay Federal Reserve easing. Monday’s stronger-than-expected ISM reading offered upward support to yields, with the prices-paid index climbing to a more than three-year high. Focus will now shift to the services PMI reading out later in the morning for signals on economic momentum and price pressures. A stronger prices reading is likely to offer strong tailwinds for yields.

Fed commentary reinforced the cautious tone. Kansas City Fed President Jeffrey Schmid reiterated his opposition to additional rate cuts, arguing that inflation remains too elevated and that demand continues to outpace supply, particularly in services. Minneapolis Fed President Neel Kashkari acknowledged that the Iran conflict has introduced a new layer of uncertainty into the policy outlook, noting that the duration and magnitude of the shock will determine whether easing remains appropriate later this year. The longer the conflict persists, the less likely policymakers may be to move on rates. New York Fed President John Williams said it is too early to assess the inflation impact of the conflict, though he emphasized that the US economy is less dependent on imported energy than in past cycles, suggesting some resilience to oil-price shocks.

Markets have responded by trimming near-term easing expectations. The probability of a June rate cut has fallen to roughly 39%, down from above 50% previously. Markets are priced for a cut in September, while total easing for year-end has narrowed to about 46 bps, down from 53 bps last week, meaning two cuts are no longer fully priced for 2026. Friday’s jobs report will provide further clarity on whether labor-market resilience continues to justify a patient Fed stance.

Watch point: With labor data pointing to continued stability and inflation remaining sticky, even as the year-over-year pace eased slightly, a late summer rate cut still remains the base case.

The spread between the two- and 10-year yields is 56.30 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.508%.

 

 

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