Relief Rally Over

MACRO FRAME

Markets have evidence that material signs of peace talks and de-escalation are necessary to sustain a rally in risk-sensitive assets. Until then, investors favor dollar liquidity. PMI readings out of several countries have reflected a direct impact to business activity and increased price pressures as a result of the conflict in Iran.

STOCK INDEX FUTURES

US equity index futures are lower, as markets digest mixed signals on peace talks ahead of PMI data out of the US, which will be the first reflection of how business activity has been impacted by the war in Iran. The three major indexes all rallied the previous session, with the Dow adding more than 600 points following two posts on Truth Social by Trump. The president said that the US would postpone strikes on Iran’s energy infrastructure for the five days, sparking an immediate drop in oil prices. Ultimately, Wall Street wants to see the talks evolve into a normalization to global oil markets and a reopening of the Strait of Hormuz. Until then, expect headlines to continue driving big price swings. Material evidence of de-escalation will likely be required for a sustained rally in the equities.

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 0.40% higher at 99.36, alongside a rebound in oil prices as investors scrutinize the outlook for the conflict in Iran. Reports point to ongoing communication and diplomatic efforts to end the war, but fighting has persisted. Adding to concerns, the Wall Street Journal reported that Saudi Arabia and the UAE are moving closer to joining the conflict against Tehran. Iran has continued its attacks on US bases in the Gulf and maintains that no negotiations with the US are underway. The dollar is likely to trade in line with oil prices, with headline trading likely to continue for the broader currency market. Today’s PMI readings will be closely watched for signs on heightened inflation for businesses and is likely to play a strong role in price direction.

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 fell 0.18% to $1.1592 following weaker than expected PMI readings from Germany,  France, and the eurozone. The latest survey revealed eurozone business activity growth at a ten-month low in March, with costs surging at the fastest pace in over three years due to soaring energy prices and supply chain disruptions from the war. Business confidence collapsed, suffering the sharpest decline since Russia’s 2022 invasion of Ukraine. The figures mark the first data points to cover the period since the conflict in Iran began, revealing 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% lower to $1.3394, as the conflict in the Middle East continues to dominate price moves. PMI readings from the UK showed that business activity grew at the slowest pace in six months in March as conflict in the Middle East triggered the biggest month-on-month acceleration in manufacturers’ input costs since 1992. The preliminary composite PMI, covering manufacturers and non-retail services businesses, sank to 51.0 in March from 53.7 in February which was the joint-highest since August 2024. The reading reflects how the way in Iran has contributed to stalling growth, while driving inflation higher. If these dynamics continue, the dilemma Bank of England policymakers will face could be extraordinary as given the upside risks to inflation and downside risks to the economy. Still, markets are expecting the BoE to raise rates twice this year, with 65 bps of total easing priced in.

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 weakened 0.38% to 158.86. Data out overnight showed that Japan’s annual inflation eased to 1.3% in February from 1.5% in the prior month, the lowest since March 2022. Meanwhile, core inflation, which excludes fresh food but includes energy, rose 1.6% year-over-year in February, slowing for a third straight month and coming in below forecasts of 1.7%. That was also the smallest gain since March 2022.

Elsewhere, Japan’s S&P Global Composite PMI slipped to 52.9 in March from a final 53.9 in February. The reading marked the weakest pace of growth since December, with both manufacturing output and services activity falling. New orders rose at the weakest rate in three months, while export demand expanded modestly. Employment growth eased to a four-month low, while capacity pressures persisted, though backlogs rose less sharply than February’s record pace.

Still, money markets are unchanged in their expectations of a July rate hike from the Bank of Japan. Largely in part to this year’s Shunto wage negotiations. Japanese firms have agreed to raise wages by more than 5%. The rise in wages supports the Bank of Japan’s path to monetary tightening given Governor Ueda had consistently repeated that increases in wages are a necessary precondition in order to raise rates.

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 sharply lower, falling 0.70% to $0.6962 as a broader relief rally in markets faded and oil prices rose. Disappointing business activity data added further pressure on the Aussie, with the manufacturing PMI slipping to a five-month low of 50.1 in March 2026, while the services PMI recorded its first contraction since January 2024, at 46.6.

Traders will await February inflation data due later in the 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 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 edged higher across the curve, following a rise in energy prices. Manufacturing and services PMI data out later in the morning will be closely watched for the war’s impact on prices. PMI readings in Europe and Australia revealed that businesses were facing higher prices as a direct result of the conflict in Iran. While Trump’s comments on Monday mark the first signs of de-escalation since the conflict began, energy prices remain elevated and still present material upside risks to inflation. Fed rate pricing is remains favorable to no policy action in 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. Still, today’s PMI readings are likely to determine price direction in markets, aside from any other developments regarding the conflict in Iran.

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 49.50 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.895%.

 

 

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