Brent crude oil prices and natural gas prices in Europe spiked as the Iran war has escalated into additional direct strikes on energy infrastructure. An energy shock with no end in sight, a Fed staying restrictive, and other central banks on the cusp of tightening into soggy growth are a brutal combo for risk assets. Stocks and bonds are selling off while USD risk is skewed to the upside.
US
FOMC delivered a hawkish hold yesterday. Fed funds futures slashed rate cut expectations from -60bps before the start of the Iran war on February 27 to just -9bps in the next twelve months.
As was widely expected, the FOMC left the target range for the funds rate at 3.50%-3.75% for a second straight meeting. The 11-1 vote split indicated that few policymakers see the need to ease. Only Governor Stephen Miran dissented in favor of a 25bps cut. Consensus penciled-in a 9-3 vote to hold.
The FOMC reiterated that “uncertainty about the economic outlook remains elevated” but the updated economic projections downplay risk of stagflation. Real GDP growth was revised higher across the forecast horizon, reflecting confidence in productivity. Headline and core PCE inflation were both raised to 2.7% for 2026 but still converges to 2.0% by 2028.
The dot plots continue to imply one cut for both 2026 and 2027, no change in 2028. But the distribution of dots for 2027 and 2028 tilted slightly more hawkish. The longer-term rate was raised to 3.125% vs 3.0% in December, which was in line with consensus.
Finally, Fed Chair Jay Powell strongly suggested a high bar to resume easing stressing three key points: (i) “Fed sees current stance of policy as appropriate”, (ii) Think it’s important to keep rates mildly restrictive”, (iii) “Possibility that next move might be hike did come up.”
JAPAN
USD/JPY retreated from the 160.00 handle as Governor Ueda laid the groundwork for an April rate hike. The Bank of Japan (BOJ) kept the policy rate at 0.75% for a second straight meeting (widely expected). Like in January, the vote split was 8-1 with staunch hawk Takata Hajime dissenting in favor of a 25bps hike.
The BOJ reiterated its conditional tightening bias that “if the outlook for economic activity and prices presented in the January Outlook Report will be realized, the Bank,…will continue to raise the policy interest rate and adjust the degree of monetary accommodation.”
BOJ Governor Kazuo Ueda signaled that it’s premature to tighten into an oil driven inflation shock. Ueda prefers to wait to see whether rising energy prices translates into sustained inflation via wages and expectations, with the focus squarely on underlying CPI inflation. Importantly, Ueda added that so far spring wage talks have been delivering solid results, setting the stage for a rate hike at the next April 28 meeting (60% priced in).
SWEDEN
USD/SEK is holding above its 200-day moving average (9.3651). The Riksbank kept the policy rate at 1.75% for a fourth consecutive meeting (widely expected) and reiterated “the rate is expected to remain at this level for some time to come.” The March Monetary Policy Report (MPR) shows the bank pencils in the policy rate at 1.75% until Q4 2026, followed by a 25bps hike to 2.00% by Q1 2028. That mirrors the policy rate path outlined in the December MPR.
SWITZERLAND
CHF is down against most major currencies after the Swiss National Bank (SNB) delivers a dovish hold. President Martin Schlegel said he sees increased likelihood for negative rates and doubled down on FX intervention threat, warning “you’ll see” what comes after high willingness.
Otherwise, the SNB left the policy rate at 0.00% for a third consecutive meeting (widely expected). As it previously flagged, the SNB warned that “Given the conflict in the Middle East, the SNB's willingness to intervene in the foreign exchange market [to counter a rapid and excessive appreciation of the Swiss franc], has increased.
UK
GBP/USD is consolidating ahead of the Bank of England (BOE) policy decision (12:00pm London, 8:00am London). The BOE is widely expected to keep the bank rate at 3.75% for a second straight meeting. The MPC vote split is seen tilting more hawkish with 7-2 to hold versus 5-4 to hold in February.
The BOE’s room to “look through” and avoid tightening in the face of a soft growth backdrop is limited given the sharp increase in UK long-term inflation expectations. Indeed, the UK swaps curve went from pricing in a full -50bps of cuts before the start of the Iran war on February 27 to +37bps of hikes in the next twelve months.
EUROZONE
EUR/USD is consolidating under 1.1500 ahead of the European Central Bank (ECB) policy decision (1:15pm London, 9:15am New York). The ECB is widely expected to keep the deposit facility rate at 2.00% for a third straight meeting. The March macroeconomic projections will highlight the ECB’s updated playbook to the current energy shock.
The ECB’s room to “look through” and avoid tightening in the face of a soft growth backdrop is limited given the sharp increase in German long-term inflation expectations. Indeed, the Eurozone swaps curve went from pricing in -12bps of cuts before the start of the Iran war on February 27 to +58bps of hikes in the next twelve months.
CZECH REPUBLIC
The Czech Central Bank (CNB) is widely expected to keep the two-week repo rate at 3.50% for a seventh consecutive meeting (1:30pm London, 9:30am New York). Board member Jan Kubicek pointed out last week that he’s “satisfied with the rates where they are” adding that low Czech inflation gives a “relatively large buffer” to absorb the oil shock.
TAIWAN
TWD is underperforming most major currencies, undermined by the energy shock (Taiwan is a net energy imported) and stock market sell-off (Taiwan is heavily tied to the global tech cycle). As was widely expected, Taiwan’s central bank (CBC) kept the discount rate at 2.00% for an eighth consecutive meeting. But the bank warned it will lean to tighten if the war drags longer.
AUSTRALIA
AUD/USD retraced some of yesterday’s losses. But until the worst of the energy price shock passes, AUD/USD risks are tilted to the downside. Australia’s February jobs report was good and backs additional RBA rate hikes. The economy added more jobs than expected (actual: +48.9k, consensus: +20k, prior: +26.1k) while details were mixed.
Full-time employment dropped -30.5k, partly reversing January’s +54.6k gains, while part-time employment increased +79.4K (the biggest monthly gain since November 2021). The unemployment rate unexpectedly rose 0.2pts to 4.3% (consensus: 4.1%) as more people entered the labor force (the participation rate improved 0.2pts to 66.9%).
CANADA
USD/CAD is up near 1.3735, with the next major resistance offered at the 200-day moving average (1.3802). Yesterday, the Bank of Canada (BOC) kept the target for the overnight rate at 2.25% for a third straight meeting (widely expected). The statement highlighted the familiar stagflation dilemma facing all central banks noting that “risks to growth look tilted to the downside. At the same time, inflation risks have gone up due to higher energy prices.”
The real signal was in the guidance shift. The BOC scrapped its previous guidance that “the current policy rate remains appropriate” implying that policy is now live for a hike. Specifically, the BOC warned it “will look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects broaden and become persistent inflation.”
We still favor long CAD on the crosses as a good hedge against a more persistent energy price shock. Canada gets the terms of trade boost and has fiscal space to absorb some of the growth drag to domestic demand.
