US
Financial markets are under mounting strain. Crude oil prices remain under upward pressure, global equity and bonds continue to slide, and USD is pushing higher against most currencies. President Donald Trump delayed for a second time the deadline to destroy Iran’s energy plant to “Monday, April 6, 2026, at 8 P.M., Eastern Time.” Absent full US military control of the Strait of Hormuz, Iran effectively controls the escalation lever of this war, and the balance of risks point to a deeper unravelling.
Iran has both the capability and the incentive to destabilize global markets and impose as much economic/political pain on the US to extract maximum concessions from its five conditions for ending the war: (i) Immediate cessation of aggression and targeted attacks, (ii) Ensuring the war will not recur, (iii) Payment of war damages and reparations, (iv) Ending of hostilities across all fronts, and (v) recognition of Iran’s sovereignty over the Strait of Hormuz.
The heightened likelihood of a more persistent energy shock raises financial stability risks because it traps central banks in restrictive policy and puts government debt on a more fragile and unsustainable path. As such, USD can continue to benefit driven by dollar funding needs, not safe haven flows.
Demand for short-term USD funding tends to spike during periods of stress due to the dollar’s dominant role in the global financial system (trade invoicing, cross border lending, global bond issuance, FX reserves). When stress hits, foreign market participants scramble for dollars to secure liquidity to roll over debt and meet liquidity needs.
Dollar funding costs and demand are best captured by the cross-currency basis, the extra cost investors pay or receive to get dollars using another currency. Dollar funding pressure shows up in a narrowing and more negative cross-currency basis, which is increasingly the case at present.
The final March print of the University of Michigan sentiment index is due today. Fed speakers include: Richmond Fed President Tom Barkin (2027 voter), Philadephia Fed president Anna Paulson (2026 voter), and San Francisco Fed president Mary Daly (2027 voter).
UK
GBP/USD is down near 1.3300. UK retail sales fell less than expected in February. Total retail sales volumes declined by -0.4% m/m (consensus: -0.7%) following a rise of 2.0% in January (revised up from 1.8% previously). Regardless, the UK macro backdrop going into the Iran war is not a strong starting point, which is a drag on GBP. Growth is soggy and inflation is high, with both trends set to worsen the longer the energy shock persists.
The UK swaps curve implies over 75bps of hikes in the next 12 months. Tightening when UK growth is already operating below potential (the BOE estimates a negative output gap of -1% of GDP in 2026) will tip the economy into recession.
JAPAN
Japanese Finance Minister Satsuki Katayama stepped-up intervention warnings as USD/JPY edged closer to 160.00, a potential intervention threshold. FX intervention may slow the yen’s slide, but it can’t offset the twin drag from higher energy import costs and higher global bond yields.
On a side note, the Bank of Japan made a minor hawkish tweak to its natural rate of interest estimate (level of the real interest rate that is neutral to economic activity and prices). The new natural rate of interest range is estimated to be between -0.9% to 0.5% (or 1.10% to 2.50% in nominal terms) vs. -1.0 to 0.5% previously (or 1.00% to 2.50% in nominal terms). The small uptick to the lower bound of the range signals less accommodation at the margin, but not a more aggressive hiking cycle.
