Market sentiment steadied briefly overnight after Israeli’s Prime Minister Benjamin Netanyahu said the war will end sooner than people think and energy infrastructure will no longer be targeted. However, the short-lived calm gave way to a fresh bout of risk aversion. Crude oil prices are back up, equity markets are under renewed downside pressure, bond yields are pushing higher again, and USD is firmer.

Political jawboning to manage risk sentiment should not be confused with a genuine top of energy shock risks. Iran has both the capability and the incentive to destabilize global markets and impose as much economic/political pain on the US and its allies.

After a packed week of central bank decisions, it’s relatively quiet on the data front today. All major central banks (with the exception of the RBA, which hiked) held rates steady as widely expected, but the signal shifted hawkish with the energy shock pushing inflation risks back to the forefront.

As a result, interest rate expectations adjusted higher. US rate cut bets over the next twelve months has been priced out, while in most other advanced economies additional rate hikes have been priced in.

Bottom line: rate differentials between the US and other major economies still anchors DXY within a 96.00-100.00 range. But until we reach peak fear around the energy shock, USD risks remain skewed to the upside driven by dollar funding needs in periods of financial market stress.

We hear today from Fed governors Michelle Bowman (12:00pm London, 8:00am New York), and Christopher Waller (12:30pm London, 8:30am New York). Both were expected to dissent in favor of a cut this week but instead voted with the majority to keep rates on hold. It will be interesting to hear if their concerns around US labor market conditions worsened or diminished.