There are two main drivers in the foreign exchange market: war and the anticipated monetary policy response. May WTI peaked on March 9 near $113.40. Last week, the average close was a little below $95. Brent has been hit harder but it also peaked on March 9 (~$119.50), The five-day average close is about $105.50. As seems to be widely recognized now, the disruption transcends energy and includes important feedstock for fertilizer, and sulfur, helium and aluminum. Helium may be an under-appreciated component in making semiconductor chips. Of course, the longer the disruption, the more impactful, but already Qatar has indicated that it will take several years to rebuild the damage to its LNG facility.
There has been a dramatic swing in central bank expectations, and it seems somewhat exaggerated. The Fed funds futures are now pricing in a 40% chance of a hike before the end of the year. Until the conclusion of the FOMC meeting in the middle of last week, the cut was still discounted. The swaps market is discounted slightly more than three ECB hikes this year with an 80% chance of the first one next month. Before the war began the market was pricing in a 55% chance of a cut. The swaps market has almost a 88 bp of tightening discounted by the Bank of England this year, a nearly 80% chance of a move next month. Before the war began, the market was discounting two cuts fully and a little more.
US
Drivers: The risk-off associated with the war has helped support the dollar. The rolling 30-day correlation between the VIX (volatility in the S&P 500) and the Dollar Index has risen to around 0.30 from inversion from mid-January until the end of February. We remain cautious because interest rate differentials have most against the US against Europe. Before the war began, the futures market was discounting two quarter-point rate cuts fully and a 40% chance of a third. At the end of last week, the market began debating about the possibility of a hike. Still, expectations for the European Central Bank and Bank of England have swung even more aggressively in favor of hikes this year.
Data: It is possible that the March survey data will begin picking up the impact of the war. In addition to a few Fed surveys, the preliminary March PMI will be reported. Recall that the composite PMI fell in February for the third month in the past four and at 51.9, was the lowest since last April. The sharp downward revision in Q4 25 GDP (0.7% from 1.4%) means that the 2.8% non-farm productivity will be revised down and unit labor costs higher (from 2.8%).
Prices: The wide swings in the Dollar Index arguably reflect a market that lacks near-term conviction. In what seemed to be an exaggerated response to the European Central Bank and Bank of England meetings, the Dollar Index tested the 99.00 area on Thursday after pushing to around 101.30 during Fed Chair Powell's press conference the previous day. The daily momentum indicators are poised to turn lower. The 99.00 area corresponds to about the halfway mark of the rally since the war began. The next retracement is near 98.70, though the 98.40-50 may offer better initial support.
EMU
Drivers: The threat of another energy shock in Europe has pushed the euro to the lower end of trading range that has prevailed since the middle of last year (~$1.1400). The rolling 30-session correlation of changes in the euro and Brent is inverse by around -0.30. From late November through the end of February the correlation was positive. It was inverse last year, with a brief exception in late May and early June-- until late in the year. The euro seems more sensitive to changes in the US two-year yield (-0.45 on a rolling 30-day correlation) than the two-year differential with Germany (~0.24). Disturbingly, the changes in the euro are also inversely correlated with changes in the German two-year yield. It is now around -0.22, through before the ECB meeting on March 19 it was -0.55, the most inverse June 2024. It was slightly positively correlated in the month before the war began. The swaps market has nearly three hikes discounted for this year, which seem excessive.
Data: The eurozone preliminary March PMI will be reported on Tuesday. Its composite PMI was the same as the US in February 51.9, but the context is different. It snapped a two-month decline to stand at a three-month high. February money supply and lending figures do not capture the market's imagination as they have previously. The ECB's February CPI survey may be too dated to capture impact of the war.
Prices: The euro held above $1.14 at the start of the week but made a new marginal low since last August. It recovered to around $1.1615 in what seemed like an exaggerated response to the ECB, which left rates steady, though the hawks immediately tried outflanking President Lagarde with threats of hike as early as next month. The daily momentum indicators are set to turn higher, and a push above $1.1620 could see $1.1670-80 next. Before the war began, the euro settled a little above $1.1810.
PRC
Drivers: Chinese officials still exert strong control over the exchange rate. We note that the rolling 30-day correlation of change is the Dollar Index and the dollar against the offshore yuan is near 0.75, the highest since last August. We had thought there was a reasonable chance that PBOC would fix the dollar higher this week, but the weekly decline continued and a new three-year low was set before the weekend (CNY6.8898). It has risen in only one week since end of last September. Since the war began, the onshore yuan is the fourth best performing emerging market currency. Year-to-date, it is the sixth best, with only the Malaysian ringgit outperforming it in Asia, while the others are high-yielding Latam currencies.
Data: Given how closely official manage the exchange rate, Chinese data tends not to have much market impact. Still, February industrial profits (reported on a year-to-date, year-over-year basis) are seen a bit as a barometer of efforts to curb "involution" or excess investment and have been positive since around the middle of last year. Beijing also updates its Q4 current account surplus. It was initially reported at about $242 bln, which some critics say is underestimated. Private sector estimates (in Bloomberg's survey) say it was around 3.8% of GDP in 2025, which matches the IMF's estimate. Both, the median forecast in Bloomberg's survey and the IMF project a narrower surplus this year.
Prices: The dollar is consolidating relatively quietly against the offshore yuan. It recorded an inside week and traded between roughly CNH6.8720 and CNH6.9085. It finished last week near the highs. Even though the dollar's reference rate was lowered, the dollar traded broadly sideways against the onshore yuan. Since the end of last November, the dollar has risen against the onshore in one week, the first week of the war.
Japan
Drivers: Since the war began, the 30-day correlation of changes in the dollar against the yen and Brent oil has flipped to positive and around 0.30, it is the highest since last November, before stabilizing in recent days, The correction of changes in the exchange rate and 10-year US Treasury yield has risen to almost 0.55, highest since last November. Some have warned that Japanese officials will defend the JPY160 level, but we are less sanguine. Will recognizing its psychological significance, we think the Ministry of Finance is more sophisticated than defending a fixed exchange rate level. The market seems orderly and reflects broad dollar gains since the war began.
Data: Japan reports its February CPI on Tuesday. Tokyo's CPI, released last month, shapes expectations. Tokyo's headline CPI firmed to 1.6% from 1.5%, while the core rate slipped to 1.8% from 2.0%. Excluding fresh food and energy, Tokyo's inflation ticked up to 2.5% from 2.4%. In January, the national headline was at 1.5%, the core was at 2.0% (the target), and excluding fresh food and energy was at 2.6%. Japan's preliminary March PMI also is due Tuesday. It tends not to be a market-mover, but in February, before the war, the composite PMI reached 53.9, the highest since May 2023. It rose for the second consecutive month and the fourth increase in five months.
Prices: The dollar stalled near JPY159.90 on the rally during the Federal Reserve's press conference in the middle of the week. The broad greenback sell-off the following day, fueled by hawkish reads other central bank meetings, saw JPY157.50. It frayed but held the 20-day moving average on a closing basis. It has been a month since the dollar closed below it. The market has not given up on JPY160 and settled last week near JPY159.30. We suspect a push above JPY160, to maybe JPY160.40 will complete the move. The momentum indicators are stretched and poised to turn lower.
UK
Drivers: Among the G10 countries, the UK has seen the largest swing this year's rate expectations. Before the war began, the swaps market was discounted a little more than two quarter-point rate cuts this year. Now, a little more than three hikes are priced, which seems extreme. Changes in sterling remain highly correlated with changes in the euro (~0.90), the highest since the middle of last year. Yet, since the war, sterling has fallen by about 0.60% against the US dollar, about a third of the decline the euro has experienced.
Data: The UK sees the flash PMI, February CPI and retail sales in the coming days. The composite PMI was flat in February at 53.7, its highest level since August 2024. January CPI fell 0.5% and the year-over-year pace slowed to 3.0% (from 3.4% in December 2025). It was the lowest since March 2025. Before the war's disruption, many expected the BOE to reduce rates last week, even though the core was elevated (3.1%) and service inflation stood at 4.4%. However, inflation in services was moving in the right direction and matched its lowest since March 2022. UK shoppers were exuberant in January. Retail sales rose a heady 1.8% (2% excluding gasoline). The British Retail Consortium warns of not to expect another robust number, and non-food sales may have contracted.
Prices: Sterling reached a seven-session high after the BOE meeting on March 19, slightly above $1.3465. There was no follow-through buying ahead of the weekend and it retreated to $1.3300. The choppy and broad consolidation continues. The daily momentum indicators are poised to turn higher, and the Slow Stochastics did not confirm the recent low. To prove itself on the upside, sterling must push above the month's high set March 10 (~$1.3485). It settled near there on the eve of the war.
Canada
Drivers: It may seem counter-intuitive, but for the first time since early last November, the rolling 30-day correlation between changes in the greenback against the Canadian dollar and WTI turned slightly positive. In mid-February, a couple of weeks before the war began, the correlation was inverse (~-0.45) the most since August 2023. Changes in the Dollar Index and the US dollar's exchange rate against the Canadian dollar is around 0.70 correlated over the past 30-sessiosn. It began the year around 0.50. The 30-day correlation between the exchange rate and two-year US rates is around 0.25, the highest since last October.
Data: Canada has a light economic calendar in the week ahead. The only report of note is the January Survey of Employment, Payrolls and Hours (SEPH), which is Canada's establishment survey as opposed to the timelier household survey. The data, like similar surveys in the US, do not always align. In December, Canada's household survey showed a 10.1k increase in employment, while the SEPH reported a decline of 35.4k jobs. Last year, according to the household survey, jobs increased by about 52k. The SEPH showed that about 28k jobs were lost.
Prices: The greenback traded firmly in the upper end of this month's range against the Canadian dollar. It reached almost CAD1.3750 last week, a smidgeon below the high set earlier in the month. The momentum indicators are still trending higher. The Canadian dollar was the only G10 currency not to have risen against the greenback last week. A break of the CAD1.3650-65 area which houses the 20-day moving average, a retracement target, and last week's low, may be a preliminary sign that a top has been forged.
Australia
Drivers: As one might intuitively expect, there was a positive correlation between changes in Australia's three-year yield and the exchange rate. It reached about 0.35 in January and early February, the highest since January 2025. However, it has flipped this month and is now around -0.10. It has slipped to almost -0.25, the most inverse since last October. Previously we have noted the strong correlation between gold and the Aussie. It was around 0.80 in the first part of February, the highest since January 2024. It has broken down, and below 0.35, it is at the lowest for the year.
Data: Australia sees the preliminary March PMI on Tuesday. Recall that the February composite pulled back to 52.4 from 55.7 in January, the highest since April 2022. The central bank projects 2.1% growth this year, a smidgeon better than the 2.0% recorded in 2025. On Wednesday, February CPI will be reported. The base effect warns of the risk that the headline pace accelerates form the 3.8% year-over-year pace seen in December 2025 and January 2026. Before the war, the Reserve Bank of Australia projected a 3.6% rate this year.
Prices: The Australian dollar is trading sideways even if choppily. The five- and 20-day moving averages have converged slightly below $0.7075. The daily momentum indicators slipped lower in recent days, but they poised to turn. The Aussie fell to two weeks of the war but gained 1.3% last week. It settled near $0.7120 on the eve of the US-Israel strikes on Iran.
Mexico
Drivers: The greenback's movement against the Mexican peso enjoys around a 0.57 correlation with changes in the Dollar Index over past 30 session, the most since last October. However, the exchange rate seems even more sensitive to changes in the volatility of the S&P 500. The 30-day correlation is near a little above 0.70. It approached 0.80 earlier in the week, the most since last May. This underscores the sensitivity of the exchange rate to the short-term risk environment.
Data: Mexico reports January retail sales and February trade and unemployment figures in the coming days. On Tuesday ahead of the central bank meeting on Thursday, the first half of March CPI is due. At the end of February, both the headline and core rates were above the upper end of the 2-4% target range. There is little doubt that the central bank is on hold. The swaps market has, however, given up on the possibility of another cut in the cycle, and is now discounting a hike in Q3.
Prices: The dollar continues to chop around a new and higher range against the peso. The broad range seems to be about MXN17.50-MXN18. However, last week, the greenback snapped a three-week advance and settled slightly lower. It finished the week near MXN17.900. It was a little below MXN17.23 before the war began. The momentum indicators are stretched but have yet to turn lower. The continuation of the war in to the fourth week and sell-off in stocks and bonds warns of the risk of additional dollar gains. A convincing more above MXN18.00 could signal toward MXN18.15-MXN18.20.
Reviewed by Marc Chandler
on
March 21, 2026
Rating:
