The Middle East war remains the dominant fundamental condition. There continues to be some indication that market participants are hopeful of a resolution soon. The May WTI contract settled near $111.55 last week, which appears to build in the risk of near-term escalation, but the June contract settled close to $98. The September contract is below $78. The US S&P 500 rose for the first time in six weeks. Benchmark 10-year yields in the US and Europe eased. Still, the firing of three US army generals and new attacks on Middle East infrastructure warns that further escalation seems likely before de-escalation.
The week ahead begins slowly with many centers shut for Easter Monday. The highlights include the US and China's CPI and Canada's employment report. The Reserve Bank of New Zealand is only G10 central bank that meets and is most likely to stand pat. All two dozen economists in Bloomberg's survey expect Poland's central bank to maintain its reference rate at 3.75%. There is also an agreement among economists that the Bank of India will leave its repo rate at 5.25%. India's central bank announced capital controls last week, which the size of banks' foreign exchange positions and barred their activity in the non-deliverable forward market to defend the rupee. It may complicate hedging of Indian bonds by international asset managers.
US
Drivers: Optimism that the Middle East war will end shortly saw the dollar's gains pared. The futures market is again pricing in around 30% chance of a cut this year. At the extreme, on March 26, the market was discounting almost 58% chance of a hike. Before the war began, the two-year yield settled below 3.40% for the first time in several years. It was around 4.03% a month later. After the March jobs report, it finished last week near 3.82%.
Data: The new week begins with the March ISM services, which are likely to start picking up the disruption caused by the war, with activity slower and prices higher. February durable goods orders and another look at Q4 GDP will be less consequential. February personal income, consumption and deflators will provide a base for comparison and to see the impact of the war. March CPI at the end of the week will draw attention even though questions have been raised over the increased use of “imputation" by the Bureau of Labor Statistics. The base effect does not auger well. Last March, headline CPI was flat and the core rose by 0.1%. The FOMC minutes from the meeting earlier this month may offer insight into official thinking two weeks into the war.
Prices: The Dollar Index settled last week above 100.00 for the second consecutive week. The high since the war began was recorded last Tuesday near 100.65, its best level since last May. The momentum indicators did not confirm the high but the risk that the war escalates seems to limit selling interest. A convincing break of 99.00 is needed to boost the odds that a high is in place.
EMU
Drivers: The euro lost nearly four cents amid the position adjustment to war and anticipated economic shock. It reached a low near $1.14 around the ides of March. However, as optimism of relatively short war took hold, the euro recovered. The US two-year premium over Germany had collapsed to a five-year low near 118 bp (from the year's peak in January of almost 153 bp). The swaps market has about 50% chance of a hike at the end of this month, down from around 85% chance at its peak.
Data: The eurozone data is unlikely to have much market impact. The final March services and composite PMI may soften further from the preliminary estimates. February retail sales and PPI are unlikely to be important factors considerations when the ECB meets later this month. Nor will they have much impact on risk appetites, which are being driven by the disruption of the war.
Prices: The euro has spent most of the last several weeks trading between $1.1400 and a little above $1.1600. The momentum indicators bottomed around the middle of March when the euro was approaching the lower end of the range. Still, they are not generating strong signals and the five- and 20-day moving averages have converged around $1.535-45. If/when the markets see an off-ramp to the war, this broadly sideways price action could mark a base.
PRC
Drivers: Beijing did not take advantage of the US dollar's strength to depreciate the yuan. It has shown restraint and actually set the yuan's fix against the dollar at its highest level in several years last week (CNY6.8880). China is the world's largest importer of oil and the higher price and disruption in a range of other industries is a challenge for China, but the higher energy prices also will likely boost the demand for EV and solar panels. Beijing likely gathered a great deal of intelligence on US military operations and tactics, and depth of supply chains.
Data: China may report lending figures in the coming days, but it can be counted on to publish March consumer and producer prices at the end of the week. Even though oil from Iran is still making its way to China, US-Israel war on Iran is likely disruptive. Even before the war began, China was emerging for the consumer deflation. The CPI rose 1.3% year-over-year in February, the most in three years. The deflation in producer prices had lessened in six of the seven months through February, and at -0.9% was the least since January 2023. The median forecasts in Bloomberg's survey see the PPI emerging from deflation (0.5%) and the CPI little changed at 1.2%.
Prices: While the PBOC has pushed the dollar fix lower, the offshore yuan remains range bound. The greenback has traded between about CNH6.86 and CNH6.9435 since the Middle East war began. Last week's high, near CNH6.9270, was the highest since March 9. A development worth monitoring is that the onshore yuan is trading stronger than the offshore yuan, with some notable exception, since the war began. It had been trading mostly weaker since late November, which had bolstered our conviction of the underlying trend.
Japan
Drivers: The yen is sensitive to the broad direction of the dollar. The 30-day rolling correlation of changes in the dollar against the yen and Dollar Index is around 0.72, not far from where it was on the eve of the Middle East war. It bottomed in mid-March below 0.60 and the low for the year was in the third week of January around 0.52. The dollar-yen 30-day correlation with changes in the US 10-year yield is near 0.60, the upper end of where it has been since last October. In January, it had fallen to almost 0.10, the lowest since May 2025. Counter-intuitively, over the past 30 sessions, changes in dollar-yen and Japan's two-year yield are positively correlated by the most in two months. This means the rising Japanese short-term yields is associated with a stronger dollar, not yen. Of note, the changes in the dollar-yen and the S&P 500 over the past 30 sessions are the most inverse (~-0.35) since last October. It means that dollar tends to move higher against the yen when US equities decline (risk-off).
Data: Most of Japan's data is for February, before the US/Israel war on Iran began. These include household spending, labor income, and the current account (which has improved sequentially for the past 20 years in February without fail). March producer prices are due ahead of the weekend. Still, the market is discounting about a 70% chance of BOJ hike when it meets next on April 28, and about a 60% chance of another one in Q4.
Prices: The dollar is trading choppily but mostly in a JPY158-JPY160 trading range. Both sides of the range have been violated by 0.4-0.5 yen a couple of times since the Ides of March. While Japanese officials have continued to warn about one-way markets and speculation, the conditions have not met their threshold for actual material intervention. The dollar settled lower in three of last week's five sessions. The yen finished stronger last week and has been alternating for the past three weeks between advances and declines. One-month implied volatility eased every day last week and is now (~8.9%) the lowest since the war began.
UK
Drivers: The single most important driver of sterling continues to be the broad direction of the US dollar. The rolling 30-day correlation between changes in sterling and the Dollar Index is inverse, -0.85. It has not been much more extreme this year. Last October, it reached a little beyond -0.90 which was the most since April 2024. Perhaps, it is even simpler. The 30-day correlation of changes in sterling and changes in the euro is about 0.88, the highest since mid-2025.
Data: The final services and composite PMI and the March construction PMI seem of secondary importance, especially for the Bank of England, which meets on April 30. The swaps market is discounting a little more than a 50% chance of a hike, and at least one more before the end of year (~80% chance of another).
Prices: Sterling looks heavy. At the end of March, it recorded a new low since last November, near $1.3160. It recovered a couple of cents on optimism about the war, but when it faded, sterling was pressed below $1.3200. The momentum indicators are stretched but show no sign that they are poised to turn higher. Perhaps, escalation of the war could see sterling approach the $1.3000-40 technical target. Another weight on sterling is coming from the cross against the euro. In the first two weeks of the war, the euro fell around 2% against sterling but since the middle of March the euro has recouped about 1.5% and looks poised to continue to outperform sterling.
Canada
Drivers: The US dollar-Canadian dollar exchange rate is not as sensitive to changes in oil prices as the conventional narrative suggests. Over the past 30 sessions, the correlation has been slightly positive, meaning the Canadian dollar is more likely to weaken in the face of a rise in oil prices than to strengthen. Statistically, it is not significant (less than 0.15), though it is the most since last September, but the sign is notable. The correlation of the greenback against the Canadian dollar and the Dollar Index is a little above 0.60. The peak near 0.85 last month was the highest since May 2024.
Data: The jobs data at the end of the week is more important for investors and policymakers than the survey results (service and composite PMI and IVEY). Canada lost a whopping 108.4k full time jobs in February and the unemployment rate rose from 6.5% to 6.7%. Another poor report would likely weigh on the Canadian dollar. The swaps market has less than 10% chance of rate hike this month (April 29) and does not have a hike fully discounted until Q4. In recent days the swaps market has pulled back from discounting two or more rate hikes this year as it had mulled in late March.
Prices: The US dollar reached just beyond CAD1.3965 last week to record a new marginal high since last December. The pullback toward CAD1.3870 may give it a running start to the next technical target in the CAD1.4000-15 area. To be sure, the momentum indicators are stretched after the greenback has run-up about 3.25% since the March 9 low. That means that what we expect to be the next leg up, will complete the move. We will be especially attentive to reversal price patterns.
Australia
Drivers: The Australian dollar tends to be sensitive to the overall US dollar environment, and over the past 30 sessions, its correlation with changes in the Dollar Index is near -0.75. It has not been much more extreme since Q2 24. There also seems a sensitivity to the risk environment. The 30-session correlation with the S&P 500 reached above 0.70 last month, rising from around 0.20 in early February. It is now near 0.62. The correlation with gold peaked around 0.80 last month, the highest since last 2022. It fell to the low for the year near 0.30 in late March and now around 0.45.
Data: The final March services and composite PMI will be of passing interest. February household spending may attract more attention as the central bank seemed to have responded to the surge in Q4 25 (average of slightly more than 0.6% a month, matching its strongest quarterly performance since Q3 23), with the two rate hikes before the war began. The futures market is pricing in almost 80% chance of a third consecutive hike.
Prices: The Australian dollar fell to two-month lows last week near $0.6835. The daily momentum indicators are oversold and look poised to turn higher. Yet the price action has not been persuasive that an important low is indeed in place. There may be potential for one more leg down to around $0.6800.
Mexico
Drivers: The peso appears to have two dominant drivers presently. The first is the general direction of the dollar. Changes in the US dollar against the Mexican peso and the Dollar Index are 0.70 correlated over the past 30 sessions, the most since last October. The other driver is the risk appetite. Changes in the US dollar against the Mexican peso and the S&P 500 is inversely correlated (~-0.80), the most since 2020.
Data: The central bank's rate cut in late March, and signal that it may cut rates again, seems to take some of the thunder away from the March CPI, due Thursday. The headline and core are above the upper end of the 2%-4% target range. Instead, most central bank officials are more concerned about growth. The economy was limping before the war began. At the end of the week, Mexico reports February industrial output. It slumped 1.1% in January, which more than offset the increase in November and December 2025. It was the largest decline in a little more than a year.
Prices: The peso rose by about 1.4% last week, the largest weekly gain since late January. It was the second strongest currency in the region after the Brazilian real (~1.6%). The dollar has been trapped in narrow range, hugging the 20-day moving average for the past three sessions (~MXN17.8250). The daily momentum indicators are turning lower after the greenback rallied a little more than 5.5% since the war began. It reached almost MXN18.1645 last week, a new high for the year and stalled in front of the 200-day moving average.
Reviewed by Marc Chandler
on
April 04, 2026
Rating:
