Strong USD and Surging Oil Amid Tensions (16–20 March)

Global markets faced significant upward pressure on yields and energy prices this week as the conflict in the Middle East entered its third week. The US Dollar Index surged above 100.3, its highest since May 2025, fueled by safe-haven flows and Defense Secretary Pete Hegseth's announcement of the largest planned strike wave against Iran to date. Brent crude breached the $105 threshold following strikes on Kharg Island and warnings that 90% of Iran’s export facilities could be targeted.

The "inflation tax" from triple-digit oil prices is reshaping central bank expectations. While US inflation remained steady at 2.4%, the core PCE index reached a 10-month high of 0.4% monthly, prompting markets to price in only a single Fed rate cut for the entirety of 2026. In Europe and the UK, the narrative has shifted toward potential rate hikes to combat energy-imported inflation, even as the UK economy recorded zero growth in January.

Market Drivers & Catalysts

• Escalating Strike Waves: The US plan for massive strikes on Iranian military sites and the effective closure of the Strait of Hormuz have created a persistent geopolitical risk premium.
• Energy Infrastructure at Risk: Strikes on Kharg Island and rhetoric regarding the targeting of Iranian export facilities have pushed Brent oil to its highest level since July 2022.
• Hawkish Shift in Expectations: Surging energy costs have forced a repricing of central bank paths; markets now anticipate only one Fed cut in 2026 and up to two ECB hikes.
• Yen Intervention Watch: With the yen near 159.4, Japanese authorities have signaled they are ready to act as imported inflation threatens domestic stability.
• China’s Export Surge: Despite global tensions, China posted a massive $213.62 billion trade surplus for early 2026, with exports surging 21.8%.

Fixed Income

• US 10 Year Treasury Note Yield: Rose to 4.27%, approaching four-week highs. The benchmark gained 13 basis points this week as investors balanced safe-haven demand against the inflationary implications of a wider war.
• UK 10 Year Bond Yield: Climbed above 4.7%, the highest since October. Investors are betting on a "higher-for-longer" BoE stance despite a stagnant January GDP report and flat services activity.
• Japan 10 Year Government Bond Yield: Surpassed 2.21%. Governor Ueda warned that the exchange rate now has a "stronger influence" on policy decisions, signaling that JGB yields must rise to defend against imported inflation.
• Germany 10-Year Bond Yield: Rose to 2.96%, its highest in over two years. The market is now pricing in two ECB rate hikes for 2026 to shield the eurozone from the secondary effects of $100+ oil.

Commodities

Gold fell below $5,050/oz. The metal faced a second straight weekly decline as the surge in Treasury yields and a dominant US dollar outweighed traditional safe-haven buying.

Silver dropped below $83/oz, losing over 2% on the week. Higher-for-longer rate expectations and the diversion of capital into yield-bearing assets amid the oil spike have weighed on the white metal.

Currencies

• U.S. Dollar Index (DXY): Rose above 100.3. The dollar remains the ultimate beneficiary of the Middle East conflict, supported by high energy prices and the Fed’s likely pause at next week’s meeting.
• Euro: Fell below $1.15, its lowest since late July. Europe’s heavy dependence on Middle Eastern energy makes the single currency particularly vulnerable to the current supply shock.
• British Pound: Declined below $1.33. A combination of zero GDP growth in January and the broader dollar rally pushed sterling to its weakest level since early December.
• Japanese Yen: Traded near 159.4. The currency is hovering at its weakest level since July 2024, keeping markets on high alert for a direct move by Finance Minister Satsuki Katayama.

Economic Data Highlights

• US Inflation Rate (Feb): Held steady at 2.4% annually. Energy prices showed a strong rebound, with natural gas up 10.9% and fuel oil rising 6.2%.
• US Core PCE Price Index (Jan): Rose 0.4% MoM and 3.1% YoY. This is the Fed's preferred inflation gauge and currently sits well above the 2% target.
• US Job Openings (Jan): Recovered to 6.946 million, beating expectations. Hiring remains slower than post-Covid averages but showed resilience in healthcare and trade.
• China Trade Balance: Posted a $213.62 billion surplus for Jan-Feb. Exports grew at their fastest pace in over a year (21.8%), ahead of a planned meeting between Xi Jinping and Donald Trump.
• UK GDP (Jan): Stalled at 0.0% growth, missing forecasts. Production output slightly contracted, highlighting a fragile domestic recovery.

Macro Calendar Highlights

• Federal Reserve Interest Rate Decision & Dot Plot
• European Central Bank (ECB) Policy Meeting
• Bank of England (BoE) Inflation Report
• Flash Manufacturing & Services PMI (Global)
• US Durable Goods Orders