We commence week five of the Middle East conflict with a stand-off between the two sides, as bombing continues and external parties like the Houthis also get involved. Markets have seemingly ignored any calming efforts from the White House with President Trump’s options now ranging from the benign (pulling back and declaring victory), to the extreme (boots on the ground). Of course, there are many options in between, but the game of ‘escalate to de-escalate’ front and centre in our minds. For what it’s worth, betting markets see a coin flip chance currently for a ceasefire by the end of May.
For currencies, the dollar should be expected to continue its ascent as oil prices remain elevated. The region’s loss of access to energy revenues and now new fiscal commitments at home will be triggering a tightening of global financial conditions. That is bad news for pro-cyclical currency pairs like EUR/USD. A key support zone sits around 1.1410/1.1391, with the equivalent highs in the Dollar Index at 100.39/54. USD/JPY has the added complication that it has entered intervention territory. Will Washington be happy with Japan selling up to $100bn as it did in 2024 and presumably US Treasuries to finance those FX sales? 10-year US Treasury yields have already risen 50bps in March, and large-scale Japanese FX intervention could exacerbate the Treasury sell-off.
US stock markets have fallen for a fifth straight week, which hasn’t been seen since May 2022. Risk-off drivers are numerous and include private credit blowups, tight financial conditions (rate cuts turned to rate hikes), another SaaS apocalypse, Mag 7 move from capex lite to capex heavy and huge corporate debt issuance, on top of zero jobs created in the US since Liberation Day. It seems like it can’t get much worse, yet the conflict situation overrides all of these for the time being. Gold posted a weekly candle rejection of lower prices having tapped the 200-day SMA just below $4,100. As we have said previously, the haven trade had broken down under the weight of a strong dollar and a Fed that warned investors it cannot cut rates into an oil shock. If events get a lot worse with market panic, then this theme may reverse.
This week’s top tier data releases will provide a “before and after” snapshot, with some showing where economies stood on the eve of the conflict and others the initial impact of the fallout. The current environment is still hugely uncertain and volatile, as we head into a shortened week with US markets closed on Good Friday.