Week of 16 March

Markets reacted to fluctuations in the crude supply outlook during the second week of the war in the Middle East, overshadowing US CPI figures and UK GDP data. Crude prices jumped to $120 per barrel at the start of the week, fell back below $85 by Tuesday and are set to end the week around $100.

The week ahead is heavy with central bank action, as the FOMC, ECB, BOJ, and BOE, among others, hold policy meetings that could be eclipsed by developments in the Middle East.

Week in Review

The theme of the week was oscillating concerns over how much the war in the Middle East would impact the global economy. Markets opened Monday broadly negative amid a souring of hopes that the war would be over soon after hardliners consolidated power in Iran and launched attacks on neighbouring oil facilities following Israeli attacks on fuel depots in Tehran. Crude saw one of its largest intraday moves on record amid Iran's threat to keep the Strait of Hormuz closed. US President Donald Trump tried to calm markets on Tuesday, suggesting the war was going well and could be over sooner than the initial timeframe of up to 4 weeks he had given. The G7, IEA and OPEC met during the week, noting the largest disruption to crude supplies ever and agreeing to release 400 million barrels of crude from reserves over the next four months. Meanwhile, Gulf states have begun production curtailments because they are unable to export crude from the Gulf. Earlier in the week, there were reports of cargo vessels attempting to cross, but as many as five ships were hit with projectiles on Wednesday and Thursday, ending those efforts.

While markets were initially reassured on Tuesday, concerns over a long-lasting conflict returned amid harsh rhetoric from both sides. Interest rates trended higher, though they fluctuated wildly. Markets priced in as much as 50 bps of ECB hikes on Monday, erased them over the next couple of days, and then moved to price in around one rate hike in the coming months by the end of the week. Meanwhile, industrial production in the Eurozone fell to negative levels in January, a surprise disappointment for the market.

The odds of the Fed easing fell substantially, and traders see near 50-50 odds of just one cut this year. US CPI readings came in unchanged, as expected. US yields trended higher to reach February highs amid worries around the economy and private credit exposure. Meanwhile, the BOE is expected to hike in the near term, as higher fuel costs are expected to push inflation higher. UK monthly GDP disappointed, coming in flat and weighing on the pound towards the end of the week.

The crude supply crisis particularly affected Asian markets, with over 80% of Persian Gulf exports heading to the East. Japan's currency continued to weaken, with increasingly urgent rhetoric from officials about market speculation and warnings of potential joint intervention. On the trade front, the US initiated Section 301 investigations into China, heightening tensions ahead of key negotiations to resolve the trade dispute between the two countries.

Oracle posted earnings midweek, helping reassure markets that demand for AI infrastructure remained solid and allowing the tech sector to remain resilient despite US markets falling to year lows. Adobe shares plunged after the CEO announced he would step down, intensifying concerns about the software industry.

Biggest Market Movers

• The dollar gained for a second week, topping a four-month high at 100.00 amid safe-haven demand and liquidity concerns.
• Gold trended lower for a second week, with strong ETF outflows providing liquidity amid falling equity indices.
• The NZD fell to a 13-year low against the AUD, as the island nation relies on fuel imports amid an already struggling economy.
• The AUD is the lone currency keeping up with the dollar amid markets pricing in a more hawkish RBA and strong commodity prices.
• The DJIA was the worst-performing of the US indices as higher interest rates and energy costs weighed on industrials.

Top Events in the Week Ahead

The coming week is likely to be dominated once again by events in the Middle East, as the war enters the second half of the original timeline. Crude production could remain curtailed, as the US Navy said it likely wouldn't be able to escort ships through the Strait of Hormuz until the end of the month. Turning to the economic calendar, the theme of the week will be central bank decisions: the ECB, Fed, BOJ, and BOC are expected to hold, while the RBA could hike, and the BOE could cut. Japan's Prime Minister Sanae Takaichi will travel to the US amid a geopolitically fraught environment, which could generate headlines as investors wonder if or when the BOJ will intervene to shore up the yen.

The Central Banks Leaving Policy Unchanged

Markets are unanimous in expecting the Fed to hold on Wednesday but could react if there is any change to the dot-plot matrix to be published alongside the rate decision. The last version showed expectations of one rate cut this year, which is now slightly more dovish than the market's projection. Commentaries on the impacts of energy inflation will likely be closely scrutinised. The yellow metal could react to headlines, sliding below the $5k handle or finally extending towards $5400.

The ECB is also expected to face similar pressure, but not enough to shake the market's confidence that it will keep policy unchanged. Traders will be listening closely to President Christine Lagarde for any warnings that inflation is leaving its "good place". The euro is not. It fell to a July 2025 low below 1.1500  against the dollar, exposing 1.1393.

The BOJ is expected to forgo a rate hike but maintain a hawkish stance as Japanese officials try to shore up the yen. As it trades in breathing distance from the 160.00 round resistance,  a rejection could form a double top, at least in the short term.

The BOC is also widely expected to keep policy unchanged, but recent comments about supply shocks in the wake of the Middle East crisis suggest it could adopt a more hawkish tone despite the weak economy. After sustaining support at 1.3530, USDCAD could be poised for 1.3800.

BOE Rate Cut in Doubt

Economists polled before the outbreak of hostilities across the Strait of Hormuz were fairly confident that the BOE would cut on Thursday. It was said to be another 5-4 vote, with Governor Andrew Bailey casting the deciding ballot. But the potential for inflation pressure from higher energy prices might convince him to vote to extend the pause. Just before the rate decision, the UK will publish its latest labour data, with the January unemployment rate expected to remain unchanged at 5.2%. The February claimant count is anticipated to remain weak at 18K, down from 28.6K a month earlier. At a December low, GBPUSD might head towards 1.3000 if bulls fail to reclaim 1.3300.

RBA Might Hold

Markets are generally projecting a hold from the RBA after the surprise hike at the last meeting. However, comments from Bullock earlier this month, combined with high housing inflation, have raised the clear possibility of a 25bps hike. In the event of a pause, markets will likely expect a hawkish tone from the monetary policy statement and reopen the path to 0.7200, or the Aussie might weaken below the 70-cent barrier.

Other Events and Earnings

Monday has Canadian inflation data. Germany's ZEW economic sentiment index comes out on Tuesday. For Wednesday, Japan's trade balance and the US core PPI are expected. Thursday includes Japanese machinery orders. Friday sees the Chinese loan prime rate. The earnings front is expected to be relatively quiet, with companies like Lululemon, Micron, General Mills, Alibaba, Accenture, FedEx, and Carnival updating investors.