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DBS Group economist Philip Wee argues that the Fed enters its March 17–18 FOMC meeting caught between surging energy-driven inflation and weakening US growth. With GDP revised down and the Sahm Rule triggered, recession is now a baseline concern. The Fed must judge whether oil spikes demand higher rates or act as a tax justifying cuts, shaping Dollar dynamics.

FOMC weighs inflation against recession risk

"The FOMC enters its March 17-18 meeting trapped in a stagflation pincer. Fed Chair Jerome Powell may still be haunted by the "behind the curve" spectre of 2022, when a delayed response to surging prices forced a painful, aggressive hiking cycle. "

"Hence, he is loath to pivot too early and risk a second wave of inflation, especially as the Iran War and the closure of the Strait of Hormuz have catapulted global crude oil prices."

"However, today’s Fed confronts a fragile US economy where 4Q25 GDP was revised down to 0.7% QoQ saar from 1.4% initially. February’s non-farm payrolls saw a shock contraction of 92,000 jobs vs. the expected 59k gain. With the unemployment rate hitting 4.4% and triggering the Sahm Rule, recession is no longer a tail risk but a baseline concern."

"While higher oil prices push headline inflation up, the accompanying supply disruptions and drained disposable income act as powerful drags on household spending and the corporations’ investment and hiring plans."

"The FOMC must determine whether these energy price spikes represent a primary inflationary threat requiring higher rates or a consumer tax necessitating cuts."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

MUFG analysts Derek Halpenny and Lee Hardman observe that Japan has seen the smallest hawkish repricing among G10, with markets already pricing two Bank of Japan (BoJ) hikes but little additional tightening after the energy shock. A weaker Japanese Yen reflects expectations that Japan’s energy-import dependence leaves it vulnerable, and the absence of a firm BoJ signal could see USD/JPY trade back above 160.00.

Limited BoJ repricing keeps Yen fragile

"At the opposite end of the spectrum, Japan has seen the smallest adjustment, with yields increasing by only around 6 basis points indicating that market participants expect the BoJ to remain cautious over delivering further rate hikes while Japan’s economy will be hit harder by the negative energy price shock."

"Rate hike expectations have risen the least in Japan in response to the energy price shock. The Japanese rates market was already pricing in another BoJ hike as soon as April, followed by a second increase later in the year, and these expectations have not changed significantly in recent weeks."

"The combination of higher energy prices and a weaker JPY has supported expectations for additional BoJ tightening. The JPY has weakened to reflect expectations that Japan’s economy is likely to be hit harder by the energy price shock given it is heavily reliant on imported energy."

"In the absence of a firm signal pointing to a near‑term hike, it would encourage further JPY selling, lifting USD/JPY back above 160.00. By allowing USD/JPY to rise above 160.00, it would also indicate that Japan’s near-term tolerance for a weaker JPY has also increased in response to the energy price shock."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• The Pound Sterling trades broadly uncertain against its major currency peers, but upbeat against the US Dollar.
• Investors expect the BoE and the Fed to leave interest rates unchanged at their current levels.
• The USD Index faces selling pressure after a four-day rally above 100.00.

The Pound Sterling trades cautiously against its major currency peers, but 0.4% higher to near 1.3270 against the US Dollar (USD), during the European trading session on Monday. The British currency is expected to remain on tenterhooks amid uncertainty surrounding the Bank of England’s (BoE) monetary policy announcement on Thursday.

Investors expect the BoE to hold interest rates steady at 3.75%, with a 7-2 majority, as the spike in the oil price amid the closure of the Strait of Hormuz due to conflicts in the Middle East has prompted consumer inflation expectations in the entire world.

The situation of higher oil prices has come at a time when the United Kingdom (UK) was already struggling with inflation remaining well above the central bank’s 2% target for a longer period. In January, the UK headline Consumer Price Index (CPI) arrived lower at 3% Year-on-Year (YoY), but was significantly higher than the BoE’s 2% target.

On Thursday, investors will also focus on the employment data for the three months ending in January. The labor market data is expected to show that the ILO Unemployment Rate remained steady at 5.2%. Average Earnings Excluding Bonuses, a key measure of wage growth, is estimated to come in lower at 4% YoY from the previous reading of 4.2%.

Though the Pound Sterling is broadly under pressure, it is outperforming the US Dollar (USD). The Cable gains as the US Dollar retraces after a four-day winning streak. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects to near 100.00 from its over nine-month high of 100.54 posted on Friday.

This week, the major trigger for the US Dollar will be the Federal Reserve’s (Fed) monetary policy announcement on Wednesday, in which it is expected to leave interest rates unchanged in the current range of 3.50%-3.75%.

Brown Brothers Harriman’s (BBH) Elias Haddad points out that USD/CAD slipped back below 1.3700 ahead of Canada’s February CPI release. Consensus expects headline inflation to fall on base effects, leaving core near mid-2% levels. Haddad argues that Canada’s relatively stable inflation backdrop gives the Bank of Canada some room to look through the Oil price shock despite weakening labor market data.

Stable CPI eases oil shock pressure

"USD/CAD dipped back under 1.3700."

"Canada February CPI is due today (12:30pm London, 8:30am New York). Consensus see headline CPI dropping to 1.9% y/y vs. 2.3% in January due to favorable base effects. Core CPI (average of trim and median) is expected at 2.35% y/y vs. 2.45% in January."

"For reference, the Bank of Canada (BOC) projects headline and core inflation to average 2.0% y/y and 2.5% y/y over Q1, respectively."

"Canada’s stable inflation backdrop gives the BOC a small cushion to look through the oil-price shock and refrain from raising rates in the face of a worsening labor market."

"Canada’s economy lost -83.9k jobs in February vs. -24.8k in January, concentrated in full-time positions, and the unemployment rate rose 0.2pts to 6.7%."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Commerzbank economists highlight that markets now price a more proactive ECB stance, with €STR forwards discounting at least one 25 basis point hike by July and nearly two by year-end, even as growth risks rise. In contrast, Fed Funds and OIS curves have only pared rate-cut expectations, leaving 2-year UST yields trading above the effective Fed Funds rate and interest on reserve balances.

Market pricing of policy trajectories

"Market focus will be on the economic implications and the policy reaction functions with Fed, ECB, BoE and BoJ meetings lined up on Wednesday and Thursday, followed by the EU leaders' summit."

"The market is therefore anticipating a proactive, zero-tolerance ECB that is willing to sacrifice growth in order to defend its inflation credibility. €STR forwards are pricing in a full 25bp rate hike by July and almost two rate hikes by year-end. 2y Schatz yields have risen 45bp since the beginning of the war."

"The new situation will most likely lead to controversial discussions within the governing council, but we are not convinced that a majority in favour of a near-term rate hike will emerge. As such, the ECB is unlikely to commit to the direction of rates, but the staff projection scenarios should allow for tough words from Lagarde."

"The Fed faces similar challenges. 2y UST yields are now trading above the effective Fed Funds rate, and also for the first time since 2023 above the Fed's interest on reserve balances (IORB), even though Fed Funds and OIS forwards have only pared rate cut expectations and are not pricing in any rate hikes."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

TD Securities analysts expect Canadian headline CPI to slow to 1.9% year-on-year in February, with softer core measures leaving inflation below Bank of Canada projections. However, they stress that this softer path matters less near term given Iranian conflict–driven Oil upside. A weak February jobs report reinforces a softer domestic backdrop even as higher WTI keeps global factors dominant for the Canadian Dollar.

Canada data soft but Oil dominates

"We look for headline CPI to slow by 0.4pp to 1.9% y/y in February (mkt: 1.9%) as prices rise by 0.7% m/m, underpinned by higher fuel prices and seasonal tailwinds."

"Softer core inflation measures should add to the dovish tone, with CPI-trim/median forecast to slow 0.1pp to 2.3%/2.4% (in line with the mkt), which if realized would leave both headline and core CPI tracking below Bank of Canada projections from the January MPR."

"However, that softer trajectory is less relevant for the near-term policy outlook with the ongoing Iranian conflict and the upside risks to inflation from higher crude oil prices."

"CAD employment surprised sharply to the downside with 84k jobs lost in February, building on the 25k decline last month as the unemployment rate rose by 0.2pp to 6.7%."

"This report takes some shine off recent labour market strength and reinforces the softer domestic backdrop heading into the March Bank of Canada meeting, even if it won't have as much impact on the Bank's deliberations with the upside risks from higher oil prices."

"We continue to be biased selling Canada vs the US in 10s, and see the move as a good opportunity for entry."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• WTI’s rally hits a pause as US President Trump appeals to various nations to intervene in the conflict with Iran near the Strait of Hormuz.
• Trump warns of a very bad future for NATO if European nations deny supporting the reopening of Hormuz.
• Oil loadings at Fujairah port in the UAE have halted after it was hit by a drone.

West Texas Intermediate (WTI), futures on NYMEX, trade slightly lower to near $98.00 during the European trading session on Monday. The oil price struggles to extend its four-day rally above $100, following appeals from United States (US) President Donald Trump to countries that largely import oil from Gulf countries to join operations against Iranian military actions near the Strait of Hormuz.

“Many Countries, especially those who are affected by Iran’s attempted closure of the Hormuz Strait, will be sending War Ships, in conjunction with the United States of America, to keep the Strait open and safe,” US President Trump said in a post on Truth.Social adding. “Hopefully China, France, Japan, South Korea, the UK, and others, that are affected by this artificial constraint, will send Ships to the area so that the Hormuz Strait will no longer be a threat by a Nation.”

US President Trump also warned that NATO will have a “very bad” future if European countries do not join his war effort in Iran.   

Trump’s calls for the reopening of the Strait of Hormuz through which 20% of oil is supplied to the world have slightly improved hopes that supply issues would resolve soon.

Meanwhile, a halt in old loadings at the Fujairah port in the United Arab Emirates (UAE) after being hit by a drone has raised fears of further disruption in the oil supply chain. The halt in the oil supply from Fujairah port indicates that there will be no oil supply from the UAE, as it is the only export route outside the Strait of Hormuz.

• EUR/JPY trades around 182.40 on Monday, holding steady after two consecutive losing days.
• The Euro gains support after reports suggesting a potential de-escalation in the US-Israel conflict with Iran.
• Expectations surrounding the European Central Bank meeting and risks of Japanese intervention limit further upside.

EUR/JPY trades around 182.40 on Monday at the time of writing, virtually unchanged on the day after two consecutive days of decline. The cross stabilizes as the Euro (EUR) finds some support against its major peers.

The single currency benefits from improved geopolitical sentiment after The Guardian reported that US Energy Secretary Chris Wright expects the war between the United States (US), Israel and Iran to end within “the next few weeks”. Such a development could allow Oil supplies to normalize and help ease pressure on global energy prices.

Despite this support, the outlook for the Euro remains mixed. The recent surge in energy prices highlights the Eurozone’s vulnerability to energy shocks, which could weigh on the region’s trade balance. In this context, money markets have significantly revised their expectations and now price in two interest rate hikes from the European Central Bank (ECB) this year, a sharp shift from last month when no policy moves were anticipated.

Investors are now focusing on the ECB’s upcoming policy meeting scheduled for March 19. ECB President Christine Lagarde is expected to outline how the central bank intends to address inflationary pressures linked to the conflict in the Middle East. Markets are currently pricing in two 25-basis-point rate hikes, potentially in June and September.

On the geopolitical front, French President Emmanuel Macron said on Sunday that freedom of navigation through the Strait of Hormuz must be restored as soon as possible. He also urged Iran’s president to immediately halt what he described as unacceptable attacks against several countries in the region, including Lebanon and Iraq.

Meanwhile, EUR/JPY could face additional headwinds from renewed support for the Japanese Yen (JPY). Japanese authorities have strengthened their warnings regarding excessive currency moves. Finance Minister Satsuki Katayama said the government is closely monitoring foreign exchange developments and stands ready to take strong action if necessary.

Over the weekend, Japan and South Korea also issued a rare joint statement expressing serious concern over the rapid depreciation of the Japanese Yen and the Korean Won (KRW). Tokyo confirmed that it is in closer contact than usual with US authorities regarding currency market developments.

The Bank of Japan (BoJ) is widely expected to keep its policy rate unchanged at 0.75% at its upcoming meeting while leaving the door open for further tightening. However, amid rising Oil prices linked to the conflict with Iran, some analysts believe a surprise rate hike cannot be completely ruled out. Investors will pay close attention to comments from BoJ Governor Kazuo Ueda to assess how higher energy prices could affect inflation and economic growth in Japan.

ING’s Chris Turner expects the Dollar to stay supported as the Middle East conflict keeps Oil prices elevated and markets await central bank responses. He sees this week’s FOMC meeting as Dollar-positive, with the Federal Reserve likely to push back against current rate-cut pricing. Turner notes DXY is testing the top of its nine‑month range near 100.35/40.

Dollar holds firm on conflict risk

"It looks like the market wants to hear news on a path to a ceasefire before removing the risk premium buoying energy and the dollar."

"But until there is some news of a negotiated settlement, the market this week will be focusing on the central bank response. Eight of the G10 central banks meet to set monetary policy this week."

"Regarding this week's FOMC meeting, we think the event risk is dollar positive. At the January FOMC meeting, the takeaway was that the Federal Reserve wanted to see clear signs of lower inflation before delivering further rate cuts."

"Events in the Middle East warn that US inflation will be heading to 3.5% and not 2.0% this summer. The FOMC will likely further question market pricing of another Fed rate cut this year, where around 23bp is still priced in by year-end."

"DXY is now at the top of the nine-month trading range at 100.35/40. A calmer equity environment this Monday morning suggests DXY may not be ready to break higher just yet."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Societe Generale economists highlight that Iran‑related energy fallout is pressuring households and growth, with limited fiscal space for large support. They expect the BoE to leave rates unchanged in a unanimous vote this week and to drop its easing bias, as the MPC grapples with uncertainty over the persistence of the current energy shock.

BoE cautious with limited fiscal space

"Last week in the UK, fallout from Iran continued to dominate the news cycle. To counter the rise in heating oil prices, the government announced a £50mn support package, although this is unlikely to have a material effect on CPI."

"Given the risk of another sharp rise in bills in 3Q26 and the cost of living remaining a key concern for voters, the government may be under pressure to prevent large increases in energy bills. However, the £24bn headroom against the stability fiscal rule has already likely been eroded by £7bn due to higher Bank Rate and gilt yields, leaving limited scope to materially increase borrowing, although a one‑off support package that ends before the fiscal target year of FY29–30 may not alter the headroom much."

"This week in the UK, the BoE meeting will likely take centre stage. The key question of how persistent the current energy shock will be means the MPC will be flying as blind as the rest of us."

"Given this uncertainty, we expect the MPC to remain on hold in a unanimous vote, and the easing bias in the guidance is likely to be dropped."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)