Forex News

OCBC strategists Sim Moh Siong and Christopher Wong highlight that Brent’s move above USD100/bbl and rising Hormuz disruption risk raise the odds of a durable energy shock, with markets bracing for stagflation and a stronger Dollar. They warn that a prolonged shock could sharply lift FX volatility and weigh on energy-importing Europe and Asia through 2026.

Brent surge raises stagflation concerns

"Crude oil has climbed back above USD100/bbl as Iran escalates attacks on oil and transport infrastructure across the Middle East, raising the odds of a prolonged disruption at the Strait of Hormuz. Persistently elevated prices are stoking concerns that the conflict could trigger a more durable—and not merely temporary—energy shock. That would reshape how markets assess inflation and growth risks."

"Higher oil and rising risk aversion supported the USD overnight, aided by the greenback’s haven appeal and the US’s relative insulation as a large energy exporter. USD gains have been orderly, helped by interest-rate markets aligning around central banks – across not just the Fed but also ECB and BoE -- leaning more toward inflation risks than growth. A short-lived conflict and rapid restoration of oil flows would justify today’s muted FX reaction."

"But if the energy shock endures, FX volatility is likely to rise sharply, especially as prolonged high prices become increasingly growth-negative for energy-importing Europe and Asia."

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

TD Securities, led by Robert Both and colleagues, expects the Bank of Canada to leave the policy rate at 2.25% in March. The statement is projected to stay cautious, balancing softer Canadian growth and moderating core inflation against upside inflation risks from higher Oil prices linked to the Iranian conflict. Guidance is seen keeping all options open on future rate moves.

BoC seen on cautious steady hold

"We look for the Bank of Canada to hold rates unchanged at 2.25% in its March policy decision, where the Bank faces two contrasting views of the world. In one, the domestic outlook has seen a mild deterioration since the January MPR, with softer Q4 GDP/Q1 tracking and the recent moderation across the Bank's preferred core inflation measures. However, the other viewpoint is one of renewed geopolitical instability and the risk of sharply higher energy prices, with knock-on effects to headline inflation and domestic growth."

"We believe the path of least resistance is for the Bank to maintain its recent messaging while acknowledging new risks from the Iranian conflict. The January policy statement already leaned heavily into heightened uncertainty, more so around US trade policy than geopolitics, but the current situation in the Middle East will introduce even more uncertainty around the previous outlook. However, the implications of the current conflict are more one-sided; if sustained, this environment will introduce substantial upside risk to the Bank's inflation forecast, while the positive terms of trade shock helps offset the impact of ongoing trade uncertainty on growth."

"We look for the Bank's guidance to repeat that the current policy rate remains appropriate to help the economy through a period of structural adjustment, while the opening statement to Governor Macklem's press conference repeats that it remains "difficult to predict the timing or direction of the next change in the policy rate." Rate cuts become a more challenging proposition in an environment of sustained pressure on global energy prices, but we think it's too early for the Bank of Canada to take cuts off the table, with the $38 intraday decline for WTI crude on March 9th illustrating how quickly conditions can change."

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

Royal Bank of Canada (RBC) economist Claire Fan notes that February’s Canadian labour market data were weak, with employment falling and the unemployment rate rising to 6.7% as participation declined. She highlights that volatile monthly data are being distorted by slower population growth. Despite softer prints, Fan expects the macro backdrop to support hiring and sees the unemployment rate gradually moving lower later in 2026.

Soft data but improving outlook signaled

"February's Canadian labour market report was soft. Employment fell 84,000, adding to the 25,000 losses in January. The unemployment rate rose to 6.7% after dropping to 6.5% in January, and the labour force participation rate declined again, to its lowest level outside the pandemic since 1997."

"Monthly employment prints are volatile, and headline job growth remains partly distorted by sharply slower population and labour force growth, driven by retirements and government curbs on the share of non-permanent residents. In January and February combined, Canada's population grew just 12,500—well below the 103,000 increase in 2025 over the same months. "

"In the past, we have warned how soft employment growth could persist and mask improvements in underlying hiring demand better reflected in the unemployment rate. In February, the unemployment rate ticked higher to 6.7% but remains below the Q4 2025 average of 6.8%. Total hours worked fell 1.1% in February, leaving Q1 on average flat versus the prior quarter. "

"Looking ahead, the macro environment—particularly a stabilizing trade backdrop thanks to preserved CUSMA exemptions, healthy domestic consumer spending trends, and continuous monetary and fiscal support—should all support a recovery in hiring demand."

"We look through near-term volatility, and continue to expect gradual improvements to drive the unemployment rate lower through the remainder of the year."

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

• AUD/USD trims part of its weekly gains and retreats below 0.7050.
• Investors assess a series of mixed US economic releases, including PCE inflation and the GDP revision.
• Rising Oil prices and geopolitical tensions support the US Dollar and weigh on risk-sensitive currencies.

AUD/USD trades lower on Friday at around 0.7040 at the time of writing, down 0.46% on the day, after hitting a multi-year high at 0.7187 earlier in the week. The pullback comes as the US Dollar (USD) strengthens and risk sentiment deteriorates across financial markets.

The US Dollar finds support as investors digest a batch of economic data from the United States (US). Inflation, measured by the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred gauge, eased slightly to 2.8% YoY in January from 2.9% in December, below market expectations. On a monthly basis, the index rose 0.3%, in line with forecasts. Meanwhile, the core PCE Price Index, which excludes volatile food and energy prices, increased 3.1%YoY, matching analysts’ estimates.

Other data pointed to a softer economic backdrop. The US Gross Domestic Product (GDP) growth for the fourth quarter was sharply revised lower to 0.7% YoY from the initial estimate and market expectations of 1.4%.

Despite these mixed indicators, the Greenback remains supported by higher US Treasury yields and renewed inflation concerns linked to rising energy prices. The US Dollar Index (DXY) advances above the 100 level as traders reassess the outlook for US monetary policy.

Escalating geopolitical tensions in the Middle East, particularly around the Strait of Hormuz, have raised fears of potential supply disruptions in global energy markets. Brent Crude trades near $100 per barrel while West Texas Intermediate (WTI) holds close to $95, reinforcing expectations that inflationary pressures could persist.

Against this backdrop, markets have scaled back expectations for interest rate cuts by the Federal Reserve (Fed) this year. Analysts at MUFG estimate that every $10 increase in Oil prices could add around 0.2 percentage points to US inflation, potentially delaying the continuation of the Fed’s easing cycle.

In Australia, Consumer Inflation Expectations rose to 5.2% in March according to the Melbourne Institute survey, their highest level since July 2023. The increase reinforces speculation that the Reserve Bank of Australia (RBA) could raise its policy rate again, with markets now expecting a possible hike at the March 17 meeting. However, despite these tightening expectations in Australia, the stronger US Dollar and broader risk aversion continue to weigh on AUD/USD in the near term.

Nordea strategists Ole Håkon Eek-Nielsen and Jan von Gerich argue the Federal Reserve is unlikely to cut rates and could even face pressure to hike as a potential energy shock lifts inflation risks. They compare current conditions with the 1970s, highlight stagflation dangers, and see investors demanding higher yields, especially at the long end of the US bond curve.

Energy shock complicates Fed policy outlook

"We have for quite a while been arguing for no more cuts from the Fed. Seems like we could be right for the wrong reasons. Even if we still struggle to see much weakness in the US labour market, it is the potential energy crisis that is the most important driver right now."

"This situation could be challenging for today’s version of Fed; balancing higher unemployment with higher inflation is never easy. The cuts that Warsh has promised to deliver will probably be even harder. The lessons learned in the seventies will probably make quite a few FOMC-members argue for hikes, but given the potential for higher unemployment some might also draw the same conclusion as many did back then and try to induce as little pain as possible."

"In the seventies core inflation topped out above 13% and interest rates peaked at 17%. Neither we nor the market is implying such an outcome, but the risk of such an extreme is now higher than before and perhaps the probability should be seen as higher than what the market is pricing in."

"The stagflationary impulse this potentially is could also be met by stimulus from the government to ease the pain inflicted on consumers. The downturn it produces is likely to increase the, already too high, budget deficits in the US. It seems likely that bond investors will demand higher interest rates to meet record high supply and increasing inflation."

"We already see quite some pressure from the supply side in the bond markets and have for quite a while been arguing for the upside in long end bond yields."

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