Growing tensions in the Iran war, combined with a hawkish Federal Reserve (Fed) tone and caution before Jerome Powell’s speech, along with key economic data this week, are weakening overall market sentiment.
The global backdrop is being driven mainly by geopolitics, as the Middle East conflict continues to expand. Iranian-backed Houthis launched missile and drone attacks on Israel, while Israeli strikes disrupted power in Tehran and nearby regions, showing the conflict is intensifying further.
The U.S. is increasing its military presence, sending Special Operations Forces such as Army Rangers and Navy SEALs, along with Marines and 82nd Airborne troops. Officials say this gives President Donald Trump more flexibility, including the option of ground operations.
On the diplomatic side, Pakistan is set to host U.S.-Iran talks soon. Trump said discussions are ongoing through both direct and indirect channels and may produce a deal, but uncertainty remains. He also noted that Iran allowed 20 oil tankers to pass through the Strait of Hormuz, indicating a slight easing. At the same time, he warned that the U.S. could target key Iranian oil assets like Kharg Island, keeping escalation risks active.
Some reports about Houthis’ deeper involvement were later questioned. U.S. negotiator Steve Witkoff indicated possible talks with Iran this week and said Trump is aiming for a peace deal. A potential optimistic scenario could involve Iran giving up nuclear material in return for sanctions relief and peace, allowing Trump to claim he prevented nuclear weapon development.
Economic data showed weakening sentiment on Friday. The University of Michigan (UMich) final March consumer sentiment index came at 53.3 versus 54.0 expected, below the preliminary) 55.5 and prior 56.6. Conditions dropped to 55.8 from prelim 57.8, and expectations declined to 51.7 from 54.1. One-year inflation rose to 3.8% from 3.4%, while five-year inflation held at 3.2%.
Talking about the Fed clues, Philadelphia Fed President Ann Paulson said inflation has eased but remains high, with expectations still fragile. She warned that the Iran war could push inflation higher through oil prices and supply shocks. The labor market is weak, job growth is limited, and conditions feel fragile, though not collapsing, while long-term inflation expectations remain stable. Meanwhile, Richmond Fed President Tom Barkin added that inflation progress had already slowed before the oil shock. He described the economy as continuing to grow but with reduced visibility due to artificial intelligence (AI) changes, rising oil prices, and policy uncertainty.
The Indian rupee (INR) gained slightly after the Reserve Bank of India (RBI) introduced FX position limits, forcing banks to cut short INR bets and supporting the currency. In Australia, fuel tax cuts were introduced to ease rising prices, but this may worsen supply issues, especially diesel shortages.
Month-end flows pushed the U.S. Dollar (USD) lower from a two-week high, while crude oil stayed strong for a fourth straight day, reaching a three-week high. EURUSD and GBPUSD recovered after four days of losses, while USDJPY recorded its first decline in five days. AUDUSD fell for the seventh straight day to a two-month low, and NZDUSD extended losses to levels last seen in mid-January. USDCAD pulled back from a 10-week high. Bitcoin (BTC) and Ethereum (ETH) posted small gains, ending four-day declines, while Asia-Pacific equities weakened following U.S. market losses.
A pullback in the U.S. Dollar (USD), along with mixed signals from the European Central Bank (ECB), Federal Reserve (Fed), and Bank of Japan (BoJ), is driving corrective moves in major currency pairs. EURUSD and GBPUSD have both recorded their first daily gains in five sessions, while USDJPY has fallen from its highest level since July 2024, stopping a four-day uptrend.
In Europe, the ECB is prepared to act if rising energy prices push inflation higher, but it is not in a hurry to tighten policy. François Villeroy de Galhau said it is too early to talk about rate hikes, while Isabel Schnabel stressed that, despite a strong energy price shock, policymakers should first carefully study incoming data.
In Asia, the BoJ continues to support gradual policy tightening but remains cautious due to geopolitical risks and higher oil prices, with some concerns about stagflation (slow growth with high inflation). Vice Finance Minister Atsushi Mimura warned that action could be taken against speculative foreign exchange (FX) movements. At the same time, BoJ Governor Kazuo Ueda highlighted the growing impact of FX on inflation, which helped push USDJPY below 160 to around 159.75.
The pullback in the U.S. Dollar (USD) did not stop the downtrend in the Australian Dollar against the U.S. Dollar (AUDUSD) and the New Zealand Dollar against the U.S. Dollar (NZDUSD), while the U.S. Dollar against the Canadian Dollar (USDCAD) has eased from recent multi-day highs.
Weak market sentiment and ongoing concerns around China are keeping pressure on the Australian Dollar (AUD) and New Zealand Dollar (NZD). In contrast, stronger oil prices and a hawkish Bank of Canada (BoC) stance are supporting the Canadian Dollar (CAD), which is pushing USDCAD lower.
Oil prices initially rose to hit a three-week high before easing slightly due to mixed signals between easing tensions and ongoing risks. Yemen launched more missile attacks on Israel, Pakistan confirmed upcoming U.S.-Iran talks, and the U.S. continues signaling troop deployments, with Rubio hinting at a possible endgame. However, fears surrounding the supply crunch from the Strait of Hormuz keep the black gold on the bull’s radar.
Gold prices are moving sideways after a four-week downtrend, while cryptocurrencies are showing a small recovery. At the same time, Asia-Pacific equities are drifting lower due to cautious sentiment ahead of key events mentioned earlier and ongoing Iran-related tensions.
Overall market mood remains weak. On Friday, equities fell sharply, while gold and oil moved higher. The Nasdaq dropped to a six-month low as war concerns intensified. President Donald Trump’s decision to extend the strike deadline by 10 days is seen as delaying the issue rather than resolving it.
Rising oil prices pushed bond yields higher and added pressure on equities. Technology stocks, especially recent top performers, faced strong selling, suggesting deleveraging as economic uncertainty grows. Earlier hopes of resolving the conflict within 4–5 weeks are fading, with Marco Rubio now indicating it could take another 2–4 weeks.
This week brings several important data releases. These include Nonfarm Payrolls (NFP), Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) and Services PMI, and Retail Sales from the U.S.; Consumer Price Index (CPI) from the Eurozone (EZ); Reserve Bank of Australia (RBA) Minutes; Bank of Canada (BoC) Minutes; Bank of Japan (BoJ) Tankan survey; and National Bureau of Statistics (NBS) Manufacturing PMI from China. At the same time, month-end flows may continue to support demand for the U.S. Dollar (USD).
Before today’s speech by Jerome Powell, markets will closely watch Eurozone Consumer Confidence, German inflation, and Dallas Fed Manufacturing PMI. Powell is likely to keep a hawkish tone, which may support USD and put pressure on currencies, gold, cryptocurrencies, and equities. However, any positive news related to Iran could weaken USD sentiment.
Crude oil is expected to remain strong as long as the Iran war continues, with West Texas Intermediate (WTI) moving toward the $120 level. Short-term pullbacks may happen if risk sentiment improves or USD strengthens, but the overall trend remains upward.
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