* Iran strikes defiant tones as oil sees little relief

* Money markets no longer fully pricing in a Fed rate cut this year

* Wall Street sinks under the wright of rising energy prices

* Dollar surges towards 100, fresh 2026 highs as investors ditch EUR and JPY

FX: USD pushed higher for a second straight day to fresh year-to-date highs. The Index closed right on the recent peaks at 99.68/69. The January top is at 99.48 and the November high sits at 100.39. Treasury yields rose with the 10-year now at 4.26%, from 3.92% at the start of the month. The intensification of the conflict between the US and Iran has seen more Iranian attacks on Dubai, Kuwait, two tankers in Iraqi waters, and concerns about strikes on a key oil export terminal in Oman. Oil prices remain well supported with Brent close to $100 again. Risk-off, due to rising crude, is only going to further support the dollar.

EUR moved lower closer to Monday’s low at 1.1507, with the November bottom at 1.1505. Recent ECB comments have been marginally more hawkish, which have backed up the repricing of rate hikes, with a 30% chance of a move in April and 42bps in 2026. Fresh March staff forecasts will partly reflect the economic impact of the Iran conflict, with a hawkish official noting upside inflation risk amid geopolitical uncertainty. Policy should remain in a “good place” but Schnabel stressed the need to monitor the persistence of energy-price shifts closely.

GBP slid away from the 200-day SMA at 1.3439. The midpoint of the November to January low to high move also sits at 1.3439 with the next major Fib below at 1.3338. The year-to-date low is at 1.3252 from earlier in March. Today’s January GDP is expected at 0.3% m/m, two-tenths above the prior reading. Momentum has picked up since the November Budget and shaken off the subdued second half of last year. Next week’s BoE meeting is also in focus with the outlook moving to neutral as rate cuts get priced out.

JPY weakened as rising Treasury yields again hurt the yen, along with rising energy prices. This week’s spike high is 158.90 was taken out with potential intervention levels around 159/160. That said, effectiveness of any intervention is being questioned as the Iran conflict continues. As we have said, the prospect of a June hike offers a slight softening in recent talk that had raised the possibility of a move in April.

US stocks: The S&P 500 lost 1.52% to close at 6,672, the Nasdaq was 1.73% lower at 24,533 and the Dow Jones settled lower by 1.56% at 46,677. The last time the broad-based benchmark S&P 500 fell three straight days was in early February. The 200-day SMA is at 6,600. The VIX, Wall Street’s fear gauge, rose to 27, with last week’s high at 35. Energy led the gainers with Utilities and Consumer Staples the only other sectors in the green, while Industrials and Consumer Discretionary were the weakest sectors. Palantir rose 1.2%as it teamed up with Nvidia to deliver sovereign AI operating system reference architecture. Morgan Stanley capped redemptions from one of its private credit funds, returning less than half of capital that investors sought to cash out, adding to worries about private markets.

Asian stocks: Futures are mixed. APAC stocks fell as the release of emergency oil stockpiles failed to keep prices down. The ASX 200 was hit by losses in all sectors except energy. There were more calls for a rate hike by the RBA next week. The Nikkei 225 slid below 54,000 as high oil prices and yields hurt exporters and manufacturers. The Hang Seng and Shanghai Composite also struggled with tariffs news about a Section 301 into 16 trading partners not helping sentiment.

Gold succumbed to selling amid a higher dollar and bond yields. Those two factors are at present outweighing any safe haven characteristics of bullion.

Day Ahead – Core PCE, Oil prices

The Fed’s favoured inflation gauge, core PCE deflator, is predicted to rise 0.3% m/m from 0.4% and unchanged at 2.9% y/y. The stronger than expected PPI data feeds into this report. The Middle East conflict will certainly overshadow this data point, headline CPI now pointing to 3%+ figures as markets potentially move away from the short-term spike to longer-term persistent implications of the macro energy supply shock. It’s now a coin toss that rates are seen staying unchanged as late as October with just 16bps of Fed rate cuts for the year.

Interestingly, some are speculating that emergency measures to ease oil supply disruptions may be sending a hidden negative signal to markets that world leaders see little room for quick de-escalation. There are concerns about the speed at which this oil will reach the market and whether it will be enough to tie up the market until we see oil flowing through the Strait of Hormuz again. Rough estimates say 20-25 days of supply. Certainly, the longer oil and gas prices stay high, the more markets would price in an inflation pass-through. But moving beyond $100 per barrel can start weighing on long-term growth expectations and risk sentiment, which in effect may actually push down the long-term bond yields.

Chart of the Day – Dow close to 200-day SMA

The energy shock has hurt the ‘HALO’ trade that had dominated stocks and sectors for a few months prior to the Iran conflict. “Heavy asset, low obscelence” was an antidote to the AI disruption trade, but now the mindset has rotated quickly.  Heavy assets need energy and has exposed those sectors while the heavily shorted Tech sector has seen positon unwinds and short covering, boosting oversold names. This all means the Dow has been underperforming, in fact until yesterday. Prices recently fell through the 100-day SMA at 48,248 and a minor Fib retracement level of the Liberation day low to record high at 47,221. The 200-day SMA sits at 46,440 with a major Fib level (38.2%) at 45,194.