Dollar Might Enter a More Neutral Pattern

Markets

Markets experienced an impressive ‘relieve squeeze’ after the US and Iran agreed to a two-week ceasefire that should allow for a more in-depth solution to the conflict. Visibility on how this process will develop and what it eventually might yield in the end remains low with US and Iranian starting points miles apart. Despite the multiple ‘likely’ roadblocks, markets cheered the announcement as if they expected it to be a real game-changer. European equities rebounded up to 5% (EuroStoxx 50). US indices which already anticipated something to happen on Tuesday still gained another 2.5-3%. The force of the moves suggests investors had built up quite some ‘defensive protection’ in the run-up to Tuesday’s deadline that now had to be unwound. Oil evidently was one of the key barometers on the perceived level of stress. Brent oil at some point dropped from $110+ levels on Tuesday to almost $90 p/b intraday (close near $94.75). It also triggered a similar impressive squeeze in the inflation trade that had been set up over the previous weeks. German yields declined between 22.9 bps (2-y) and 7.4 bps (30-y). Euro are money markets reduced their expected probability on a April 30 ECB rate hike to 30% from 70% and now see two rather than three hikes EoY. The ‘pricing out’ in the UK (yield declines up to 23.7 bps in the 2-y) was even more impressive. US yields initially joined the easing trend but gradually reversed gains and eventually closed the session little changed between -0.5 bps 5-y & +1.2 bps 30-y. The Fed assessment as revealed in the Minutes of the March 18 meeting in the current context evidently is subject to a quickly developing economic and inflation environment. The conflict in the Middle East probably raises the risk both to the labour market and at the same time of higher inflation. While views in the Fed are divided on the weight of those factors for policy, a growing number of governors is rather focusing on the inflation risks. On FX markets the dollar, which of late profited only modestly for safe haven flows, was one of the victims of the ‘relieve squeeze’. DXY closed at 99.13 (from 99.86 on Tuesday). However, ‘in line’ with the reversal on the US yields markets, the dollar closed well off intraday lows. EUR/USD filled offers north of 1.17, but closed at 1.166 (from 1.1595). In a similar move, EUR/GBP briefly dipped below 0.87 to close just north of the big figure.

The evident question now evidently is ‘what’s next’? This uncertainty applies to the status of the ceasefire (violated?), the kick-off of the negotiations (expected this weekend in Islamabad) & the status of the ‘opening’ of the Strait of Hormuz. For (interest rate) markets, the key is to assess the inflationary fall-out of the conflict even with this (fragile) ceasefire in place. The multiple political and logistic issues that still have to be solved suggest that quite some costs in the end still might filter through to end demand. In this respect, the relief rally on interest rate markets yesterday probably doesn’t have to go much further as long as there is no indication of a genuine improvement in fixing distorted supply chains. The dollar might enter a more neutral pattern. Recent performance at least doesn’t suggest a really strong rush to the US currency in a context of current low geopolitical visibility. Some EUR/USD consolidation in the 1.15/1.18 corridor might be on the cards with the downside better protected.

News & Views

Geopolitically driven macro pressures weigh on UK housing market activity and the near term outlook according to the March 2026 RICS UK Residential Market Survey. With intensifying inflationary pressures pushing borrowing costs higher, buyer demand has weakened. At the headline level, the new buyer enquiries net balance slipped to -39% (-29% in Febr, weakest since August 2023). Volume of agreed sales has also been adversely affected, with the aggregate net balance falling from -13% to -34%, also the weakest since the summer of 2023. Respondents anticipate a further contraction of sales in coming months and see broadly stabilization for year-ahead sales (vs moderately positive view last month). On the supply side, there was marginally softer flow of listings coming to the market. The level of unsold stock on agents’ books has risen. The aggregate net balance of -23% for house prices points to some renewed downward pressure on prices coming through. It is still relatively moderate at the moment and is expected to build over the coming three months. A broad flat trend is seen for the year ahead, significantly down from +43% and +33% levels at the start of the year.

Czech National Bank board member Seidler said in an interview with Hospodarske Noviny that the central bank was in a relatively good position when the war in the Middle East started. Its slightly restrictive monetary policy allows it to look through the primary impact on inflation from the energy-related supply shock. The CNB must nevertheless be attentive to second-round effects to assess potential steps and their timing.