Hope that the Iran war could end soon fuelled optimism yesterday after Trump announced willingness to pull back, and Iran State News reported a phone call between a EU councillor and Iran President suggesting ‘necessary will to end the war’ if guarantees are met.
S&P500 rallied 2.91%, Nasdaq soared 3.83%. Oil pulled back. Kospi skyrocketed 8% in Asia.
The US dollar fell sharply too, also pulled lower by a series of comments and data releases.
- Federal Reserve (Fed) Chair Jerome Powell said a day earlier that, despite rising oil and gas prices, long-term inflation expectations remained “in check,” and that oil shocks tend to come and go. By the time rate hikes would take effect, the oil price shock would be “probably long gone,” and tighter monetary conditions would be “weighing on the economy at a time when it’s not appropriate.” In short, he pushed back on expectations that the Fed would raise rates to fight energy shock led short term inflation.
- The EURUSD rebounded following a set of euro area CPI updates confirming that the Middle East war had led to a notable jump in inflation. March preliminary data came in slightly lower than analysts had penciled in, but headline inflation rose 1.2% over the month, pushing the yearly figure to 2.5%, up from 1.9% printed before the war. Energy prices rose 4.9%. Core inflation slightly eased from 2.4% to 2.3%, but the impact of higher energy prices will push inflation away from the European Central Bank’s (ECB) 2% policy target, potentially forcing policymakers to adopt a tighter monetary policy.
- US job openings came in softer than expected (data for February). The chances are that the labour market may have slowed further in March due to the negative impact of higher oil prices on activity.
So, the combination of more hawkish ECB pricing versus a more dovish Fed outlook sent the EURUSD all the way up to 1.1578. As discussed earlier, the ECB/Fed rate outlook differential could put a floor under the EURUSD’s decline since the end of January. For the rebound to be sustainable, however, oil and gas prices should stabilize. Otherwise, growth risks to the euro area economy—a net energy importer—will remain higher than growth risks to the US economy—a net energy exporter—which could justify a deeper downside correction in the EURUSD.
Technically, the EURUSD remains in the bullish trend built since the beginning of 2025. Key support for this trend sits near 1.1350, the major 38.2% Fibonacci retracement of the 2025-to-date rally. Only a slide below this level would open the discussion on whether the US dollar deserves to return to a broader, medium-term bullish trend.
Again, the answer depends on the duration of Middle East tensions and oil prices. Crude oil eased 3% yesterday, helping the US dollar soften on top of economic data and central bank expectations, while Brent crude fell more than 5%.
The decline could be partly attributed to Donald Trump telling aides that the US will stop its campaign against Iran even if the Strait of Hormuz remains closed. However, a few hours earlier, he had threatened to invade Kharg Island and seize Iranian oil. In the current conditions, volatility is almost inevitable.
Both WTI and Brent push higher this morning.
As a rule of thumb, a sustainable move into the $90–100 per barrel range could help investors digest the energy shock and seek new catalysts and direction across FX and equities. Many warn that prolonged supply disruptions in the Strait of Hormuz—through which 20% of global oil and 20-25% of gas flows transit—could trigger “demand destruction,” meaning prices rise enough to force companies and consumers to reduce usage, hitting economic activity.
That is why the $120–130 per barrel range is probably the top range for crude prices. Above this, falling demand would likely pull prices lower, while in the longer run, more affordable levels would ideally be $80 per barrel or below.
Interestingly, if you looked at US market price action yesterday, you could hardly guess how uncertain the geopolitical and macroeconomic backdrop is. The S&P500 rallied 2.9% on a sharp decline in US yields—the 2-year yield, which best captures Fed rate expectations, fell 8 basis points yesterday and nearly 20bp from last Friday’s peak above 4%.
This is positive if you isolate the impact of higher oil prices on operating costs and profit margins. Forward EPS continues to rise as investors look past rising energy prices, and falling valuations from the recent market drop are whetting appetites, especially for tech stocks. The tech-heavy Nasdaq 100 trades at 21x estimated earnings, just under 2 points above the S&P500’s. The last time this valuation gap was so narrow was 2019.
Moving forward, all eyes will be on the next earnings season and the impact of the Iran war and higher energy prices across industries. Tech hasn’t been a great place to hide in this latest oil shock—rising crude linked to the Iran war has pushed inflation expectations higher, driven yields up and hit long-duration tech valuations. But the underlying story hasn’t broken: AI demand remains strong, AI spending is massive and fundamentals across mega-cap tech are holding up. If geopolitical tensions ease and rates stabilize, the sector—now relatively cheap—could be one of the first to rebound.
There are even reports that OpenAI may allow investors to gain exposure ahead of a potential IPO later this year, by including its shares in several ETFs—among them funds from Cathie Wood’s ARK Invest.
Let’s hope calm returns soon, then!
Also, note that I will be out of the office until April 20. Wishing you a very Happy Easter!
