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This is obviously a very fluid situation and as the facts on the ground evolve so too will the economic impact. As a framing, just bear in mind that, absent a prolonged war and major long-term disruptions to key shipping routes in the Strait of Hormuz, the impact on U.S. economic growth, inflation and monetary policy should remain modest. Of course, the opposite also could be true.

Our model simulations of 10% and 30% sustained increases in oil prices do not come close to generating a U.S. recession or markedly changing the trajectory for core inflation. Headline inflation does move higher via higher energy prices for the consumer, but the drag on real consumer spending and thus economic growth is muted in these scenarios (0.1-0.2 percentage points for the year).

Central banks typically look through oil-driven inflation shocks, and we expect this time to be similar. We expect the FOMC to take the long view, and the weekend's events probably will not have a major impact on the Federal Reserve's reaction function. Our forecast for 50 bps of rate cuts this year remains unchanged. Similarly, we are not making any changes to our G10 or EM central bank forecasts at this time. In the very near term, we expect central banks around the world to remain in wait-and-see mode as they await additional clarity on the geopolitical situation.

Below, the Team responds FAQ style to some of the most common questions we have received in the past 72 hours on this topic:

What happens to U.S. inflation in the wake of an oil-price shock?

• Oil prices were already moving up over the past couple of weeks in anticipation of potential escalation, but the price of Brent crude has risen $7 since the U.S. strikes, or about 14% above its February average. Henry Hub natural gas prices are also up 6% in the wake of the strikes (Figure 1). Higher oil prices would need to persist to meaningfully impact the U.S. economy, as a sharp spike followed by a rapid normalization would not have much of an impact.

• To assess the potential U.S. macro impact from the military escalation, we run two scenarios: (1) a sustained 10% rise in Brent oil prices from a baseline expectation of around $65/barrel on average in Q1, and (2) a larger, sustained 30% rise in oil prices, which is closer to the spike that occurred immediately following Russia's invasion of Ukraine in early 2022.
• A 10% sustained rise in oil prices would add roughly 0.3 percentage point to the year-over-year rate of headline consumer price inflation in the second and third quarter of this year, whereas a 30% rise would lift the one-year change closer to a full percentage point (Figure 2). The impact on core inflation would be much more modest (a few tenths with a 30% rise in oil prices) but not zero. This upward pressure on oil prices would reverse what has been one notable tailwind for disinflation and consumer spending over the past year; since last January, energy goods prices are down 7.3% compared to the 2.4% increase in headline CPI.

What does history say about consumer confidence sensitivity to energy spikes?

• U.S. consumer confidence tends to correlate more strongly with jobs and inflation than foreign conflict headlines. Of course, foreign conflict and inflation can also go hand in hand. That makes retail energy prices (mostly gasoline) the most important consideration for many households as it relates to this conflict. The average national price at the pump currently sits around $3/gallon. In the immediate wake of Russia's invasion of Ukraine in February 2022, the average price initially jumped and remained elevated for around four months before receding (Figure 3). In the end, the fate of pump prices and the consumer's reaction function will be dictated largely by any prolonged disruptions in the Strait of Hormuz.

How big of a hit could we expect an oil-price shock to have on U.S. economic growth?

• Our model simulations suggest a 10% rise in oil prices would dampen average annual U.S. GDP growth by a very modest 0.08 percentage points (pp) this year (Figure 4), primarily through lower consumer spending with a 0.15pp reduction in real personal consumption expenditures growth. Business fixed investment spending actually rises modestly in this scenario, likely due to higher oil prices spurring some additional investment in domestic oil and gas production, which happened in the wake of Russia's invasion of Ukraine. Even in the 30% price-shock scenario, the hit to real GDP growth this year is only 0.23pp. It takes very large and persistent gas price increases to meaningfully restrain household consumption.

Will a surge in commodity prices slow the U.S. tech build out?

• A temporary spike in oil and gas prices will pressure input costs but not meaningfully limit the pace of new data center construction. Higher energy commodity prices will likely flow through to building material and freight costs, representing a modest headwind to new development. Operationally, data centers are increasingly powered by natural gas, and while higher global LNG prices could have modest short-run negative cost implications, we generally do not see increased energy prices as a major limitation on new construction.
• The tech buildout relies on other trade routes. The Straight of Hormuz is a key energy chokepoint, but high-tech trade flows are minimal with the Straight of Malacca serving as the primary passage for global electronics, advanced chips, critical minerals and other inputs predominantly sourced from Asia. For the U.S., tech shipments from Asia are straight-shotted to West Coast ports or routed through the Panama Canal. So long as supply disruptions are contained to Hormuz, the negative effects on high-tech capex should be limited.

How will the Fed react to the conflict?

• The weekend's events probably will not have a major impact on the Federal Reserve's reaction function. A jump in oil prices would generate higher headline inflation, but this would be driven by a supply shock rather than overly hot aggregate demand. Accordingly, tighter monetary policy would do little to mitigate the hotter inflation and instead would further compound the hit to economic growth. In short, a supply-driven oil price shock is a classic example of something most FOMC officials will attempt to "look through."
• Key will be the behavior of inflation expectations. The Fed will likely be sensitive to any notable deviations from what have been well-behaved inflation expectations. But again, any unanchoring here would stem from prolonged conflict and persistently higher energy prices. If higher prices in the short-run start to lead to higher expected inflation in the future, the inflationary shock can become more persistent. In 2021-2022, inflation expectations rose abruptly across a broad range of measures, causing the FOMC concern that the higher inflation of the time may not prove to be transitory (Figure 5).

Could more Fed easing be coming?

• We doubt more easing will be forthcoming than our base case projection of 50 bps (Figure 6). We expect the impact on the U.S. economy from the conflict to be modest, and we think the FOMC will take the long view on this rather than knee-jerk react in a foggy environment. While we suspect the FOMC will want to "look through" higher inflation from a jump in energy prices, they also may be wary about adopting accommodative monetary policy given the past five years (and counting) of above-target inflation. In the very near term, we expect the FOMC to remain in wait-and-see mode as they seek additional clarity on the geopolitical situation.

How will foreign central banks respond?

• Under our assumption that renewed military confrontation in the Middle East proves to be a temporary shock, international central banks are unlikely to adjust monetary policy paths all too materially. Similar to how we are thinking about the Fed, foreign central bank policymakers are likely to view the rise in oil and broader energy prices as a supply shock rather than a sharp upswing in demand. In that sense, pre-conflict guidance on rates is likely to remain in effect, and we are not making adjustments to our G10 (Figure 7) nor EM (Figure 8) central bank policy rate forecasts. At the same time, central banks will weigh the increase of geopolitical uncertainty on investor sentiment adding to existing downside risks to growth from trade and policy uncertainty. As such, absent a more sustained disruption from the Middle East, we see greater asymmetry of global central banks to ease policy.

• For advanced economy central banks where we forecast rate cuts prior to renewed conflict in the Middle East (e.g., Bank of Canada and Bank of England), our conviction in those calls is stronger, and we believe the balance of risk is now tilted toward more BoC and BoE easing than we currently forecast. Central banks where we felt the pre-conflict balance of risk was asymmetrically tilted toward restarting easing cycles (e.g., European Central Bank) may now have new rationale to lower rates. And in Japan, we already hold a less hawkish view on Bank of Japan rates than market pricing, a place we remain comfortable.
• Emerging market economies are more exposed to events in the Middle East and have more exposure to two-sided risks, but under the assumption of only temporary market disruptions, we do not believe EM central bank preferences for rates are set to change. Oil price shocks can be more impactful in EMs as energy tends to account for a greater share of CPI baskets relative to advanced economies. But if energy price rises are temporary, a transitory disruption to disinflation trends can also be shrugged off by EM policymakers. Also, and while not unique to EMs, local currency depreciation and the subsequent pass-through to prices is more of a risk in EMs. For now, EM currencies are under only modest pressure, which for us, is not enough to generate less dovish or more hawkish postures from major EM central banks. Even in a scenario where EM FX depreciation is more intense or longer-lasting, EM currencies have rallied over the past 12–18 months. Baked in currency strength offers central banks a degree of flexibility to maintain easing biases, or at least not rush to communicate rate hikes, going forward.

Markets

Energy is front and center to today’s market response following the Israeli-US bombings against Iran which killed several high-ranking officials including Supreme leader Khamenei. Bombings could last for weeks according to US President Trump as Iran fights back with attacks across the Middle East. One of those Iranian drone attacks targeted the world’s largest LNG export facility, prompting Qatar to shut down production. Gas prices were already trading 25% higher on the day, linked to the surge in oil prices, but they spiked to more than 50% above Friday’s closing levels after QatarEnergy confirmed the output suspension. In cutting its dependence on Russian gas, Europe made a huge shift towards the Middle East, exposing its energy-reliant economies once again. The European benchmark contract, the Dutch TTF future, currently trades at €45/MWh up from €32 at the end of last week. Brent crude changes hands around $80/b with traffic through the pivotal Straight of Hormuz grinding to a halt. Aramco also halted operations at Saudi Arabia’s largest oil refinery after a drone strike in the area. Interest rate markets learned their lesson from the energy crisis around four years ago. The additional inflationary impact (on top of current >2% levels) is something central bankers should be aware of instead of going with the “transitionary” talk. In the current inflation context, it outweighs potential second-round negative economic effects. While the Fed or the ECB obviously won’t immediately respond with a rate hike, money markets reposition towards a longer status quo in the US and by pricing out any remaining ECB rate cut bets. The likelihood of a March BoE rate cut similarly fell from 80% to 50%. The resulting market outcome is a bear flattening of yield curves. German yields add 5 bps (30-yr) to 8 bps (2-yr) at the time of writing. Daily changes in the US range between +5 bps (30-yr) and +7.5 bps (2-yr). The dollar gains the upper hand on FX markets, especially against currencies from energy-reliant (importing) nations. EUR/USD currently loses first support at 1.1743, testing the 1.17 big figure. The YtD low at 1.1573 is the next reference. USD/JPY tests the February high at 157.76, compared to a 156.05 close last Friday. Cable (GBP/USD) tested the YtD low at 1.3331. On a trade-weighted basis, the greenback (DXY) broke through 98 resistance to currently change hands around 98.50. The prospect of a longer and wider geopolitical conflict equally hurts overall risk sentiment with main European indices losing 2% to 3% while main US indices open up to 1% lower. The gold price initially rallied up to 2.5%, but fails to get over the $5400/ounce bar for now.

News & Views

The Czech manufacturing PMI showed operating conditions stabilizing in February. The headline index printed at exactly 50 up from 49.8. Production rose at the fastest pace in 4 years last month, but underlying data still indicated challenging demand conditions and cost considerations for manufacturers. Orders declined for the second consecutive month pointing to a less favourable sales environment and intense competition. Firms tried to better manage their cashflow by cutting employment and input buying again. Meanwhile, input costs continued to rise at a steep, albeit softer, pace. Greater operating expenses prompted firms to raise their selling prices at a sharper rate despite international competition (fastest pace in three years). The latter will capture the attention of the Czech National Bank as it ponders whether there is room for some (limited) further easing as headline inflation returned to/below the CNB target. The Czech 2-y yield today rises by 9 bps, but this mostly mirrors a global market repositioning. The koruna in a global risk-off context eased from EUR/CZK 24.24 to EUR/CZK 24.28.

The Hungarian manufacturing PMI rose from an upwardly revised 50 to 51.3. The index indicates modest growth in the industry, but remains below the historic average. New orders and production were reported higher. At the same time, the employment index remained in contraction territory. Purchase prices accelerated. Today’s PMI and a risk-off related decline of the forint (EUR/HUF 381 from 377) complicates the MNB’s approach of cautiously easing its monetary policy. The MNB last week cut its policy rate by 25 bps to 6.25%. The central bank indicated that this wasn’t the start of an easing cycle even as inflation dropped below the MNB target (2.1% in January). Financial stability remains an important topic for the MNB. The 2-y HUF swap rate jumps 11.5 bps (5.83%) today.

US ISM Manufacturing PMI edged down from 52.6 in January to 52.4 in February, but the reading remained comfortably above expectations of 51.9 and firmly in expansion territory. The data point to continued resilience in the factory sector, with activity still consistent with moderate economic growth.

The most striking development was the sharp surge in the Prices Index, which jumped from 59.0 to 70.5 — the highest level since June 2022. The move signals a renewed acceleration in input cost pressures and raises questions about the pace of disinflation in the goods sector, particularly as energy and supply risks intensify.

Underlying components showed some cooling in demand momentum. New orders declined from 57.1 to 55.8, while production eased from 55.9 to 53.5. Employment improved slightly from 48.1 to 48.8 but remained in contraction.

Importantly, only 1% of manufacturing GDP was in strong contraction territory (PMI at or below 45), down sharply from 12% in January. Historically, a PMI reading of 52.4 corresponds to roughly 1.7% annualized real GDP growth.

Full US ISM manufacturing release here.

Daily Pivots: (S1) 0.9052; (P) 0.9097; (R1) 0.9133; More....

Intraday bias in EUR/CHF is turned neutral first with current rebound. Price actions from 0.9026 are viewed as a near term consolidation pattern only. Hence, upside should be limited by 0.9168 cluster resistance (38.2% retracement of 0.9394 to 0.9026 at 0.9167). Another fall below 0.9026 to resume the larger down trend is expected at a later stage. However, decisive break of 0.9167/8 will bring stronger rebound to 55 D EMA (now at 0.9199) and possibly above.

In the bigger picture, down trend from 0.9928 (2024 high) is still in progress. Next target is 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851. Outlook will stay bearish as long as 0.9394 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.1796; (P) 1.1812; (R1) 1.1834; More….

Intraday bias in EUR/USD remains on the downside as fall from 12081 is in progress for 1.1576 structural support. Firm break there should confirm rejection by 1.2 key psychological level and turn near term outlook bearish. For now, risk will stay on the downside as long as 1.1826 resistance holds, in case of recovery.

In the bigger picture, as long as 55 W EMA (now at 1.1494) holds, up trend from 0.9534 (2022 low) is still in favor to continue. Decisive break of 1.2 key psychological level will add to the case of long term bullish trend reversal. Next medium term target will be 138.2% projection of 0.9534 to 1.1274 from 1.0176 at 1.2581. However, sustained trading below 55 W EMA will argue that rise from 0.9534 has completed as a three wave corrective bounce, and keep long term outlook bearish.

Daily Pivots: (S1) 1.3449; (P) 1.3478; (R1) 1.3517; More...

Intraday bias in GBP/USD remains on the downside with focus on 1.3342 structural support. Decisive break there should confirm that fall from 1.3867 is already correcting the whole rise from 1.2099. In this case, deeper fall should be seen to 1.3008 support next. For now, risk will stay on the downside as long as 1.3574 resistance holds, in case of recovery.

In the bigger picture, as long as 1.3008 support holds, rise from 1.3051 (2022 low) should still be in progress for 1.4284 key resistance (2021 high). Decisive break there will add to the case of long term bullish trend reversal. However, firm break of 1.3008 will raise the chance of medium term bearish reversal and target 1.2099 support next.

Daily Pivots: (S1) 155.66; (P) 155.95; (R1) 156.36; More...

Intraday bias in USD/JPY remains on the upside as rise from 152.25 is in progress for 157.65 resistance. Firm break there will pave the way to retest 159.44 high. On the downside, below 155.52 minor support will turn intraday bias neutral. Overall, price actions from 159.44 are viewed as a near term consolidation pattern. Outlook will remain bullish as long as 38.2% retracement of 139.87 to 159.44 at 151.96 holds.

In the bigger picture, outlook is unchanged that corrective pattern from 161.94 (2024 high) should have completed with three waves at 139.87. Larger up trend from 102.58 (2021 low) could be ready to resume through 161.94. This will remain the favored case as long as 55 W EMA (now at 152.16) holds. However, sustained break of 55 W EMA will argue that the pattern from 161.94 is extending with another falling leg.

Daily Pivots: (S1) 0.7659; (P) 0.7705; (R1) 0.7737; More….

USD/CHF jumps sharply today, but upside is still limited below 0.7816 resistance, as well as 55 D EMA (now at 0.7818). Intraday bias stays neutral first, and further decline is till expected. Below 0.7671 will bring retest of 0.7603 low. Firm break there will resume larger down trend, and target 0.7382 projection level next. However, sustained break of 55 D EMA will indicate that a larger scale corrective bounce in underway and target 0.8039 resistance next.

In the bigger picture, down trend from 1.0342 (2017 high) is still in progress. Next target is 100% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.7382. In any case, outlook will stay bearish as long as 0.8123 resistance holds.

Global markets have entered a phase of heightened volatility as Middle East tensions transition into direct and widening regional conflict. Initial safe-haven flows rushed into Swiss Franc, pushing the currency to decade-highs against Euro. However, the move proved short-lived after rare and explicit pushback from Swiss National Bank.

In what traders quickly labeled a “verbal floor,” SNB warned of increased willingness to intervene to protect price stability. With Swiss inflation sitting at just 0.1%, authorities made clear they will not tolerate a safe-haven squeeze that risks tipping economy into deflation. The unprompted nature of the statement carried significant weight.

The message was effective. EUR/CHF stabilized after approaching key 0.9000 level — with some viewed as trigger zone for actual currency sales. Current CHF strength is seen as geopolitical spike rather than structural Eurozone deterioration back in 2010, and SNB appears determined to treat it as temporary battle of nerves.

The vacuum left by capped CHF strength has resulted in aggressive rotation into Dollar, which now stands as strongest performer. Canadian Dollar ranks second, supported by elevated energy prices. Sterling surprisingly holds third place. By contrast, Euro and Kiwi sit among weakest performers, together with Swiss Franc.

Equity markets reflect broader stress. European indexes, led by Germany’s DAX down roughly -2.4%. US futures are also pressured, with DOW down around -1.0%. Gold extended recent rebound and it's now pressing 5,400 as hedge against systemic escalation. WTI crude, though moderating near 73 after initial spike, remains highly sensitive to developments around Strait of Hormuz.

In Europe, at the time of writing, FTSE is down -1.44%. DAX is down -2.41%. CAC is down -2.06%. UK 10-year yield is up 0.078at 4.311. Germany 10-year yield is up 0.044 at 2.700. Earlier in Asia, Nikkei fell -1.35%. Hong Kong HSI fell -2.14%. China Shanghai SSE rose 0.47%. Singapore Strait Times fell -2.09%. Japan 10-year JGB yield fell -0.047 to 2.065.

UK PMI manufacturing finalized at 51.7, strong output and export growth

UK PMI Manufacturing was finalized at 51.7 in February, easing marginally from January’s 17-month high of 51.8 but remaining firmly in expansion territory. The data suggest that the sector has made an "encouraging start" to 2026, with output rising at the fastest pace in 17 months as new orders improved across both "home and overseas markets".

According to Rob Dobson at S&P Global Market Intelligence, growth in new export business reached a four-and-a-half year high, supported by stronger client confidence in North America, mainland China, the EU and the Middle East. The rebound in external demand has helped offset lingering weakness seen through much of last year, giving manufacturers renewed momentum.

Business optimism remains elevated, close to January’s recent peak, with nearly three-fifths of firms expecting to raise production over the coming year. While staffing levels continue to decline, the pace of job losses has moderated to the weakest in the current 16-month downturn, pointing to early signs of stabilization.

Eurozone PMI manufacturing finalized at 50.8, turning corner with broad-based recovery

Eurozone PMI Manufacturing was finalized at 50.8 in February, rising from January’s 49.5 and marking a 44-month high. The move above also the 50 threshold signals a return to expansion for the bloc’s factory sector.

The rebound appears increasingly broad-based. Greece (54.4) and Ireland (53.1) led growth, while Germany climbed to 50.9, its highest level in nearly four years and back in expansion for the first time in three-and-a-half years. Netherlands, Italy, France and Spain also hovered around or above the growth line, with Austria the only country still below 50. Among the major economies, Germany is now showing the fastest improvement in manufacturing conditions.

According to Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, the data point to a "broad-based recovery", with six of eight surveyed countries now in growth territory. However, input price pressures accelerated for a fourth consecutive month and picked up sharply in February. While companies were able to pass on part of these increases, margins likely remained under strain.

Encouragingly, firms expressed growing optimism about future sales and production. Expectations for output improved further compared to January, suggesting confidence that demand conditions will strengthen in coming months.

Japan's PMI manufacturing finalized at 53.0, output and orders post fastest gains in years

Japan’s PMI Manufacturing was finalized at 53.0 in February, rising from 51.5 in January and marking highest reading since May 2022. The data point to a clear acceleration in factory activity, with the sector extending its expansion and signaling that recovery momentum is broadening at the start of Q1.

According to Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence, companies reported the quickest increases in output, new orders, employment and purchasing activity in more than four years. Business confidence also climbed to highest level since mid-2024, supported by expectations that global demand will continue to revive, particularly across technology and automotive sectors.

While input cost pressures eased slightly, price growth remained elevated by historical standards, partly reflecting impact of "weak Yen" on imported materials. Nevertheless, stronger demand could improve firms ability to pass on higher costs, helping to stabilize margins.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.7659; (P) 0.7705; (R1) 0.7737; More….

USD/CHF jumps sharply today, but upside is still limited below 0.7816 resistance, as well as 55 D EMA (now at 0.7818). Intraday bias stays neutral first, and further decline is till expected. Below 0.7671 will bring retest of 0.7603 low. Firm break there will resume larger down trend, and target 0.7382 projection level next. However, sustained break of 55 D EMA will indicate that a larger scale corrective bounce in underway and target 0.8039 resistance next.

In the bigger picture, down trend from 1.0342 (2017 high) is still in progress. Next target is 100% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.7382. In any case, outlook will stay bearish as long as 0.8123 resistance holds.