USD: Fed clouded by the fog of war
The Fed held rates at 3.5%–3.75% in an 11–1 vote, but “hawkish pause” is not an accurate label. What came out from the press conference was a central bank unsure that policy is meaningfully restrictive, even as its cautious dot plot and modestly higher forecasts signal little appetite to ease. Powell hinted that monetary policy under supply shocks works less under current circumstances, with policy sitting near the line between restrictive and not. Markets heard the ambiguity and pushed the easing path further out, not because growth looks strong, but because the Fed has less room to respond cleanly, given the high level of uncertainty.
Inflation is also getting messier. Price pressure is tilting back toward goods just as the labor market continues its 2025 weak performance, a mix that stretches policy on both sides. Tariff effects are filtering in slowly enough to confuse, yet clearly enough to lift forecasts, while higher oil tightens the whole macro backdrop. This is a story of persistent inflation meeting decelerating hiring and a squeeze on real incomes that could come from sustained higher gas prices. The wait-and-see pattern in North American central banks will dictate policy outlook in the near future. The reality is, we’re six weeks away from next Fed meeting, and there’s nothing but uncertainty on how things could unfold in the very next few days. For how long policy gets stuck, will depend on, as mentioned previously, duration and degree of the US-Iran conflict.
The February PPI didn’t help. Final demand rose 0.7% m/m and 3.4% y/y, with core at 3.9% y/y, hot prints that landed into a worsening Middle East backdrop. Brent surged above $109 as Israel struck Iran’s upstream South Pars gas field and Iran flagged Gulf energy targets, prompting precautionary evacuations at Samref and Jubail. Missiles and drones have targeted oil infrastructure, contingency routes are straining around Hormuz, the US Navy’s carrier exit from the Red Sea opened a security gap, and shipping mandates were waived to ease domestic costs. Layer these shocks on top of sticky PPI and the path to lower inflation looks clouded by the fog of war.
For the US dollar, that mix is supportive. Even as officials maintained a highly cautious outlook, projecting just one quarter-point rate cut for 2026 and another for 2027, the greenback firmed after the press conference as futures still hesitate to price a cut before Q4. Most importantly, the US dollar index remains highly tethered to headlines out of Iran. Near term, dips likely stay shallow until shipping, storage, and insurance conditions around Hormuz improve and the conflict premium fades, something current news flow does not yet allow. A further leg up in the USD hinges on energy and volatility flaring again, but with policy “stuck,” inflation not fading broadly, and risk premia elevated, the balance of risks keeps the dollar bid on setbacks.
CAD: Two sided oil test
The Bank of Canada kept its overnight rate at 2.25%, where it has sat since October, signaling caution as growth cools and slack persists. As mentioned yesterday, the symmetric 2% target within a 1–3% band, plus a flexible horizon, lets the Bank tolerate a temporary headline bump while guarding against persistence. That mirrors the 2015 “insurance” mindset on growth hits and the 2022 lesson to keep expectations anchored. Governor Macklem reiterated during the press conference that the effects of this supply shock depend entirely on duration and degree.
It’s a tricky environment for the BoC to navigate, and as for most major central banks this week, the wait-and-see approach is the most prudent response. After a 2.4% gain in Q3, GDP fell 0.6% in Q4, with domestic demand still up 2.4% on steady consumer and government spending even as housing stayed weak. Early 2026 data point to modest expansion, but slower than January’s forecast. The labor market has softened, with earlier job gains reversing and unemployment rising to 6.7% in February as exports remain choppy.
Inflation eased to 1.8% in February from 2.3% in January, while core measures hover near 2%. However, the war in Iran has pushed oil higher, which will lift near‑term inflation.
Governor Macklem also acknowledged that financial conditions have tightened as global yields rise and risk assets wobble, and the bottlenecks through the Strait of Hormuz pose added supply risks, including for fertilizer. As a result, growth risks are tilted to the downside, but inflation risks lean higher in the short run.
During the press conference, several questions focused on why food inflation has been running ahead of headline CPI in recent months. The Bank acknowledged that grocery prices, while slowing in February, remain elevated and could stay sticky if energy, transport, and input costs keep climbing. Policymakers stressed they will look through the immediate oil shock but will not allow those pressures to broaden and become persistent, aiming to protect purchasing power while preserving progress back to target.
For now, the stance is patient and data‑dependent. With the economy in excess supply and inflation near target, Governing Council is prepared to act if needed, watching US trade policy, the CUSMA review, and shifting global conditions. The Bank’s message is steady: support the expansion, keep inflation anchored, and prevent energy‑driven spikes, whether at the pump or in the grocery aisle, from becoming entrenched.
Against this backdrop, the CAD has seen choppy trading, and should stay choppy and headline‑driven as oil volatility collides with slack at home. If disruption fades and supply lanes normalize, Canada’s two‑sided oil exposure turns less of a drag. Only then, alongside better domestic prints, does the map point to more durable CAD gains.
EUR: ECB won’t move the euro
The euro came under renewed pressure yesterday as Iran escalated threats to key energy assets in the Gulf following Israel’s strike on the South Pars gas field. Oil prices climbed on the headlines. Markets appear to be parsing Iran’s stance more acutely than Washington’s: Trump’s earlier comment that the “war may be ending in the near future” barely registered, while Iran’s warnings stuck. After all, Iran holds the greater leverage over energy markets through its de facto control of the Strait of Hormuz. Reignited pressure on government yields across the eurozone underscores how sensitive curves remain to geopolitics, reversing some of the early‑week normalisation ahead of a heavy central‑bank calendar, while blurring the pass-through into FX.
We expect a muted reaction from the euro to today’s ECB meeting. While the Bank will likely acknowledge the upside risks the conflict poses to inflation, we expect it to remain non‑committal. And although we will get updated staff projections, it is unlikely that any conflict‑related inflation impulse will be incorporated – at least not in the March round. One may argue that risks for the euro tilt to the downside: the market is currently pricing almost two full 25‑basis‑point hikes, and any acknowledgment by Lagarde of risks to the growth outlook would temper a more hawkish market bias, triggering an unwind. That said, FX sensitivity to rate differentials has deteriorated sharply since the conflict began, and also the knee‑jerk hawkish repricing lacks substance at this early stage, with little clarity on the macro implications – meaning the euro is unlikely to move much even if some of that hawkishness is unwound after the meeting.
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Calendar: March 16 – 20
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