Major central banks are preparing for pivotal policy meetings this week against a backdrop of heightened geopolitical tensions and oil-driven inflation risks. The Federal Reserve is widely expected to keep rates unchanged, with Deutsche Bank economists noting that Chair Powell will likely emphasize elevated geopolitical uncertainty and the transmission of recent events through financial conditions, particularly oil prices. Core PCE inflation has seen back-to-back 0.4% monthly increases, pushing the year-on-year rate to 3.1%, the highest since early 2024. The Fed's dot plot is anticipated to signal one rate cut this year, with the outlook heavily dependent on oil prices remaining near or below $100 per barrel [3]. The CME FedWatch tool suggests the Fed will maintain its current rate stance for at least four more meetings [2].
The European Central Bank (ECB) is also expected to hold rates steady, as price pressures have remained close to the 2% target. However, money markets have revised expectations and now price in two ECB rate hikes this year, a sharp shift from last month when no policy moves were anticipated. Investors are focusing on the ECB’s upcoming policy meeting scheduled for March 19, where President Christine Lagarde is expected to address inflationary pressures linked to the conflict in the Middle East. Markets are currently pricing in two 25-basis-point rate hikes, potentially in June and September [1].
Currency markets have responded to these developments. The EUR/JPY pair stabilized around 182.40 after two days of decline, as the Euro found support from improved geopolitical sentiment and intervention fears persisted. Japanese authorities have strengthened warnings regarding excessive currency moves, with Finance Minister Satsuki Katayama stating the government is closely monitoring foreign exchange developments and stands ready to take strong action if necessary. The Bank of Japan is expected to keep its policy rate unchanged at 0.75%, though some analysts believe a surprise rate hike cannot be ruled out amid rising oil prices [1].
Elsewhere, the New Zealand Dollar (NZD) remains firm above 0.5800, supported by strong Chinese economic data and expectations of a Reserve Bank of New Zealand rate hike. Markets are pricing in a 25-basis-point hike in September and assigning more than a 70% probability to another increase in December, though the RBNZ’s own projections do not fully reflect this outlook due to New Zealand’s weak economic backdrop [4]. The Australian Dollar (AUD) is supported by hawkish domestic fundamentals, with markets expecting a back-to-back RBA hike to 4.10% on March 17. However, global risk aversion linked to the Iran War is weighing on the currency, and AUD/USD support is seen around 0.69–0.70, conditional on a dovish Fed and CNY strength [6].
Crude oil prices edged lower after a bullish opening, and the US Dollar Index corrected lower early Monday after rising more than 1.5% in the previous week. Over the weekend, the US military hit targets on Kharg Island, a strategic Iranian outpost, and warned it could target oil infrastructure if Tehran continues disrupting naval activity in the Strait of Hormuz. The White House is preparing to announce a coalition to escort ships, while EU foreign ministers and the UK are considering naval responses to secure oil exports [5].
CONCLUSION
Central banks are expected to maintain current policy rates amid rising oil prices and geopolitical uncertainty, with markets closely watching for any shifts in guidance. Currency and commodity markets remain volatile, reflecting the ongoing risks from the Middle East conflict and its impact on inflation expectations. The upcoming policy meetings will be crucial in shaping market sentiment and future rate trajectories.