The core event across all sources is the release of US inflation data for February, which showed the Consumer Price Index (CPI) rising 0.3% month-over-month and 2.4% year-over-year, both in line with market expectations and slightly accelerating from January's figures [1][3][8]. Core CPI increased 0.2% MoM and held steady at 2.5% YoY [1][3]. This data is significant as it predates the onset of the US-Iran conflict, which has since driven oil prices sharply higher and is expected to impact future inflation readings [8].
In immediate market reaction, the US Dollar strengthened, with the Dollar Index (DXY) reclaiming the 99.00 mark and trading around 99.13, up nearly 0.20% on the day [1]. EUR/USD slipped to around 1.1587, extending losses for a second day, and has printed lows in the 1.1507 area this week [1][5]. Rabobank and MUFG analysts note that the Dollar's safe haven appeal has been reinforced by the conflict and rising oil prices, while the Euro remains under pressure due to the Eurozone's net energy importer status [2][5]. MUFG's regression analysis suggests that a 10% jump in crude oil prices would typically result in a 0.7% drop in EUR/USD, but the actual move has been less pronounced, with EUR/USD down only 1.7% after oil retraced from its initial surge [2].
Forward-looking statements from multiple sources indicate that the Federal Reserve is expected to keep interest rates unchanged at its upcoming meetings, with markets pricing in a 36.2% probability of a 25-basis-point rate cut in June and 51.3% in July [1]. Commerzbank and ABN AMRO economists highlight that the Fed is likely to wait and see, focusing more on the PCE deflator and the impact of higher energy prices, with potential rate cuts delayed until mid-year or later depending on how inflation evolves [4][6]. ABN AMRO outlines three scenarios: in the central case, headline inflation could approach 4% by Q2 2026, with easing resuming in 2027; in a negative scenario, inflation could peak at 4.7% and rates may be held at 4.00% until Q3 2027; in a positive scenario, the current plan for three cuts starting in June remains [6].
Geopolitical tensions from the US-Iran conflict and risks to the Strait of Hormuz are clouding the outlook for global monetary policy, with rising oil prices posing upside risks to inflation and downside risks to growth, particularly in Europe [1][3][5]. ECB Vice President Luis de Guindos and Council member Peter Kažimír have signaled readiness to act if needed, with Kažimír stating that a reaction from the ECB could be closer than markets think [1][2]. Rabobank warns that a sustained closure of the Strait of Hormuz could push EUR/USD back to last summer’s levels in the 1.14 area or below [5].
Other asset classes have responded to the shifting risk environment. Gold has extended its recovery as the Dollar and oil prices retraced lower and risk sentiment stabilised on signs the Iran conflict may be nearing an end, with technical support at 5105–5060 and resistance at 5260–5315 [7]. The Australian Dollar (AUD) has strengthened, trading around 0.7150, supported by expectations of a 75% chance of a 25 basis point rate hike at the next RBA meeting, as oil price volatility and Middle East tensions pose challenges for central banks [3].
CONCLUSION
February US inflation data came in line with expectations, but markets are bracing for higher readings as the impact of the Iran conflict and surging oil prices filter through. The US Dollar has strengthened on safe haven flows, while the Euro remains pressured by energy import risks. Central banks, including the Fed and ECB, are expected to maintain cautious stances, with potential policy shifts dependent on how energy-driven inflation evolves. Overall, market sentiment is jittery and the impact is high, with volatility expected to persist across currencies and commodities.