Markets opened the week confronting a clear shift in expectations for monetary policy across major economies, driven chiefly by a sharp run-up in energy prices. That re-pricing has interrupted the dollar's rally, not because of a sudden improvement in the greenback's fundamentals, but because investors increasingly expect other central banks to adopt more aggressive policy stances in response to energy-led inflation.
With oil prices rallying, consensus forecasts now leave the Federal Reserve as the only major central bank not anticipated to raise rates this year. The change in outlook came after a turbulent series of monetary policy meetings among G7 central banks and others, where a common theme emerged: policymakers are intent on reining in inflation without triggering a broad-based slowdown in growth. The overriding priority, officials signalled, is to avert the combination of rising prices and contracting output that defines stagflation.
Market pricing now places a roughly 40% probability on a Bank of England rate increase next month. Sources cited expectations that the European Central Bank will need to begin internal discussions on raising rates in April and could move to tighten policy by June. Those shifting expectations have driven a marked repricing across fixed income markets.
The response in bonds has been severe. Short-dated British gilts experienced one of their worst sessions on record on Thursday, while the two-year U.S. Treasury yield spiked by more than 20 basis points at one point during the same trading period. In Asia, cash trading in U.S. Treasuries was not active on Friday because of a holiday in Japan, though futures trading suggested some easing of the intense selling pressure. Germany's bund futures ticked marginally higher on Friday, as did French OAT futures, providing only modest stability.
Price action in oil provided an important backstory to the market moves. Brent crude remained comfortably above $100 a barrel, having climbed roughly 47% so far this month, while U.S. crude futures were up about 40% over the same span. The recent escalation in strikes on energy infrastructure since the outbreak of the U.S.-Israel war on Iran has reinforced concerns that prolonged conflict in the region could create longer-lasting damage and supply shortfalls in global energy markets.
Markets found a degree of steadiness on Friday as oil retreated from intraday highs following diplomatic and policy developments. Leading European nations and Japan offered to coordinate efforts to secure safe passage for vessels through the Strait of Hormuz, and the U.S. set out measures intended to bolster oil supplies. Those steps helped temper immediate market fears, but did not eliminate the underlying concern that energy costs could remain elevated for an extended period while the conflict shows little sign of abating.
Looking ahead, one scheduled data point - Germany's producer price index for February - could influence market direction on Friday. Beyond that release, the broader narrative remains focused on the interplay between energy-driven inflation risks and central bank responses, and how that dynamic affects currencies, sovereign yields and commodity prices.
Contextual note: The current market environment is defined by a shift toward higher-for-longer rate expectations outside the U.S., steep moves in short-dated government bond yields, and a pronounced rally in crude amid regional conflict and targeted attacks on energy infrastructure.