Financial markets steadied unevenly on Friday as central bank commentary this week left investors reassessing the likely path of interest rates while oil prices pulled back modestly from recent surges. The recalibration followed a spate of monetary policy meetings across G7 economies and other major jurisdictions, with officials collectively signaling that inflation risks linked to the ongoing war in the Middle East warrant a more forceful response.
That hawkish messaging has altered expectations among traders. Markets have largely abandoned the prospect of a Federal Reserve rate cut this year. A Bank of England tightening next month is viewed as roughly a coin toss, and market sources suggest the European Central Bank may need to open discussions about raising rates in April and could move toward actual tightening by June.
"There’s a lot of value in the signal," said Vishnu Varathan, Mizuho’s head of macro research for Asia ex-Japan, referring to the collective central bank rhetoric. He added that the communication serves to show policy makers are addressing the threat to price stability while implying that yields themselves are performing some of the necessary work.
Bond markets reflected the shift. A broad selloff drove yields to multi-month highs on Thursday, though the pace of selling eased in Asian trade on Friday. Cash trading in U.S. Treasuries was closed because of a holiday in Japan, yet futures moved slightly higher. The two-year U.S. Treasury yield - a barometer of short-term rate expectations - rose as much as over 20 basis points in the prior session.
"Probably every day that goes by without an end to the war or clear positive steps increases the chances of that more adverse scenario for the bond market," said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics, speaking to the increased risk that major central banks may lift rates by year-end.
Domestic two-year yields have climbed markedly in parts of Europe this month, with Germany’s two-year yield up roughly 56 basis points and two-year British gilt yields jumping about 88 basis points so far in the month.
Energy markets, central to the current inflation debate, saw a pullback in crude late in the week after diplomatic and supply measures were announced. Brent crude futures fell about 3% to $105.43 a barrel on Friday, while U.S. crude eased roughly 2.2% to $94 a barrel. Those declines came after leading European nations and Japan offered to join efforts to secure safe passage for ships through the Strait of Hormuz and the U.S. described steps to bolster oil supply.
Even with the respite, both benchmarks remain substantially above pre-conflict levels, having climbed more than 40% this month. Natural gas prices also jumped, with European gas spiking as much as 35% on Thursday after Iranian and Israeli strikes hit key regional gas infrastructure. The attacks prompted U.S. President Donald Trump to tell Israel not to repeat its attacks on Iranian natural gas infrastructure.
Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, highlighted that even if some actors step back, strikes and retaliatory moves could continue at a different tempo. "Even if the U.S. leaves (the conflict), Israel might not leave, and there may still be some strikes and Iran will retaliate, maybe at a lower volume," she said. Garcia-Herrero added that sustained pressure on the Gulf implies oil prices are unlikely to fall back to previous lows this year.
Equities and currencies showed mixed responses to the evolving backdrop. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.18% on Friday and was on track for a weekly gain of around 0.7%, snapping two consecutive weeks of losses. The fall in oil late in the session helped calm market sentiment, though volatility remained elevated.
U.S. futures were firmer: Nasdaq futures advanced about 0.3% while S&P 500 futures gained roughly 0.37% after the cash session had closed lower overnight. In Europe, EUROSTOXX 50 futures were up about 0.87% and DAX futures rose roughly 0.8%.
The dollar weakened over the week as investors priced steeper tightening from other central banks relative to the Fed. The euro last traded at $1.1570 after a 1.2% jump on Thursday, while sterling held at $1.3424 following an overnight gain of 1.3%. The yen, which flirted with 160 per dollar in the previous session, was at 157.85, supported in part by comments from Bank of Japan Governor Kazuo Ueda that maintained a bias toward tighter policy even as rates were left unchanged.
Nomura’s JPY FX and rates strategist Yusuke Miyairi cautioned that while Ueda may have left open the possibility of a rate move in April, it is still "premature" to assume such a step is imminent.
Safe-haven gold moved higher as well, with spot gold up about 0.8% to $4,686.97 an ounce on Friday.
Markets are entering a phase where central bank rhetoric, the course of the Middle East conflict, and energy market developments interact closely. Investors are monitoring policy communication for signals that could further lift yields or alter risk asset valuations, while energy supply and shipping security remain important determinants of near-term price swings.