Will Cunliffe
Research Analyst, The Officials
Oil Drives Inflation Pricing, Dollar Index Firm, Asian Equities Pressured
Risk-off deepens as Iran conflict drives supply fears; yields and inflation expectations rise, dollar firms, equities weaken.
Risk-off continues as the Middle East conflict escalates, with Iran directly targeting energy infrastructure.
Markets are now increasingly pricing a prolonged supply shock rather than a temporary disruption.
The move in energy is feeding directly into rates. US Treasury yields are pushing higher, with the 2Y at 3.811%, 5Y 3.89%, 10Y 4.275%, and 30Y 4.887%, as markets continue to price out easing. July rate cut expectations have collapsed to 6%, down from about 42.9% earlier this year, following a hawkish Fed signal that the Iran war complicates disinflation. (Figure 1)
Oil’s driving front-end inflation pricing, with the US 2Y breakeven pushing up to 3.38% alongside Brent’s move. The recent leg higher in crude is feeding almost mechanically into breakevens. WTI hasn’t correlated well as rumours of US export bans weigh on WTI.
FX reflects the same dynamic. The dollar index is firm around 100.251, with EUR/USD slipping toward 1.1470 and GBP/USD near 1.3270. USD/JPY remains elevated at 159.6, testing the 160 intervention zone despite BOJ inaction (rate held 0.75%, 8–1 vote).
Equities are under pressure across Asia, with the Nikkei down 3% and tech names reversing earlier gains.
Data today: BoE rate decision, ECB rate decision, US initial claims, New home sales.
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