Market Brief: Currency markets are roiled as noise level ramps up

The dollar is beating a retreat from two-week highs as traders process the implications from four major central bank decisions, three critical economic data releases, another leg higher in crude prices, and a “final” currency intervention warning from Japanese authorities.

Apologies in advance for the length of this morning’s brief, there was a lot to cover, and I didn’t have time to make it shorter:

The Federal Reserve left interest rates unchanged in a meeting that exposed a growing hawkish tilt among many members of the policy committee. With inflation risks intensifying, regional presidents Hammack, Kashkari, and Logan backed the decision to hold but objected to statement language implying the central bank will eventually resume easing. Governor Miran again dissented in favour of a cut, leaving the committee with an eight-to-four split, the widest since 1992.

The real drama, of course, came when Jerome Powell confirmed he plans to remain on the Board of Governors for an indefinite “period of time” after his term as chair ends, saying he will remain in place until there is a clear resolution to the Department of Justice’s criminal investigation into the central bank’s headquarters renovation*. “My concern is legal attacks on the Fed,” he said, “which threaten our ability to conduct monetary policy without considering political factors”. The outgoing chair noted that he will maintain a “low profile” as governor, but the implications are clear: Kevin Warsh will take Miran's seat when he is confirmed, not Powell's, leaving the ideological balance on the committee roughly unchanged and limiting the scope for rate cuts in the absence of a dramatic easing in inflation pressures. Policy-sensitive two-year yields climbed to one-month highs, and the dollar extended its gains.

The Bank of Canada delivered an equally predictable hold, with policymakers suggesting the Iran conflict and US trade threats represent offsetting forces that could—conveniently—cancel each other out, leaving current settings at "appropriate" levels. In the accompanying forecast update, the Bank left its growth outlook and longer-term core inflation expectations virtually unchanged, citing limited evidence of the oil shock feeding into broader price measures. Governor Macklem said “There may still be a need to adjust the policy rate depending on how the risks evolve. But if the economy evolves broadly in line with the base case, changes in the policy rate can be expected to be small”. Data released this morning showed growth rising 0.2% in February—rising from 0.1% in the prior month—even as an advance estimate suggested it could flatline again in March, but swap rates and the loonie are following broader trends higher as traders focus on bigger-picture themes.

Across the Atlantic, the Bank of England kept benchmark rates stable, but rate-hike expectations fell as policymakers expressed surprisingly-cautious views on the path ahead. Only one official on the Monetary Policy Committee—Huw Pill—voted to hike, noting that a “prompt but modest” move might help defray inflation risks, while all eight of his counterparts opted to stay sidelined, with long-standing hawk Clare Lombardelli saying “Holding rates provides an appropriate degree of restrictiveness while we learn more about the scale of the shock and its propagation”. The Bank warned it “stands ready” to act if needed, but noted “monetary policy cannot influence global energy prices” and said policy is currently in a “reasonable place” to help inflation revert to target over time. Gilt yields are under pressure and the pound is gaining, reflecting a dynamic in which deteriorating growth prospects have taken precedence over strongly-favourable interest rate differentials in driving exchange rates.

On the other side of the Channel, the European Central Bank completed a quadruple hold, avoiding making tweaks to its policy settings as officials await further clarity on the conflict’s impact. The Bank said it remains “well positioned” to navigate the threat environment and repeated language found in previous statements emphasising its “data-dependent and meeting-by-meeting” approach, saying it is not “pre-committing” to any rate moves for now. Policymakers noted that incoming information has remained broadly consistent with previously-issued guidance, but warned that “upside risks to inflation and downside risks to growth have intensified”. Data released in the hours prior to the decision showed growth slowing to 0.1% in the first quarter and inflation topping 3%—well above the central bank’s target in April—as higher energy costs impacted consumer spending, industrial production, and business investment. The euro is paring its gains as we go to print, and rate expectations are being reshuffled across the major advanced economies as investors move into closer alignment with the cautious tone being expressed by policymakers.

US growth rebounded less than expected in the first quarter as the effects of last year’s government shutdown faded, but accelerated nonetheless, putting the economy on a stronger footing going into the Iran conflict. Inflation-adjusted gross domestic product increased an annualised 2.0% in the first three months of the year after rising at a 0.5% pace in the prior period, according to an initial estimate published by the Bureau of Economic Analysis this morning. This was below the 2.3% market consensus and comes after the shutdown subtracted roughly 1 percentage point from growth in the fourth quarter of 2025.

The Federal Reserve’s preferred inflation measure remained elevated in March, making it more difficult to justify rate cuts. Data released by the Bureau of Economic Analysis concurrently with the gross domestic product report showed the core personal consumption expenditures index rising 0.31% from the prior month, up 3.2% on a year-over-year basis and aligning with economist estimates. The overall personal consumption expenditures index climbed 0.7% relative to the prior month, and was up 3.2% from a year ago, while personal income rose 0.9% month-over-month, and inflation-adjusted household spending climbed 0.2%. Energy expenditures jumped, but at 2.3% remained a relatively small share of overall consumption.

Brent crude prices are flirting with the $115-per-barrel level after briefly topping $126 when President Trump said he does “not want to” stop his naval blockade against Iran, suggesting that the conflict could stretch on for far longer, imperilling global energy markets. “The blockade is somewhat more effective than the bombing,” Trump told Axios in an interview, “They are choking like a stuffed pig. And it is going to be worse for them. They can’t have a nuclear weapon”. Shipping through the Strait of Hormuz remains at an effective standstill and energy inventories are rapidly drawing down across the planet, putting steady upward pressure on price benchmarks.

Finally, the Japanese yen is rallying after the government official responsible for exchange rate policy warned speculators against shorting the currency, saying “Let me say this as my final advisory if you want to escape”. Atsushi Mimura, Vice Finance Minister for International Affairs made the comments after rising energy costs forced the yen through the 160 threshold against the dollar earlier in the session, breaking a level often seen as a “line in the sand” for Japanese authorities, and following a message from Finance Minister Satsuki Katayama, who said the time for “taking bold steps is now nearing”. If this morning’s gains reverse, traders expect the central bank to intervene before the 162 level is reached, and are keeping a watchful eye on the US Treasury, which has expressed interest in coordinated action to support the exchange rate.

After all that, no one will blame you for needing a third shot of espresso. I’m on my fourth.

*In a wonderful** historical irony, the Federal Reserve building under renovation is named after Marriner Eccles, the last person to remain on the board after stepping down as chair. Eccles—easily one of the most fascinating figures ever to have led a central bank—served as a governor for more than three years after becoming embroiled in a battle over the institution's independence with Harry Truman.

**Your mileage may vary.

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Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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