The recent turbulence in the global financial markets, driven by escalating tensions in the Middle East, highlighted the fragility of investor confidence. Although some stability returned later, the rapid swings in sentiment emphasized the underlying uncertainty and risk aversion among investors.
Against the backdrop of geopolitical tension, those at the Fed who favour higher interest rates have reinforced the idea that any cuts will likely be later and smaller than previously thought. Some Fed members are even open to the idea of raising rates again, though that’s not completely dismissed.
As the week concluded, Dollar held a middle ground in the currency rankings. But it’s positioned to capitalize should geopolitical tensions flare up anew, or risk sentiment turns sour further.
Investor confidence has taken a hit due to expectations of delayed Fed rate cuts and ongoing tensions in the Middle East. Hopes for a mid-year rate cut have been pushed back to at least September, mainly because inflation remains high.
The rethink on Fed easing has led to a general repricing of global rate cut timelines, but expectations for the European Central Bank (ECB) and the Bank of England (BoE) to start cutting by mid-year are still intact.
Geopolitical tensions, especially between Israel and Iran, have added to market instability. Though a major conflict was avoided, Friday’s sharp market swings show how fragile investor confidence is, especially regarding geopolitical risks.
Weekly Outlook
The dollar remained steady against the euro and the yen on Monday after the most volatile week of trading for the currency market in months, as investors assessed policy and geopolitical developments. The market is laser-focused on the yen ahead of the Bank of Japan’s policy review on Friday.
Besides the BOJ meeting and one of the biggest weeks for US earnings releases, investors will also get US first-quarter gross domestic product data on Thursday and the inflation metric the Fed targets, the personal consumption price expenditures (PCE) index.
The rupee is back into its range-bound mood, but the bias remains towards rupee weakness, given the global picture of strong US data and geopolitical risks.