Markets Face a Cost Shock from Energy (23-27 March)

Financial markets closed the week under pressure as rising energy costs, firm interest rate expectations, and ongoing developments in the Middle East reshaped the outlook for inflation and growth.

Bond yields moved higher across major economies, precious metals extended their declines, and oil prices remained supported by supply concerns, reinforcing uncertainty across currencies and commodities.

Currencies

Dollar Index: The dollar index rose to 99.8 on Friday, recovering from a 0.8% decline in the previous session as uncertainty surrounding the Iran conflict continued without a clear resolution. Oil prices stayed volatile near 2022 highs, reinforcing inflation concerns while central banks kept a cautious but firm stance. The Federal Reserve left rates unchanged, signaling one possible cut this year while highlighting ongoing uncertainty. The dollar gained broadly, particularly against the yen, though it still recorded a weekly loss of nearly 1%.
Euro: The euro slipped to $1.156 by the end of a volatile week as demand for the US dollar increased amid inflation risks linked to the Iran-driven energy shock. Brent crude climbed to multi-year highs following attacks on Middle East refineries, while speculation grew over potential US action targeting Iran’s Kharg Island. The ECB held rates steady but lifted its inflation projections and trimmed growth forecasts, indicating that additional tightening remains possible if price pressures persist.
British Pound: The British pound dropped below $1.34 by week’s end as demand shifted toward the US dollar with rising inflation concerns driven by higher energy costs linked to the Iran conflict. Rising oil and gas prices increased the strain on the UK economy and strengthened expectations for further rate hikes. The Bank of England kept rates unchanged but emphasized ongoing inflation risks, while higher public sector borrowing added to worries about the country’s fiscal outlook.
Japanese Yen: The Japanese yen strengthened to around 158 per dollar, rebounding from levels near 160 earlier in the week, supported by signals from the Bank of Japan pointing toward tighter policy as inflation pressures build alongside higher oil prices tied to Middle East developments. The BOJ maintained its policy rate at 0.75%, despite one board member supporting another increase. The yen gained additional support as oil prices eased following a reduction in regional military tensions between the US and Israel.

Commodities

Gold Suffers Historic Weekly Drop

Gold dropped 2% to $4,570 per ounce on Friday, marking its sharpest weekly decline since 1983 as tensions in the Middle East pushed energy prices higher and reduced expectations for near-term rate cuts.

Selling pressure intensified after the Pentagon deployed warships and Marines to the region, strengthening the view that the Federal Reserve could raise rates by October. The metal has now declined for consecutive weeks following US–Israel strikes on Iran, weighed down by rising Treasury yields, a firmer dollar, and profit-taking during broader market volatility.

Brent Climbs Above $110 with Supply Risks

Brent crude surged past $110 per barrel, reaching its highest level since mid-2022, as supply concerns deepened across the Middle East. Iraq declared force majeure on all oilfields, while drone attacks targeted Kuwaiti refineries.

President Trump rejected a ceasefire with Iran while sending additional US Marines to the region. Risk premiums expanded as tanker traffic dropped sharply, and emergency releases from the International Energy Agency failed to fully offset potential supply losses, keeping prices supported.

Silver Slides 14% in a Week

Silver fell 5% to $69.5 per ounce, bringing its weekly loss to 14% as rising energy costs reduced expectations for monetary easing. The decline accelerated after further US military deployments, with markets pricing roughly a 50% probability of a Federal Reserve rate increase by October, alongside multiple rate hikes from the ECB and Bank of England in 2026.

The metal has now declined for three consecutive weeks, pressured by higher Treasury yields, a stronger dollar, and ongoing investor liquidations during continued market volatility.

Fixed Income

US 10 Year Treasury Note Yield: The US 10 Year Treasury yield rose by about 10 basis points to 4.37% on Friday, reaching its highest level since July 2025, as markets assessed the inflation impact of the Iran conflict alongside the prospect of a firm Federal Reserve stance. Oil prices remained close to 2022 highs amid continued strikes in the Middle East, reflecting persistent volatility across energy markets. The Fed left interest rates unchanged on Wednesday, indicating one possible cut this year while highlighting economic uncertainty and inflation risks. The 2-year yield also increased by nearly 10 basis points to 3.9%.
UK 10 Year Bond Yield: The UK’s 10-year gilt yield climbed to 5% for the first time since April 2008, supported by sharply higher energy costs and firm signals from the Bank of England that revived expectations of three rate increases in 2026. Brent crude and European natural gas prices remained close to multi-year highs, adding pressure to the inflation outlook. The BoE kept rates at 3.75% but warned that developments in the Middle East could push energy costs higher, while UK public borrowing jumped to £14.3 billion, marking the second-highest February on record.
Japan 10 Year Government Bond Yield: Japan’s 10 Year Government bond yield increased by more than 5 basis points to around 2.26% on Thursday after the Bank of Japan maintained its policy rate, in line with expectations. Board member Hajime Takata once again dissented, calling for a 25-basis-point increase in response to rising inflation risks, while Governor Kazuo Ueda indicated that a rate hike could follow if the Iran-related slowdown proves temporary. Takaichi is scheduled to meet Trump to discuss economic and military cooperation. Markets will be closed on Friday due to a public holiday.
Germany 10-Year Bond Yield: Germany’s 10-year Bund yield rose to 3%, its highest level since July 2011, as higher energy costs and the ECB’s firm policy stance strengthened expectations of multiple rate increases in 2026. Brent crude moved above $110 per barrel following attacks on Middle East refineries, while reports pointed to possible US action targeting Iran’s Kharg Island. The ECB held interest rates steady but lifted its inflation outlook and lowered growth projections, with policymakers signaling readiness to tighten policy further if price pressures persist.

Economic Data

United States Fed Funds Interest Rate

The Federal Reserve kept the federal funds rate unchanged at 3.5%–3.75% for the second consecutive meeting in March 2026, in line with expectations. Officials pointed to steady economic expansion, moderate job creation, and persistent inflation pressures while acknowledging uncertainty linked to developments surrounding Iran.

Policymakers still project one rate cut this year and another in 2027, though the exact timing remains uncertain. GDP forecasts were revised higher to 2.4% for 2026 and 2.3% for 2027. The unemployment rate is expected to reach 4.4% in 2026 and 4.3% in 2027, while both PCE and Core PCE inflation forecasts were adjusted upward for the same period.

Euro Area Interest Rate

The European Central Bank left interest rates unchanged at its March 2026 meeting, keeping the main refinancing rate at 2.15%, the deposit facility at 2.0%, and the marginal lending rate at 2.4%, while reaffirming its objective of guiding inflation toward 2% over the medium term. Policymakers noted that developments in the Middle East have increased uncertainty, adding pressure to inflation while weighing on economic activity.

The ECB lifted its 2026 inflation forecast to 2.6% and lowered the GDP growth outlook to 0.9%, with core inflation projections also revised higher. Growth expectations show modest improvement in 2027–2028.

Japan Interest Rate

The Bank of Japan maintained its key short-term rate at 0.75% in March 2026, leaving borrowing costs at their highest level since September 1995. The widely expected 8–1 vote included dissent from Hajime Takata, who supported a move to 1%. The decision followed the Federal Reserve’s rate pause and reflected a cautious policy stance across major economies. Officials pointed to Japan’s ongoing, moderate recovery but noted that developments in the Middle East continue to add uncertainty.

The BOJ indicated that further rate increases and adjustments to policy support remain possible as growth and inflation trends evolve, with CPI expected to dip below 2% before moving higher again alongside rising oil prices.

China Industrial Production

China’s industrial production increased by 6.3% year-on-year in the combined January–February 2026 period, accelerating from 5.2% in December and exceeding the expected 5.1%. Growth was broad-based across sectors, including mining (6.1%), manufacturing (6.6%), and utilities such as electricity, heat, gas, and water (4.7%). Within manufacturing, 35 of 41 major industries recorded expansion, led by computers and communications equipment (14.2%), railway and shipbuilding (13.7%), and general equipment (8.9%). Monthly, output rose 0.83%, building on overall industrial growth of 5.9% in 2025.

Latest Analysis

Rates Stay Put, Yields Rise (23.03.2026)

The dollar index held above 99.5 on Monday, building on the previous session’s gains as Middle East tensions sustained demand for safe-haven assets.

Detail

ECB Maintains Rates Amid Inflation Forecasts

The European Central Bank (ECB) opted for stability at its March 2026 meeting, holding interest rates steady as widely anticipated by global markets. The policy rate remains at 2.15%, the deposit rate at 2.00%, and the marginal lending rate at 2.40%. Despite the pause, the Governing Council reaffirmed its commitment to the 2% medium-term target, adopting a cautious stance as geopolitical volatility reshapes the Eurozone's economic landscape.

Detail