- Central banks on inflation alert as Fed, BoC, BoJ and SNB hold rates
- BoE and ECB next to decide, as investors price in more rate hikes
- Iran conflict continues to escalate, with more energy infrastructure hit
- Dollar stands tall as gold and stocks take a dive
A looming energy crisis
The brief spout of optimism earlier in the week has dissipated as the conflict in the Middle East shows no sign of easing, while the gatherings of the world’s most important central banks have shunned the spotlight on the fresh inflation threat facing the global economy.
The overriding trend of higher energy prices and tighter monetary policy is making its mark again on the markets, with risk assets crumbling and gold succumbing to the US dollar’s strength, as investors struggle to see an end to the war.
Israel struck Iran’s South Pars gas field on Wednesday, which is the world’s largest natural gas field, triggering an angry retaliation by Tehran. Qatar’s Ras Laffan Industrial City – the largest LNG plant in the world – came under attack again, prompting an intervention by the US President.
Posting on his Truth Social platform, Trump attempted to diffuse the situation by distancing the US from Israel’s actions, saying America was unaware of those plans and that “no more attacks will be made by Israel” on South Pars. However, he also warned Tehran that any new strikes on Qatar’s LNG facility would be met by a strong response.
Trump’s somewhat measured response only went so far in keeping a lid on oil prices. Brent crude skyrocketed to $117 a barrel today, widening its spread with WTI futures, which is up more modestly and trading just above $97 a barrel.
Powell strikes cautiously hawkish tone
The worsening crisis in the Middle East has put central banks on full alert about resurgent inflation, with both the Bank of Canada yesterday and the Bank of Japan today warning about the upside risks. However, the Fed adopted a more cautious tone, with Chair Powell saying that it is “too soon” to know the impact of the war on the economy.
As expected, the Fed kept interest rates unchanged on Wednesday, hours after the Bank of Canada did the same. There was no change in the March dot plot compared to December, with one 25-basis-point rate cut still pencilled in for 2026. Growth projections were revised higher, while inflation was seen to be slightly higher this year and next.
However, Powell was quite explicit on what it would take for the Fed to resume easing, explaining that “If we don’t see that progress, then we won’t see the rate cut”, referring to the still elevated inflation.
BoJ offers few clues to April rate hike
US Treasury yields rose after Powell’s comment, lifting the US dollar back towards last week’s highs and pressuring the yen. The dollar came within a whisker of the 160-yen level but it’s heading lower today, helped by a fresh intervention warning by Japan’s finance minister.
Unsurprisingly, the Bank of Japan is not doing the yen any favours, as Governor Ueda continues to be vague on the timing of the next rate hike. Ueda told reporters in his post-meeting press conference that the Bank is “some distance from target inflation rate”, even as some board members dissented on that view.
Investors see just a 50% chance that the BoJ will raise rates in April, but the odds of a second hike have gone up slightly.
BoE and ECB set to join ‘wait-and-see’ club
There were no surprises from the Swiss National Bank either today, becoming the fourth central bank to hold rates this week. Nevertheless, the SNB warned that its “willingness to intervene in the foreign exchange market has increased”, pushing the franc slightly lower against both the dollar and euro.
It will be the Bank of England’s turn next to announce its decision at 12:00 GMT, followed by the European Central Bank at 13:15 GMT. Both are widely expected to leave rates unchanged, although the BoE’s decision carries the risk of a small dovish surprise, while the ECB could catch some traders off guard with hawkish remarks.
The euro and pound, which have taken a bit of hammering during the Iran conflict, are recouping some of yesterday’s losses versus the dollar today. Sterling is likely being supported by stronger-than-expected UK employment data out this morning.
Gold selloff accelerates
Gold, however, is extending its freefall on Thursday, tumbling towards the $4,700 level to a six-week low. With most major central banks headed towards rate increases and dimming prospects of further rate cuts by the Fed, which have fallen to 33%, gold is becoming increasingly unattractive right now against the backdrop of rising sovereign bond yields and a strengthening US dollar.
Whilst the ongoing turmoil in the Middle East is lending some support, it seems that many investors are selling gold to cover margin calls from losses in other positions.
Stock markets turn sea of red
Hence, the slump in equity markets is likely working against gold at the moment rather than driving flows towards it. After a two-day rebound, the S&P 500 slid on Wednesday to the lowest since late November. The Nasdaq 100 fell the most, losing 1.4%, with global indices following suit today. Even though most central banks are refraining from committing to rate increases just yet, their alarm about the jump in energy prices suggests hikes are on the way, as it’s unlikely that the US, Israel and Iran will stop targeting oil and gas facilities in the region, while the Strait of Hormuz remains off limits to US allies.
So although the selloff on Wall Street could arguably have been a lot worse, there’s little prospect of a recovery right now.