Global markets steadied after the early-week selloff triggered by anti-risk news linked to Iran, as traders found support in stronger economic data. A key surprise was in bonds. US 10-year Treasury yields rose 8 basis points (bps) to 4.04%, after dropping below 4.00% late last week. Part of the rebound reflects profit-taking and easing fears that the conflict would escalate sharply, but the speed of the move higher was notable.
In economic data, the U.S. Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) for February eased from its highest level since September 2022 but beat expectations, printing 52.4 versus 51.7 forecast. The final U.S. S&P Global Manufacturing PMI for February also exceeded estimates, rising to 51.6 from the 51.2 preliminary reading.
The US Central Command reported that US forces destroyed Islamic Revolutionary Guard Corps command and control centers, Iranian air defense systems, missile and drone launch sites, and military airfields during sustained operations, adding that action against imminent threats from the Iranian regime will continue.
U.S. President Donald Trump said he “doesn’t think” ground forces will be used, a less definitive stance than Vice President J.D. Vance, who had previously ruled that out completely. US Secretary of Defense Pete Hegseth said Iran must not obtain nuclear weapons and stressed that enforcement requires resolve, reinforcing expectations that tensions could stay elevated.
Elsewhere, Saudi Aramco’s Ras Tanura refinery was forced to shut after a reported drone attack. QatarEnergy halted liquefied natural gas (LNG) production following military strikes on its facilities. The European Union (EU) said there is no immediate threat to oil supply security from the US-Iran conflict.
Central bank officials continued to focus on inflation and policy despite rising geopolitical risks, stressing data dependence and the challenge of managing firm economic activity alongside potential energy-driven price pressures.
The Swiss National Bank (SNB) previously warned about excessive currency strength, signaling discomfort and prompting traders to unwind defensive positions despite rising global tensions.
Crude oil prices jumped on fears of supply disruption due to Iran’s Revolutionary Guard’s choking of the key supply line, namely the Strait of Hormuz.
In currency and commodity markets, the U.S. Dollar Index (DXY) moved within a five-week high range, maintaining a bullish tone. This pressured EURUSD and GBPUSD and limited the pullback in USDJPY from its five-week high. AUDUSD and NZDUSD remained under pressure, while USDCAD slipped slightly as firmer crude oil supported the Canadian Dollar. Cryptocurrencies gave back part of the previous day’s gains, gold edged higher, and Asia-Pacific equities declined despite Wall Street’s mixed close and slightly positive bond yields.
EURUSD and GBPUSD stay under pressure as the broadly stronger U.S. Dollar combines with mixed economic data and policy signals from the Eurozone and the United Kingdom.
In the Eurozone, Germany’s January retail sales fell 0.9% month-on-month (m/m), worse than the expected 0.2% decline. The Eurozone’s February final Manufacturing Purchasing Managers’ Index (PMI) held steady at 50.8, unchanged from the preliminary reading. In the United Kingdom, the February final Manufacturing PMI was revised down to 51.7 from the 52.0 preliminary estimate.
At the European Central Bank (ECB), policymakers stressed flexibility. Governing Council member Robert Holzmann said interest rates should be moved quickly in either direction if required and stated that inflation is “exactly where you want it to be,” reflecting a neutral and two-sided stance. Pierre Wunsch said the initial approach is to look through Middle East developments, but persistent higher oil prices would force a reassessment, signaling a conditional hawkish bias. Gabriel Makhlouf highlighted that Middle East tensions are adding uncertainty, pointing to a neutral and cautious stance focused on monitoring spillover risks rather than signaling immediate policy changes. ECB Chief Economist Philip Lane, speaking to the Financial Times, warned that the US-Iran conflict could cause an inflation spike.
At the Bank of England (BoE), external member Alan Taylor, who is considered dovish, said policymakers must closely monitor Middle East risks. He explained that energy shocks influence inflation faster than central banks can react, but expressed confidence that the disinflation process remains intact. He also warned about weak demand risks, noted that monetary policy has become more restrictive over the past year, and said US tariffs are expected to be disinflationary for the United Kingdom, reinforcing a dovish tilt.
USDJPY lacks clear direction as traders avoid extending the previous day’s rally near the five-week high, supported by the Japanese Yen’s safe-haven appeal and the hawkish bias surrounding the Bank of Japan (BoJ). At the same time, broad U.S. Dollar strength and overall market indecision keep buyers cautiously optimistic.
Japan’s unemployment rate rose to 2.7% in January from 2.6% previously. The jobless rate had remained at 2.6% for four consecutive months through December, up from 2.4% in June and a cycle low of 2.2% in mid-2024. While still low by international standards, the gradual increase signals a shift in a labor market that had been tightening steadily since the pandemic.
The jobs-to-applicants ratio increased to 1.19 in December from 1.18 in October and November, marking the lowest level since January 2022. The ratio had peaked above 1.30 in late 2023 and has steadily declined as companies turn more cautious due to elevated input costs, even though structural labor shortages continue.
AUDUSD and NZDUSD reflect their risk-sensitive nature and record modest losses early Tuesday as the firmer U.S. Dollar and market concerns over Iran weigh on sentiment. In contrast, USDCAD resists the broader move due to stronger crude oil prices, Canada’s key export, and cautious optimism following comments from a Bank of Canada (BoC) official.
In Australia, January building approvals dropped 7.2% month-on-month (m/m), against expectations of a 5.0% increase, after a 14.9% decline previously. Although this marks a sharp two-month fall in construction activity, it is better seen as a normalization after earlier volatility.
In New Zealand, January building consents rose 1.9% on a seasonally adjusted basis, following a 4.6% decline previously, partially reversing December’s drop. While the monthly increase is modest, the annual data points to a more constructive trend.
Meanwhile, Bank of Canada (BoC) Deputy Governor Sharon Kozicki said monetary policy may need further tightening even during periods of economic weakness, stressing that supply-side factors are becoming increasingly important in controlling inflation.
Although overall market sentiment improves and earlier risk aversion fades, crude oil, gold, and silver prices remain firm as traders continue to seek safety in traditional haven assets and focus on potential energy supply risks. Concerns over oil supply disruptions have increased after Iran’s Revolutionary Guard tightened control over the key Strait of Hormuz shipping route, a vital global energy supply line.
Bitcoin (BTC) and Ethereum (ETH) give back the previous day’s gains as traders remain uncertain about the passage of the Clarity Act this week. Broader risk aversion and a firmer U.S. Dollar also weigh on digital assets. At the same time, Asia-Pacific equities move lower, even as markets remain closed in India, and Wall Street ended on a mixed note.
In the United States, major indices recovered from sharp early losses and finished higher, indicating that investors are not preparing for a sustained risk-off environment. However, gains were led by energy and defense stocks, while consumer sectors underperformed, highlighting a cautious and selective tone. The S&P 500 and the NASDAQ rebounded from early declines driven by war concerns, as investors weighed rising geopolitical tensions against resilient economic data and ongoing sector rotation.
Eurozone Inflation and comments from the Federal Reserve (Fed) and European Central Bank (ECB) shape Tuesday’s economic calendar, but attention remains on updates from the Iran war for clearer market direction.
Despite strong data, the U.S. Dollar (USD) is struggling to extend gains, indicating the market may be entering a consolidation phase. If sentiment improves, the Greenback could see slight intraday pressure, potentially supporting major currencies and Antipodean currencies, while cryptocurrencies may gain little. Equities could move higher, and gold, silver, and crude oil may hold recent gains unless major geopolitical developments occur.
USDJPY is likely to pare recent gains if the U.S. Dollar softens and sentiment shifts, especially given the Bank of Japan’s (BoJ) hawkish bias and concerns over potential intervention to defend the Japanese Yen (JPY).
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