The euro has recovered most of Tuesday’s losses. ECB President Christine Lagarde signaled that the euro area is better positioned than in 2022–23 to handle an Iran-related energy shock, while emphasizing the ECB will act if rising energy costs threaten to push inflation meaningfully above its 2% target. Markets briefly priced in nearly two rate hikes for 2026 after the oil spike, but expectations have since eased to less than one hike as de-escalation headlines emerged and policymakers reinforced a cautious “wait-and-see” stance. Overall, ECB officials suggest they will tolerate near-term volatility but remain ready to respond if higher energy prices begin feeding into wages and services inflation, leaving policy risks slightly tilted toward tighter settings if the shock proves persistent.

The yen remains under pressure against the dollar, with USDJPY approaching Monday’s 6.5-week high near 158.9. Softer February PPI data — up 2.0% YoY and down 0.1% MoM — suggests some easing in upstream price pressures, though producer inflation remains relatively elevated overall. While the BOJ has only recently lifted rates to 0.75% and continues to signal the possibility of further hikes, Japan’s expansionary fiscal stance, improving growth, and efforts to sustain inflation through wage gains point to ongoing medium-term yen weakness. Near-term direction will largely hinge on oil prices and the Iran conflict, with volatility in energy markets influencing BOJ expectations; however, even if tensions ease and markets price an April hike, structural factors are expected to limit USDJPY downside.

The Australian dollar is the top performer today, reaching a new year-to-date high. The move follows hawkish comments from RBA Deputy Governor Andrew Hauser, who warned that the economy has limited spare capacity and that rising oil prices linked to the Iran conflict could add to inflation pressures. Markets have sharply increased expectations for further tightening, now pricing about a 65% chance of a 25bp rate hike at the March 17 RBA meeting and roughly 58bp of hikes over the rest of the year.