With CPI ahead, markets may collide with a peak-dovish Fed wall

Asia wrap

European stocks are gearing up for a bullish open as traders recalibrate risk after a chaotic stretch, fueled by Trump’s economic reassurances, Ukraine’s 30-day ceasefire acceptance, and a potential shift in sentiment.

But let’s not kid ourselves—this is far from a clean slate. The macro minefield remains fully intact.

Trump’s tariff brinkmanship, geopolitical realignments over Ukraine, and a White House-induced slow burn on government spending are colliding with sticky inflation and a Fed that’s in no rush to slash rates. This toxic mix has teetered U.S. equities on the edge of a full-blown correction.

Meanwhile, volatility is screaming. The VIX—Wall Street’s fear gauge—sits near its highest levels since August, while Treasury market volatility is flashing its most extreme readings since November. With recession alarm bells ringing in the background and liquidity pockets tightening, most investors are still unsure if risk will rest higher or lower.

A VIX north of 20 is when traders start paying attention, but once we breach 30, we’re firmly in panic mode—where risk managers start sweating, algo sell programs ramp up, and hedge funds scramble for cover. At these levels, we’re no longer talking about elevated volatility; we’re entering a full-blown risk-off vortex where forced liquidations, margin calls, and flight-to-safety trades dominate the tape.

Right now, the VIX is hovering dangerously close to that threshold, and with U.S. equities flirting with correction territory, Treasury market volatility at its highest since November, and global risk sentiment still skittish, the next big move could determine whether this is just another shakeout—or the start of something much uglier. If the ego-driven gamma unwinds picks up steam, expect a capitulation flush that forces the Fed into a corner sooner rather than later.

Forex markets

The Euro

The EUR/USD downside test has been exactly as expected—a slow grind rather than a sharp break, mainly due to the ceasefire optimism that supported EU risk markets and the Euro. But here’s the real question: why hasn’t the pair decisively shifted into 1.10 mode?

The market is stretched; perhaps traders have overplayed the bullish EU narrative. The European infrastructure and rearmament process—which has been a key tailwind for the Euro—isn’t an overnight phenomenon. These are multi-year if not decade-long, investment cycles, yet FX positioning has already priced in a substantial chunk of the upside.

My logic was that the positioning looked a little too one-dimensional. There’s room for a tactical pullback, especially if U.S. yields stabilize or US stocks bounce. 1.10 might still be in play, but I’m hoping to buy dips towards 1.07

Even after the overnight dip, EUR/USD is still hot, with short-term fair value models flagging it as 1.2 -1.7 % overvalued. Meanwhile, positioning has reset, with the latest CFTC data showing speculative net shorts nearly wiped out, now just 1.5% of open interest—a dramatic shift from 11% at the end of February. Translation? Euro bulls must let the data do the heavy lifting from here.

And now, with U.S. core CPI on deck, the market could hit a peak dovish limit on the Fed, capping any further easing in the two-year EUR: USD swap rate gap—currently parked at -144bp, struggling to break through -140bp. Instead, the risk skews toward a rewidening, which would make EUR/USD look even more expensive at current levels.

All eyes are on this week’s February U.S. CPI print. With job growth still at a reasonable level and wage pressures refusing to ease, the risks skew toward another sticky inflation surprise. Core inflation will likely stay well above the Fed’s 2% target, keeping policymakers stuck between a rock and a hard place.

To complicate matters further, incoming U.S. tariffs could add another layer of inflationary pressure, depending on their scope and timing. The big concern is that if inflation remains stubbornly high, the Fed won’t cut rates as aggressively as markets have priced in, potentially hammering stocks again as stagflation fears take center stage.

Adding to the headwinds, ECB President Christine Lagarde and a parade of ECB speakers could throw some dovish cold water on the Euro, especially after the EU’s retaliatory tariff announcement. If the ECB starts nudging expectations lower, that could sap some of the Euro’s rate differential edge, tilting the momentum south.

Right now, the actual trade isn’t a moonshot to 1.1000—it’s the grind lower to 1.0800. Ahh, the perils of being a reversion trader …..

The Yen

If you’ve been frustrated by JPY’s erratic moves—especially its struggle to hold below 147 despite Monday’s stock market selloff—it’s probably because you’re too dialed in on the pair itself rather than the broader macro landscape. The bigger picture is what really matters here: volatility is surging, central banks are scrambling to manage expectations, and global bond markets are dictating the playbook.

Right on cue—and exactly as expected—the BoJ stepped in to cool speculation, aiming to cap rising JGB yields and take some steam out of the yen without committing to anything substantial. This is classic BoJ strategy: deliver a well-timed verbal intervention, curb excessive volatility, and push back against premature rate-hike bets—all while keeping policy flexibility intact.

Governor Kazuo Ueda made the messaging clear on Wednesday, warning that he remains “very worried” about the uncertainty surrounding the overseas economy and prices. Translation? Market expectations got ahead of reality, and the BoJ isn’t about letting the market dictate its next move's timing.

Looking deeper into the signals: underlying inflation remains below 2%, reinforcing that the BoJ sees no urgency in tightening policy aggressively. Meanwhile, the central bank is positioning itself for nimble bond-buying operations, signalling readiness to step in if long-term JGB yields move erratically.

This move is all about buying time and keeping traders second-guessing. The BoJ’s well-timed intervention is meant to prevent an unchecked yen rally while maintaining control over the JGB curve. With JGB yields climbing and speculative yen positioning increasing, this was a strategic shot across the bow to remind markets who’s in charge—without actually changing a thing.