Good morning. Stress is easing across the currency markets this morning as energy prices pull back, Treasury yields dip, and equity futures advance.

The euro is holding steady even after Germany’s biggest conservative party suffered some of its worst state election results since 1949. Preliminary results show the Christian Democratic Union led by chancellor Friedrich Merz winning just 4.9% of the vote in Mecklenburg-Vorpommern—against 38.3% for the hard-right Alternative für Deutschland—and 18.8% of the vote in Berlin, with the far-left Die Linke taking 25.7%. Merz’s leadership was not on the ballots, but the setback will make his reform agenda more difficult to advance. Against this backdrop, we think the euro’s gains are likely to be capped: Germany, like France and other big economies in the bloc, faces deep structural challenges ahead without a plan to tackle extreme entitlement growth, over-regulation, structurally-higher energy costs, and competition from China.

This week’s economic calendar looks substantially lighter, with no first-tier releases due in North America. President Donald Trump and Xi Jinping meet in Washington, with trade issues likely to dominate. Investors will refine their views on monetary policy as a stream of Fed officials—Michael Barr, Thomas Barkin, Michelle Bowman, Austan Goolsbee, Beth Hammack, Philip Jefferson, Jeffrey Schmid and John Williams among them—make public appearances, as well as the European Central Bank’s Christine Lagarde and the Bank of Canada’s Tiff Macklem. And the Swiss National Bank is expected to hold its policy rate at zero, with Mexico’s central bank likely to follow with a third straight hold.

Hopes of a resumption in Saudi flows are helping drag benchmark crude back towards $100 a barrel this morning, providing a reminder of how resilient the world’s supply networks have proven. After a coordinated release of more than 375mn barrels from strategic reserves, a pullback in Chinese buying and a ramp in “dark” shipments out of the Middle East, market participants’ worst fears have gone unrealised. But energy market fundamentals remain dire: traffic through the Strait of Hormuz is still severely limited, Saudi Arabia’s East-West pipeline is still running well below capacity, the Bab el-Mandeb is under threat from Houthi attacks, and much of Russia’s refining capacity has been badly degraded.

Central banks are turning more hawkish. After the European Central Bank raised rates earlier this month, the Federal Reserve followed last week, saying the move would support a “timelier” return to its inflation target and telegraphing at least one additional hike by December. The Bank of Japan lifted rates to a 31-year high just three months after its previous move, with Governor Kazuo Ueda warning that the normalisation process “has shifted to a new stage”. Although the Bank of Canada and Bank of England each held off, officials signalled growing unease about spillovers from high energy costs, leading investors to expect more policy tightening in the months ahead. Across the 19 largest central banks, 62 rate hikes are priced into overnight index swaps over the next year.

It’s—perhaps foolishly—contrarian to suggest, but this may prove an overreaction. If consumer demand softens and second-round inflation effects fail to materialise—or if the Middle East shows signs of calming—central banks could tighten by far less than markets now assume. Yield curves might invert as investors return to pricing cuts, and rate differentials could shift abruptly, one after another, as expectations turn. Currency markets are unlikely to enjoy their present calm for long.