The dollar resets lower to start the week
The dollar eases at the start of the week, though geopolitical tensions and elevated energy prices continue to underpin FX market sentiment.
USD
The dollar drifted lower through yesterday's session, with the DXY giving back a small portion of last week's gains in what looked like a technical correction after the index posted its strongest weekly performance since mid-March. Underneath the surface, however, support for the buck remained intact. Brent traded higher on news that drones struck a UAE nuclear facility, while long-dated Treasury yields held close to their highest since 2023. Today's calendar is similarly light, leaving FX once again hostage to Middle East headlines. We continue to view the dollar as tactically underpinned: with markets having fully priced out 2026 Fed cuts last week, and Brent sticky above $105, we expect any further escalation to find willing dollar buyers.
EUR
EURUSD eked out a modest gain to start the new week, recovering off Friday's lows to trade back into the mid-1.16s, though this owed more to broader dollar consolidation than any euro-specific positives. Indeed, the single currency continues to scan as one of the most exposed in G10 to the terms-of-trade hit from the Strait of Hormuz closure. With eurozone Q1 GDP growth of just 0.1% QoQ, hinting that the energy shock is already biting and April HICP printing at 3.0%, the ECB's hawkish repricing is, in our view, more reluctant insurance against second-round effects than a positive growth story for EUR. Today brings little of first-tier consequence beyond ECB speakers, leaving the pair tethered to oil and risk sentiment. Our bias remains for range trade with a downside skew, particularly if hostilities escalate further.
GBP
Monday saw sterling deliver a rebound, with cable nudging back above 1.34 after starting the week in the low 1.33s, though we view this very much as a positioning-driven reprieve rather than the start of anything more durable. Indeed, confirmation that Manchester Mayor Andy Burnham intends to seek a return to parliament should add another layer to the leadership pressure on Prime Minister Starmer, and on sterling in turn. But today is where this week comes alive for GBP, starting with the April labour market report, published at 07:00 BST. The data showed unemployment ticking up to 5.0% from 4.9%, with weekly earnings growth slowing further ahead of tomorrow's all-important April CPI release. Most eye-catching, however, was the April payrolled employees figure, which suggested that the economy shed -100k jobs last month. Admittedly, this series is notoriously volatile, so we are treating the print with caution for now. Still, if this is indicative of hard data in the coming weeks, we would expect to see rising labour market concerns weighing on Bank Rate pricing, compounding the downside pressure on sterling.
CAD
The loonie traded in a tight range through Monday's session, with USDCAD holding around 1.375 in thin conditions as Canadian markets observed Victoria Day. Today's domestic calendar sees April CPI data as Canadian liquidity returns, though given our expectations for a set of on-consensus prints, USDCAD should again track oil and Middle East headlines. Our view remains that risks are asymmetrically tilted higher: any sharper escalation in the Gulf would likely overwhelm the terms-of-trade tailwind for CAD via the broader risk-off channel, while a de-escalation would weigh on oil and remove the loonie's main remaining support.