Risks skew dollar-supportive while Hormuz remains in play

USD

The dollar entered Tuesday on the front foot, extending Monday's leg higher overnight to see the DXY break firmly above 99. Two distinct catalysts drove the move. First, the situation in the Middle East deteriorated yet again yesterday, with Iranian state media reporting that Tehran had suspended communications with Washington following Israeli strikes on Lebanon, alongside renewed threats to fully close the Strait of Hormuz — a sharp reversal of the constructive tone that had prevailed into the weekend. Second, May's ISM Manufacturing PMI surged to 54.0, the strongest factory print in four years, comfortably eclipsing the 52.6 consensus. Prices paid remained elevated, lifting market-implied odds of a Fed hike before year-end to above 60%. Admittedly, the first of these factors has unwound as a support this morning, with President Trump suggesting that an Israel-Hezbollah ceasefire has been agreed. Albeit that has triggered only a modest downturn for the buck, with the DXY continuing to trade above 99 as of writing. Today brings April JOLTS, kicking off a heavy labour-market week that includes ADP tomorrow, claims on Thursday, and Friday's marquee NFP release — where consensus looks for a print that is modestly softer than April's +115k and an unchanged 4.3% unemployment rate. But as we have argued, peace-talk newsflow looks set to continue eclipsing macro fundamentals, with risks skewed dollar-supportive while Hormuz remains in play.

EUR

The euro struggled to make headway through Monday, seeing the single currency opening Tuesday a few tenths lower than it started the week, with renewed Hormuz risk premium translating into broad euro softness against a firmer greenback. Domestic flow was limited; German retail sales eased a smaller-than-expected 0.3% in April, but the data nonetheless marked a fourth consecutive monthly contraction, reinforcing the structural growth headwinds facing the bloc. The latest ECB inflation expectations eased at the margin too, with modestly dovish implications for the Governing Council, even if a June hike remains a done deal. Today's focus shifts to May flash HICP, which we expect to land below consensus at 3.1% YoY. That should only add to the downside pressure on EURUSD, even if US-Iran headlines and Friday's US payrolls will ultimately set the tone.

GBP

Cable finished Monday flat, trading in the mid-1.34s overnight. A light docket domestically, and mixed Middle East headlines offered few catalysts for the pair. Still, the pound remains hostage to familiar forces: an unhelpful terms-of-trade backdrop, a cooling labour market, softer inflation prints, and the political overhang from Labour's local-election drubbing and lingering questions over Prime Minister Starmer. We continue to doubt that sterling can sustain rallies against this backdrop. Today's UK calendar is sparse again, leaving cable headline- and dollar-driven, with Hormuz developments dominant. Friday's DMP, alongside US payrolls, bookend the week, albeit also contributing to the negative skew for sterling risks.

CAD

The loonie traded heavy through Monday, with USDCAD pushing further into the 1.38 area, delivering another leg higher after Friday's GDP shock. As we noted yesterday, Canada's surprise -0.1% annualised Q1 contraction has tipped the economy into a technical recession, compounding April's slide in the Bank of Canada's preferred core inflation gauges to five-year lows. Together, these reinforce the sense that energy-driven price pressures may prove temporary, paring the odds of further BoC tightening and leaving us looking for a hold at the 10 June decision. While Monday's Hormuz-driven oil rebound has helped stabilise CAD intraday, the loonie's traditional crude prop has been dulled by May's broader slide in Brent, while a firmer greenback and fragile risk tone are doing the heavy lifting in the other direction. The week culminates in Canada's May Labour Force Survey alongside US payrolls on Friday — a double-header where, as we have flagged, the balance of risks remains skewed unfavourably for CAD.

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