Peace deal optimism sees the buck giving back gains

USD

The dollar initially firmed on Thursday as the Middle East reasserted itself as the dominant driver, before slipping back as the day progressed and US-Iran peace optimism rose. Granted, the buck’s slide was helped at the margin by data, too. April PCE landed mixed: headline accelerated to 3.8% y/y (0.4% m/m), the highest since 2023 on energy, but core softened to 0.2% m/m (3.3% y/y), a touch below consensus, while Q1 GDP was revised down to 1.6% from 2.0%. Still, Middle East risks remain the major market catalyst, with rising hopes for a deal boosting risk conditions and equities. With no tier-one US data today, month-end flows and conflict headlines should dominate again. We look for a modest dollar uplift while a framework deal proves elusive, and we continue to see inflation, not the labour market, as the Fed's chief concern.

EUR

EURUSD was little changed yesterday, ending the day in the mid-1.16s with the dollar still in the driving seat. Today, however, the focus turns to domestic factors, with national CPI data for May due this morning. So far, both French and Spanish headline numbers have undershot expectations by a tenth, albeit in the latter case, core price growth rose by more than predicted, beating consensus by 0.1pp to limit any dovish implications. Accompanied by German numbers later this morning, this will set the scene for the ECB’s June policy decision. A rate rise looks like a done deal, given recent guidance, assuming that the upcoming inflation data continues to land broadly in line with expectations. That should be enough to ensure that EURUSD remains in the mid-1.16s, absent further Middle East developments.

GBP

Sterling underperformed again yesterday, continuing its recent grind lower versus the euro, albeit cable direction remains at the mercy of Middle East headlines, as with most other currencies. The UK calendar is bare today, likely meaning more of the same. US-Iran headlines will continue to drive GBPUSD, while soft domestic data and political uncertainty suggest continued underperformance on crosses, absent any unexpected developments.

CAD

USDCAD finally broke its winning streak yesterday, reversing course to nudge below 1.38 late in the session. Hopes of a Middle East peace deal, and an associated improvement in risk conditions, underpinned the turnaround, with domestic considerations still a secondary factor for USDCAD performance. That should remain the case today, despite Canadian Q1 GDP at 13:30 BST, alongside the March monthly figure. We look for a rebound after Q4's modest contraction, with the advance industry tally pointing to roughly 0.4% QoQ growth, helped by strong oil-and-gas output. Even so, markets are likely to treat these readings as dated, given the developments of recent months, with limited read-through to Q2 performance, which should see much greater impact from the US-Iran war. In turn, that means Middle East developments and month-end flows are likely to dictate USDCAD performance ahead of the weekend.

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