USD

The dollar ultimately softened on Monday as traders digested weekend developments in US–Iran negotiations and braced for a heavy run of central‑bank meetings. Pakistan’s mediators stepped up efforts to revive talks after direct negotiations collapsed, and Tehran proposed deferring its nuclear programme until wider conflict and shipping issues are resolved. That arguably represents progress, even if markets continue to see a slim chance of a breakthrough, leaving the dollar index down about 0.2pp by the end of the day, albeit with momentum taking the buck higher into this morning. Looking ahead, the Fed’s decision on Wednesday will be pivotal. We expect rates to remain at 3.50–3.75%, with Chair Powell signalling optionality and acknowledging that the energy shock complicates the disinflation narrative. Rate differentials should remain dollar‑supportive as a result, with the BoJ, BoC, BoE, and ECB all set to stay on hold and potentially push back harder on market pricing.

EUR

Modest euro gains to start the week owed more to dollar weakness than euro‑specific optimism, with EURUSD edging cautiously above 1.17. Despite the uptick, the single currency remains vulnerable to the region’s heavy reliance on imported energy and subdued domestic data. With inflation still close to target and input price pressures concentrated in energy, the ECB should leave the deposit rate unchanged at 2.00% on Thursday, emphasising patience. That would offer a counterpoint to markets, which continue to price two hikes this year, especially if accompanied by guidance that the current energy‑driven inflation spike should prove temporary. Ahead of that, today’s calendar is light, leaving the euro sensitive to geopolitical headlines and any surprises from Spain’s and Germany’s flash inflation prints tomorrow. Absent a material de‑escalation in the Middle East or a decisive decline in US yields, rallies in EURUSD are likely to fade.

GBP

Sterling drifted higher against the dollar yesterday but has given back most gains overnight. The move largely reflected broad dollar softness and hopes that US–Iran talks might eventually reopen the Strait of Hormuz, with the pound remaining highly sensitive to global risk sentiment given the UK’s exposure to energy imports. As we highlighted in yesterday’s morning report, recent data have flattered to deceive: retail sales were boosted by panic fuel buying, and PMIs benefited from precautionary stockpiling. Inflation jumped to 3.3% in March, partly due to the initial impact of the war, but underlying growth momentum remains fragile. With that in mind, we think markets have over‑priced the risk of further BoE hikes. On Thursday, the MPC is expected to keep Bank Rate at 3.75% and, we suspect, signal that the current energy shock should prove transitory, with wage growth moderating and the labour market softening. Today offers little in the way of domestic catalysts; sterling will likely take its cue from Middle Eastern headlines and risk appetite until Governor Bailey’s press conference provides more clarity.

CAD

The Canadian dollar outperformed on Monday, strengthening to briefly threaten 1.36 per US dollar before retreating, as hopes for progress in US–Iran negotiations buoyed risk appetite and oil prices rallied. Brent crude rose nearly 3% as traders focused on the Strait of Hormuz, underpinning the energy‑sensitive loonie. The gains, however, were modest, reflecting caution ahead of the Bank of Canada’s policy decision tomorrow. We have argued that the BoC would hold its policy rate at 2.25%, but likely tilt guidance modestly dovish relative to swap market pricing. Core inflation measures have cooled to roughly 2.2%, and labour‑market data remain soft, leading Governor Macklem to suggest in March that rates might have been cut were it not for the energy shock. We therefore expect the Governing Council to reiterate that stance, contrasting with a likely steady‑as‑she‑goes Fed, and see limited scope for USDCAD to break decisively lower without a breakthrough in peace talks. Until then, Canadian economic releases are thin on the ground, leaving the currency to trade off oil prices and broader risk sentiment.

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