A Tuesday reversal leaves the dollar flat
The dollar trades sideways after a reversal, with geopolitical risks and hawkish Fed expectations continuing to shape FX market direction.
USD
The dollar's gentle Monday slide reversed yesterday to leave the DXY broadly flat against the G10 on the week so far — price action that broadly tallied with our view that any softness would prove a technical correction within a still-supported uptrend. Indeed, absent a durable peace deal between the US and Iran, terms of trade and risk conditions are likely to remain dollar supportive. That backdrop should continue to keep risks for the buck skewed to the upside through today, given a sparsely populated US calendar ahead of FOMC meeting minutes, due this evening. These, we think, will likely strike a somewhat hawkish tone. With 2026 Fed cuts now fully priced out and long-dated Treasury yields near 2023 highs, further dollar gains look likely.
EUR
EURUSD struggled to extend Monday's modest recovery, fading back towards 1.16 as the dollar regained its footing. As we have repeatedly flagged, the eurozone scans as among the most exposed in G10 to a sustained Strait of Hormuz dislocation, with Q1 GDP growth of just 0.1% QoQ and April HICP at 3.0% pointing to a stagflationary mix that, in our view, makes the ECB's recent hawkish repricing look more like reluctant insurance against second-round effects than a positive cyclical story for the euro. Today's calendar offers little in the way of catalysts, with final April HICP the most notable event. Our bias remains for EURUSD to trade a 1.15-1.17 range with a downside skew, with any further deterioration in the Middle East picture, or a leg higher in Brent, the most likely catalyst for a break of the lower bound.
GBP
Sterling gave back some ground against the dollar on Tuesday, with cable retesting 1.34 after April's labour market report landed materially weaker than expected. The unemployment rate jumped to 5.0% from 4.9%, and three-month earnings growth slowed further, hardening the message we have been pushing, that the downside risks facing the UK economy remain underpriced by markets. That sentiment received further support this morning, seeing April CPI surprise sharply to the downside at 2.8% YoY, a 0.5pp drop relative to March, and 0.2pp below consensus expectations. With similar weakness replicated across core inflation prints, and coupled with yesterday's labour data, this materially undermines the case for market rate expectations that still imply more than two rate hikes in 2026. The political backdrop, meanwhile, continues to offer little respite, with Manchester Mayor Andy Burnham's signalled return to parliament adding to the leadership pressure on Prime Minister Starmer. We think sterling should remain under pressure as a result, expecting further losses today.
CAD
The loonie traded in a tight range through Monday in thin holiday conditions, with Canadian markets shut for Victoria Day, before underperforming yesterday afternoon as April CPI undershot across the board. Headline price growth came in at 2.8% YoY — 0.3pp below consensus — but more importantly for the Bank of Canada, both preferred underlying measures eased: core-median slipped to 2.2% YoY and core-trim to 2.0%, while CPI ex-food and energy collapsed to 1.5% from 1.9%. As we set out in our data-reactive note yesterday, this severely dents the case for any near-term BoC tightening, and we now see growing risks that the Governing Council resurrects the conditional dovish guidance it pulled in March. USDCAD briefly pushed back toward 1.38 in response, albeit with the pair then struggling to retain those gains overnight. Today's domestic calendar is bare, leaving the loonie to track oil, Middle East headlines, and BoC hiking expectations. The latter still scans as too aggressive in our eyes, and as such, we expect USDCAD risks to remain skewed higher, absent a meaningful de-escalation in the Gulf.