Ceasefire risks see the dollar paring gains
USD
The US dollar’s safe-haven rally took a breather yesterday as quarter-end rebalancing and softer US data prompted modest profit-taking. After pushing the DXY index to a fresh multi-month high around the 100.5 mark on Monday, the greenback pulled back slightly on Tuesday amid hints of a possible de-escalation in the Middle East conflict and a surprisingly weak US JOLTS job openings report. Still, ongoing hostilities in the Middle East and elevated oil prices mean the overall risk backdrop remains fragile. Looking ahead to today, the ISM manufacturing PMI for March will be in focus, with an emphasis on input cost pressures and any signs of passthrough, though markets are likely to look past other backward-looking data and stay more attuned to any fresh geopolitical headlines. Overall, our bias remains that the dollar will stay broadly supported absent a clear de-escalation in the conflict, with any further negative Middle East news likely to keep the dollar buoyant in the near term, while meaningful peace signals would be needed to trigger a deeper and more lasting pullback.
EUR
The euro gained some traction yesterday even as the dollar eased, seeing EURUSD rebound off recent lows, climbing into the mid-1.15s, partly as investors grew hopeful about possible diplomatic progress in the Middle East and as quarter-end flows trimmed some of the dollar’s strength. Meanwhile, the euro area’s preliminary March CPI release confirmed a surge in headline inflation from 1.9% to 2.5% year-on-year, driven largely by higher energy costs linked to the conflict. Importantly, however, this figure came in just shy of market expectations of 2.6%, and core inflation actually edged down to 2.3% from 2.4%. With no major eurozone data due today, the currency’s direction will hinge on broader risk sentiment and potential spillovers from US developments. Unless tangible progress towards a ceasefire in the Middle East emerges, any near-term rallies in the euro are likely to be limited.
GBP
Sterling continued to trade cautiously on Tuesday, closing out the first quarter under pressure as global risk aversion and war anxieties overshadowed domestic influences. A conflict-fuelled jump in oil and gas prices is fanning UK inflation fears while darkening the domestic growth outlook, a combination that leaves the Bank of England in a difficult position, seeing even some of the BoE’s more hawkish policymakers striking a cautious tone on further interest rate hikes in recent days. With no major UK data due today, we expect sterling to continue taking its cues from global developments, particularly any changes in risk sentiment or energy price trends. Overall, without a clear improvement in the geopolitical backdrop, any rebounds in sterling are likely to be hard-won and short-lived.
CAD
The Canadian dollar saw a modest turnaround yesterday, breaking a string of daily losses. Oil prices actually softened slightly from last week’s peak amid whispers of de-escalation, removing a key source of support for the loonie, but one that was more than overshadowed by improving risk sentiment, combined with dollar selling into quarter-end. Looking to the day ahead, there are no high-profile Canadian data releases. Markets will parse the Bank of Canada’s Summary of Deliberations due this evening for any clues on policymakers’ thinking after this month’s rate hold, but we suspect it will reaffirm the BoC’s cautious stance in light of war-related inflation risks, in line with our recent expectations. In the meantime, the loonie is set to trade on global risk sentiment and oil price fluctuations. All told, without a sustained easing of Middle East tensions, we remain wary of calling a top in USDCAD despite yesterday’s dip, with the Canadian dollar only likely to find lasting relief once convincing signs of geopolitical calm and stabilising oil markets appear.