Dollar gains on fading peace hopes
The dollar gains as fading peace hopes revive safe‑haven demand, with geopolitical risks and policy expectations driving FX market direction.
USD
The dollar held a firmer tone yesterday, with the DXY consolidating above 99, having threatened to break lower earlier in the week on a burst of US-Iran peace optimism. President Trump's Cabinet remarks on Wednesday that Tehran was "negotiating on fumes," coupled with overnight confirmation that US Central Command had carried out a second round of defensive strikes near Bandar Abbas, have firmed the safe-haven bid into this morning, with WTI nudging back above $90. We continue to expect a framework agreement to eventually emerge, as flagged in our May FX forecasts, but the back-and-forth highlights why we remain cautious about pricing peace prematurely. Today's diary is meaningful: the second estimate of Q1 GDP (consensus 2.0%, unrevised) lands at 13:30 BST alongside weekly jobless claims and pending home sales, while a raft of Fedspeak fills out the docket. Absent any major surprises, that mix should keep the buck supported, with Middle East risks still front of mind.
EUR
Tuesday's tentative euro recovery on Middle East peace headlines unwound yesterday after fresh US strikes on Iran were confirmed. Granted, continued hawkish ECBspeak, reiterating that the ECB should still hike in June even if a Middle East deal is reached, has helped to limit the damage, with a 90% chance of a hike next month currently priced in by traders. But even so, EURUSD has been left floundering in the low 1.16s as of this morning, struggling to pick up support. As we have noted across our recent commentary, persistence of the energy shock and the sharp deterioration in last week's flash PMIs leaves the Governing Council confronting an inflation impulse it cannot easily look through, despite the negative implications for growth. That message is likely to be further reinforced today, with consumer confidence readings top of the domestic data calendar. In conjunction with the news flow overnight, a positive catalyst for the single currency is likely to remain elusive, assuming no progress in peace negotiations.
GBP
The pound slipped lower yesterday, losing ground to both the dollar and the euro. A light data calendar and a lack of Middle East developments earlier in the day proved to be unfavourable for sterling, allowing time for traders to shift focus to UK domestic fundamentals, which continue to deteriorate. Indeed, as we flagged last week, sterling's underlying picture is increasingly fragile: May flash PMIs showed a first month of private sector contraction in a year, April retail sales fell 1.3%, and the labour market has continued to cool. This trifecta has driven markets to trim BoE hike pricing aggressively. Swaps now imply only around 40bps of tightening by year-end, having been more confidently positioned for tightening just two weeks ago. Admittedly, that could rise today - Huw Pill speaks later this morning, and a hawkish tilt could offer the pound some support. Still, given the deteriorating economic backdrop, and with persistent reporting on the leadership pressure facing Prime Minister Starmer, we expect rallies to be faded while political risk and softer cyclical data persist.
CAD
USDCAD drifted higher on Wednesday, topping out in the high 1.38s overnight, with oil failing to provide a sufficient offset to deteriorating Middle East risks. Today's domestic calendar is thin, with Q1 current account numbers and the March SEPH report topping the docket, alongside the BoC’s financial stability report. Tomorrow's Q1 GDP print is the headline event for the loonie this week - we expect a soft figure that would do little to challenge the constructive dollar bid above 1.38, particularly if the overnight escalation in Middle East tensions fails to translate into more sustained oil upside.