The dollar slips ahead of PMIs
The dollar slips ahead of key PMI data, with geopolitical headlines and Fed expectations continuing to steer FX market direction.
USD
The dollar's session on Wednesday was a tale of two halves, ultimately leaving the DXY lower this morning. Having pushed up to a fresh six-week high around 99.4 in early European trading, consistent with our long-held view that risks remain skewed higher absent a durable Middle East deal, the buck reversed sharply mid-afternoon after President Trump was reported as saying that US-Iran negotiations were in the "final stages". The remark triggered a roughly 5% slide in WTI and a broad-based dollar sell-off. Having read the full quote, though, that reaction seems unwarranted. For context, the President followed up his initial peace deal comments by noting that: “We'll see what happens. Either have a deal or we're going to do some things that are a little bit nasty, but hopefully that won't happen." This looks materially unchanged from other recent statements, keeping us sceptical on the durability of yesterday’s dollar selloff. That sentiment found additional support from the April FOMC minutes, which struck a notably hawkish tone, with several participants flagging that the Committee's next move could be a hike should core inflation prove sticky. Today's flash PMIs, jobless claims, and the Philly Fed will offer the next test, but we expect a dollar rebound on balance.
EUR
EURUSD found a bid in the afternoon yesterday as Trump's Iran comments hammered oil and lifted risk, lifting the pair back above the 1.16 level for the time being. The move, however, looks more like a function of dollar weakness than any constructive euro story. Indeed, final April HICP was confirmed at 3.0% YoY, the highest since September 2023, reinforcing the increasingly stagflationary mix we have flagged as defining the eurozone. That backdrop continues to make the ECB's hawkish repricing look more like insurance against second-round effects than a positive cyclical story for the single currency. Attention now turns to today's flash PMIs, which we expect to confirm the deepening growth headwinds from sustained energy price pressure. A repeat of April's contractionary composite reading could well see yesterday’s price action unwound, with another test of 1.16 a key risk for the day ahead.
GBP
Sterling should have come under renewed pressure on Wednesday after April CPI undershot sharply at 2.8% YoY, a 0.5pp drop from March and 0.2pp below consensus. Coupled with Tuesday's softer labour market report showing unemployment up to 5.0%, this materially undermines the case for market pricing that still implies two BoE hikes in 2026, and reinforces our view that downside risks to the UK economy remain underpriced. Indeed, MPC evidence to the Treasury select committee echoed a similar point. And yet, sterling finished the day stronger against both the dollar and the euro. Granted, UK data was somewhat overshadowed by the dollar’s headline-driven slide. But, given our view on the sustainability of that move and on UK fundamentals, we see growing downside risks for sterling. Today's flash UK PMIs will be the key domestic catalyst, with a soft services print likely to weigh further on the pound, if our expectations are met.
CAD
The loonie traded rangebound yesterday, again caught between risk conditions and oil prices. Limited domestic data flow meant minimal impetus for a sustained directional move for USDCAD. Today's domestic calendar is again light ahead of tomorrow's March retail sales print, with only the CFIB business barometer due for publication. This should, yet again, keep the loonie at the mercy of oil, Middle East headlines, and broad-dollar moves. The risk of peace talks stalling once more, a pattern we have seen repeatedly in recent months, keeps our bias for USDCAD risks skewed higher, absent meaningful de-escalation in the Gulf.