The dollar slips despite Middle East uncertainties
The dollar traded with a mixed tone on Monday, closing marginally lower with the DXY near 98.2 despite renewed Middle East tensions. Reports that the US seized an Iranian vessel as part of its ongoing naval blockade cast doubt on peace talks and initially supported safe-haven demand, while Brent cru
USD
The dollar traded with a mixed tone on Monday, closing marginally lower with the DXY near 98.2 despite renewed Middle East tensions. Reports that the US seized an Iranian vessel as part of its ongoing naval blockade cast doubt on peace talks and initially supported safe-haven demand, while Brent crude surged over 5% to around $95 per barrel. However, the greenback struggled to build on those gains, with traders reluctant to extend long-dollar positions at current levels. As we flagged in our Week Ahead, geopolitical developments continue to dictate dollar direction, and Monday’s back-and-forth captured that dynamic well. Today, March retail sales at 13:30 BST headline the US data calendar. A soft print would reinforce the recent dollar pullback from one-year highs. However, early headlines this morning suggest a formal truce extension with Iran looks unlikely even as talks continue, which could quickly revive safe haven flows if tensions escalate further. We continue to see the Middle East as the primary near-term driver for the greenback, with scheduled data playing a secondary role until a durable ceasefire comes into view.
EUR
Yesterday saw EURUSD rising toward 1.18, albeit still closing shy of that level, benefiting from the softer dollar rather than any domestic catalyst. Today’s eurozone calendar is again thin, and although ECB President Lagarde speaks later this evening, she is unlikely to say much of interest to FX markets, leaving the single currency to trade on external developments for the time being. The real test for the single currency comes later this week: flash April PMIs on Thursday are forecast to show the eurozone composite index slipping to 50.1 from 50.7. We expect the PMI data to confirm only tepid growth momentum, which, alongside our view that the ECB will hold rates at its end-of-month meeting, should temper the euro’s recent advances. Even so, renewed Middle East volatility remains a key swing factor for EURUSD in the interim.
GBP
Sterling edged higher to start the week, with GBPUSD trading around the 1.35 mark this morning as the softer dollar provided a tailwind. Still, this belies the domestic political volatility playing out in the UK, with Monday seeing PM Keir Starmer grilled in Parliament yet again over the ongoing Peter Mandelson scandal. Our sense is that Starmer escaped for now, albeit not entirely unharmed. The next focus will be on testimony from former foreign office chief Olly Robbins, who was sacked by Starmer just last week for his role in the debacle, and is due to give evidence to Parliament later today. Ahead of that, though, UK labour market figures were released at 07:00 GMT this morning, with the data scanning as soft. A drop in the unemployment rate from 5.2% to 4.9% is not all it seems – this was driven by a roughly 0.8% jump in the inactivity rate. Wage growth also appears weak below the surface, with public sector figures propping up aggregate readings. Regular private sector wages grew just 2.8% YoY in February, a pace of increase last seen in 2020, and in line with pre-COVID averages. For now, markets are responding to the headline unemployment undershoot, with sterling stronger post-release. But given the soft underlying details, plus political risks later in the day and CPI numbers tomorrow morning, we would be surprised if this lasts, expecting the pound to trade under pressure as the day wears on.
CAD
Monday’s March CPI release confirmed the energy-driven acceleration we had flagged in our preview note last Friday. Headline inflation rose to 2.4% year-on-year from 1.8% in February, propelled by a large surge in gasoline prices linked to the war in Iran. That said, the print came in marginally below the consensus expectation of 2.6% predicted by economists. Importantly, the energy spike appears to have had limited pass-through into core measures so far, consistent with our assessment that the underlying inflation picture warrants minimal concern. While initially struggling for direction post-release, USDCAD eventually dipped lower into the end of the day, helped too by reasonably solid BoC business outlook numbers, and a broad overall improvement in market risk sentiment. That mix leaves USDCAD trading in the mid-1.36s this morning, but with few domestic catalysts in the near term, meaning that Middle East developments now take centre stage once again, where loonie fortunes are concerned.