Having sold off on Friday on news that the Strait of Hormuz is 'completely open', the dollar has come back a little bid on more tough talk between the US and Iran, plus the US Navy's seizure of an Iranian cargo ship. Investors seem happy to focus on a resolution to this crisis, but we think it is too soon to expect the resumption of the broad dollar bear trend.
Friday's headline from Iranian authorities that the Strait of Hormuz was 'fully open' gave us a vision of where the dollar could be trading were this crisis over. That equated to around the 97.50/98.00 area in DXY and just over 1.18 in EUR/USD. In our April release of FX Talking, we expect the dollar to stray not too far from those levels for the remainder of the quarter.
In terms of the immediate focus, the question is whether investors will receive further positive news on renewed peace talks in Pakistan, or whether both sides will talk tough and potentially act tougher ahead of tomorrow's deadline on the two-week ceasefire. Today's benchmark of any progress will probably be whether Iran sends any negotiators to peace talks, now that US representatives are already on their way there. The mood music of markets is one of concern, but one that sees progress towards a resolution.
The stop-start nature of peace talks does focus attention on when energy flows can fully restart and whether high oil prices will start to seep into other areas of the economy. We note another good speech from the Federal Reserve's Christopher Waller, released on Friday ahead of the Fed's blackout period. The speech was entitled 'One Transitory Shock After Another'. Recall that Waller voted for a cut in January, and the point he is making now is that the longer energy prices stay high, the greater the risk that this oil shock adds to the tariff shock and de-anchors inflation expectations. For him, the 5-10 year US inflation expectations derived through the 5Y5Y inflation swap look important. From a low point near 2.30% at the end of March, these are now trading at 2.41%. Any move to the 2.70/2.80% area, as seen in early 2022, could well call time on any hopes of Fed easing this year.
On the subject of the Fed and looking ahead this week, tomorrow is probably the biggest day for markets. Beyond the expiring ceasefire, we also have Kevin Warsh's confirmation hearing at the Senate Banking Committee for the role of Fed Chair. He is expected to be dovish on rates, but hawkish on the size of the Fed's balance sheet. More on this tomorrow. Tuesday will also see US retail sales for March - expected to hold up despite high energy prices.
We are not in the camp looking for an immediate return of the benign dollar decline that characterised the start of the year, and suspect DXY can trade in ranges near the 98.00/98.50 area.
We have a flurry of European Central Bank speakers in the early part of this week, ahead of the blackout period starting this Thursday. The main message continuing to come through is that the ECB is prepared to act (hike rates) should it be necessary, but that more time is needed. That means the market has priced out a 30 April hike and now attaches only roughly a 50% probably to a June hike. Our team think the ECB will indeed hike in June.
Away from ECB speakers, the eurozone calendar is dominated by business and investor surveys. This starts with the German ZEW tomorrow, builds through the eurozone April PMIs on Thursday, and then sees the Ifo on Friday. March business surveys were not as bad as they could have been and it will be interesting to see whether they deteriorated much this month.
We are a little cautious on risk at the moment and see a steady state for EUR/USD closer to the 1.17 area.
Sterling has been performing reasonably well despite the market removing a lot of the expected Bank of England tightening this year. The market still prices one 25bp hike this year while our team sees unchanged rates. That hike may not be priced out until oil prices drop however.
There is also the small matter of politics in the UK. Prime Minister Keir Starmer will today make a statement in parliament to potentially correct the record on the approval process for the former UK ambassador to the US, Peter Mandelson. This will be a tough session for PM Starmer and one which will extend into tomorrow when the top civil servant involved in the approval process also appears at a parliamentary hearing.
GBP/USD could well hand back a big chunk of recent gains this week with a first target being around the 1.3380/3400 area.