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USD
The dollar starts this morning stronger after an up-and-down session on Monday. Mixed Middle East headlines offered little direction for the greenback, with a light data calendar similarly uninspiring. Geopolitical risks aside, USDJPY continues to be a focus, moving higher through trading yesterday before a sharp but contained drop-off in recent hours, sparking concerns about further yen buying by the MoF. Looking ahead, all eyes today turn to April CPI at 13:30 BST, which our week-ahead piece flagged as the key US data risk. Consensus looks for headline at 3.7% YoY (from 3.3%) and core at 2.7% (from 2.6%), with the read on energy pass-through into core categories the more important question. A firm print should reinforce the “Fed on hold for longer” narrative we have argued for, allowing the dollar to benefit if risk-off sentiment continues to build, particularly with a stalling peace track in the background.
EUR
EURUSD opens up this morning modestly softer as renewed escalation in US-Iran rhetoric reasserted the energy-import drag on the single currency. Brent near $105 remains an unhelpful terms-of-trade backdrop, and last week’s hawkish ECB chorus has not been sufficient to offset that headwind against a firmer dollar. Today’s focus is the German ZEW survey at 10:00 BST, where consensus looks for a modest improvement from April’s grim -17.2 reading, the lowest since December 2022. We are inclined to suspect that traders will be disappointed, given the renewed deterioration in the Gulf backdrop through the survey period, entailing downside risks for the euro this morning. The broader catalyst today, however, will be US CPI. Should the print confirm sticky inflation, that is likely to compound euro downside.
GBP
Domestic political news flow continues to validate the asymmetric downside risks to sterling we have highlighted in recent weeks. Labour’s heavy local election losses have prompted further calls for Sir Keir Starmer to resign, with Angela Rayner publicly warning that “what we are doing isn’t working” while Reform UK and the Greens have consolidated gains at Labour’s expense. Starmer has so far rejected the calls, but the leadership noise represents a clear, ongoing downside catalyst that traders will need to navigate. As of this morning, the volume is only growing louder, with rumours that the Cabinet will advise the PM to resign as soon as today. The upshot is that sterling has made further losses through early trading, with GBPUSD now in the low 1.35s and GBPEUR just north of 1.15 as of writing. We continue to look for the pound to weaken in the coming days, especially if a Starmer resignation is forthcoming, assuming no US-Iran breakthrough emerges.
CAD
USDCAD held just below 1.37 through Monday’s session as the two opposing forces we flagged at the start of the week, supportive WTI near $100 from the Middle East escalation versus broader risk-off and dollar firmness, broadly cancelled out. Friday’s domestic employment data, which delivered the soft print we had flagged as a risk with Canada shedding 18k jobs against consensus for a +10k gain and the unemployment rate jumping to a six-month high of 6.9%, continues to weigh in the background. We remain comfortable with our long-held view that residual market pricing for further Bank of Canada tightening looks misplaced, and would expect growth concerns to dominate the BoC discussion into the June meeting. Today’s domestic calendar is again empty, leaving the loonie a passenger to US CPI and oil price action. A firm US inflation print should reinforce the broader dollar bid and could push USDCAD through the 1.37 handle, though commodity-linked support from sustained crude strength should limit the magnitude of any move.