USD

The dollar extended its recent retreat on Tuesday as risk appetite firmed despite the US naval blockade of Iranian ports that took effect on Monday. Surprisingly, oil continues to slide, with traders seemingly taking greater comfort from hints of rapprochement between the negotiating parties, as opposed to further energy supply disruption. With events in the Middle East still top of mind, data and Fed speak continue to be overshadowed. Indeed, with no major US releases due today, the dollar’s path looks likely to again hinge on Middle East headlines and whether Thursday’s reported talks materialise.

EUR

The euro extended its recovery on Tuesday, climbing alongside other risk currencies as the dollar sagged. The ongoing ceasefire between the US and Iran has helped push oil prices back below $100 per barrel, with the dollar following energy costs lower, removing a key headwind for the eurozone given its heavy energy import bill. Though Monday’s naval blockade briefly disrupted that narrative, markets are now pricing a resumption of negotiations, allowing a broader retracement to reassert. Hawkish rhetoric from ECB officials has also buttressed the single currency as markets refocus on rate differentials, though it was notable to us that President Lagarde proved somewhat noncommittal in a speech yesterday. With no major eurozone data due today, further central bank speak, and the evolving Middle East picture will likely continue to dictate the euro’s trajectory.

GBP

Sterling rose alongside its peers on Tuesday, lifted by the weaker dollar and improving global sentiment. The pound has now clawed back much of the ground lost during March’s flight-to-safety, with the BoE’s hawkish tone on inflation providing a supportive backdrop. That said, yesterday also saw the MPC’s Alan Taylor underline that the state of the economy when an energy shock hits is crucial, and that there is “no simple read-across from past shocks”. That language suggests a more nuanced view on recent developments, rather than a simple knee-jerk reaction to hike rates. Admittedly, Taylor is an MPC dove, and it matters more whether this view carries weight with the Committee’s swing voters. We think it should, and with the UK data calendar quiet today, sterling performance will hang on both Middle East developments, alongside any further MPC commentary.

CAD

The Canadian dollar held firm on Tuesday, caught between improving risk sentiment and falling oil prices. Still, that leaves the USDCAD hovering near its lowest level in several weeks, reflecting the net effect of these offsetting channels. With only manufacturing sales data on the docket today, the loonie will trade on external cues. We expect range-bound conditions to persist, with oil price swings and Middle East headlines the primary catalysts for any directional breakout.

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