USD

The US dollar steadied on Tuesday after Monday’s relief rally saw the DXY index fall below 100, with renewed Middle East hostilities and weak European data helping spur safe haven flows back into the greenback. Given a lack of major US releases yesterday, investors remain focused on geopolitical headlines and oil prices. That said, this dynamic has proven somewhat less positive for the buck overnight, seeing further speculation around peace negotiations drive both energy and the dollar lower this morning. Looking ahead, tomorrow’s US jobless claims and Fed commentary will be watched for confirmation of the domestic outlook, but for now, our view is that ongoing Middle East tensions will keep the dollar tracking sideways.

EUR

Yesterday saw flash March PMIs confirm a stagflationary theme in the eurozone. The composite index slid from 51.9 to 50.5, undershooting expectations amid surging energy costs and waning demand. This souring economic picture, a direct outcome of hostilities in the Middle East disrupting supply routes and boosting input prices, saw EURUSD slip towards the mid-1.15s, before a rebound overnight on peace talk headlines. Today, attention turns to Germany’s IFO survey and remarks from ECB President Lagarde and Chief Economist Lane. We expect business sentiment to weaken and Lagarde to maintain a hawkish-but-cautious tone, given the delicate trade-off between inflation and growth. Any relief from geopolitical tensions or unexpectedly strong data could bring a modest bounce, but absent that, we foresee the single currency trading defensively, with further downside if energy-driven inflation concerns intensify.

GBP

Sterling could not hold onto its early-week rally on Tuesday, easing lower as UK data echoed continental weakness. The flash UK PMI for March fell sharply, seeing the composite index drop from 53.7 to 51.0, a steeper decline than expected, signalling that Middle East-induced energy costs and uncertainty are weighing heavily on business confidence. This morning’s data, the February CPI report, registered headline inflation at 3.0% YoY, with core unchanged at 3.2%, broadly in line with forecasts. As anticipated in our preview note, traders have largely shrugged off this backward-looking figure, focusing instead on how the ongoing Middle East conflict will drive prices in the coming months. For the day ahead, that means sterling fortunes will likely hinge on broader risk sentiment. A scheduled speech by BoE’s Megan Greene may highlight the Bank’s vigilance regarding energy inflation, but is unlikely to shift the dial. Absent a clear de-escalation in the Middle East to boost global risk appetite, we expect the pound to remain range-bound, with any gains hard-won and easily reversed in the current climate.

CAD

USDCAD rose modestly on Tuesday as early optimism from the US decision to delay military action in the Gulf gave way to renewed caution as fighting continued in the Middle East, creating choppy trading for the pair, albeit maintaining some upside pressure. Today the domestic calendar is sparse, with the focus likely to be on any guidance from BoC Senior Deputy Governor Carolyn Rogers tomorrow. Her remarks will be parsed for confirmation of the Bank’s balanced approach after it recently held rates at 2.25% earlier in the month, acknowledging the “dilemma” of weaker domestic growth versus rising inflation pressures. We suspect the BoC will stick to a patient stance, reinforcing that unless Middle East developments markedly alter the outlook, policy will remain data-dependent. In the meantime, we expect the loonie to stay range-bound, supported on dips by firm oil prices but unlikely to appreciate significantly.

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