While the shaky Iran war ceasefire is holding, for now, the near-complete blockade of the Strait of Hormuz is still in force from both sides, and there is little sign that peace talks are making progress, or even taking place.

Currency markets are gyrating without a clear trend, as while the indefinite ceasefire suggests that military activity is over, it provides no real urgency for a peace deal. US stocks have hit new all-time highs, however, while some ominous signs from the Euro Area economy are capping the rally in European risk assets. What's clear is that the Sell America trade has been indefinitely put on hold, as markets expect the US to remain relatively isolated from the war's fallout, particularly the inflationary implications of the conflict.

This week is shaping up to be critical. In addition to the war headlines, we will get a raft of key central bank meetings, including the Federal Reserve (Wednesday), the ECB (Thursday) and the Bank of England (Thursday). While none are expected to move rates, policymakers have communicated relatively little to the market about how they are weighing the war's impact on prices and growth, and which effect they will prioritise in response. Inflation data out of the Eurozone and personal consumer expenditure (PCE) inflation from the US, both released on Thursday, will round out a very busy week for markets.

USD

US economic data continue to prove resilient to the war's impact. March retail sales were very solid, confirming the disconnect between dismal consumer confidence and actual household spending decisions. The PMIs also strengthened unexpectedly, with the key services index returning back to levels that denote expansion in April.

All in all, the universally expected hold on rate is likely justified from the Fed on Wednesday. There will be no ‘dot plot’ or updated economic projections, although we expect Powell to introduce a cautiously hawkish tone during his press conference. We expect Powell to recognise the inflationary risks posed by the conflict, without going so far as to cause markets to price in hikes later in the year. Yet, given the general lack of clarity brought about by the war, and the added uncertainty due to the impending change of leadership to a presumably dovish Trump nominee, Kevin Warsh, the next move in rates is perhaps as likely to be up as down.

GBP

Last week's economic releases validated and supported sterling’s modest outperformance since the war started. Wages and unemployment were both positive surprises, although these numbers are from February and thus predate the war. Inflation ticked up, as expected, but the real cheerful news came from the April PMI surveys of business activity, which rebounded to 18-month highs despite the gloomy war headlines and energy price spikes.

This week's Bank of England meeting will almost certainly yield no move in rates. We will instead eagerly await the voting split and accompanying communications to see if market expectations for two 25 basis point hikes in 2026 align with the MPC's thinking. While we think that current pricing for rates is too aggressive, we don’t expect Bailey and co. to forcefully push back against markets given that it will be a little while before policymakers have a true read on the economic fallout from the Iran war.

EUR

Survey data out of the Eurozone last week was unambiguously dismal. The ZEW investor survey fell to a three-year low, despite the resilient price action in European asset markets. More worryingly, the PMIs of business activity for April crashed well below already negative expectations, to a level consistent with outright economic contraction. It remains to be seen whether this soft data is an overreaction to war gloom and if hard data holds up better, but it seems like any chance of a hike by the ECB this week has been removed.

First quarter GDP and April flash inflation data will be released this week. Together with ECB communications on Thursday, we will have a significantly clearer picture of the war's impact and the ECB's reaction by the week's end. Recent communications from ECB officials suggest that they are in no rush to hike, but expect Lagarde to keep the door open to a summer hike on Thursday should they fret over a de-anchoring of inflation expectations.

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