President Trump alternates threats with repeated postponements of deadlines, and financial assets increasingly ignore his bluster to focus on events on the ground - much as they did after the first weeks of tariff turmoil a year ago. Investors are clearly groping for a coherent narrative, as risk assets rebound but oil prices continue to climb and the Strait of Hormuz remains closed by Iran. Early signs of the war's macroeconomic impact point to stagflation in energy-importing Europe and a more resilient reaction in the self-sufficient US. In the background, emerging market currencies from commodity exporting countries have started to rebound and most are now notably higher against the euro than they were the day before the war.
The key driver of market moves this week will remain war developments, particularly Trump's repeatedly postponed deadline tonight for Iran to reopen the strait and agree to terms. Another focus for markets will be the March inflation report from the US. This will be the first report to fully reflect the war's impact and is expected to show a massive spike in headline inflation, undoing two years of slow progress toward the Federal Reserve's target.
USD
The March payrolls report was stronger than expected across the board, however, it should probably be averaged with the much weaker February data, which was revised lower from the preliminary estimate. Nevertheless, there are few signs that the war and the spike in oil prices are having a meaningful impact on the US economy so far.
All eyes are now on this week's inflation data. First, the March inflation report, which is expected to show the full pass through of the energy price spikes. Then on Friday we will get the Michigan reading on inflation expectations. We think that Federal Reserve officials remain excessively unconcerned with the de-anchoring of inflation expectations. This is the sixth consecutive year the central bank has failed to meet its inflation target, with little chance of meeting it in the medium term.
GBP
Governor Bailey again explicitly pushed back against market pricing for Bank of England interest rate hikes last week, though with limited success, as two full hikes are still priced in by year end. Not only is the energy shock a supply-side issue out of the MPC’s control, but with the UK economy and labour market already in a fragile state, the committee will be wary that aggressive hikes could tip Britain into a recession. We note that the upward shift in gilt yields and mortgage rates also already acts as de facto policy tightening, which should take pressure off the BoE to raise the base rate.
We were impressed that sterling managed to keep up against the euro and outperform the dollar last week in spite of Bailey’s jawboning. We still have little sense of how inflation and growth in the UK will be impacted by the war and the energy price spike, as we have received very little data so far that covers the war period. We will have to wait at least another two weeks for enough March data to be forthcoming before drawing conclusions.
EUR
Early Eurozone inflation and sentiment data point to a significant stagflationary impact from the war. Headline inflation spiked to 2.5% in March from 1.9% the month before, and various sentiment indices retreated from February levels, although the falls here were generally relatively small. Core inflation remains contained and actually dropped last month, but it remains early days and European Central Bank members will be closely monitoring this key indicator in the next few months to see whether the energy shock is delivering second round effects on consumer prices.
While some of the hawks on the ECB have stressed a need for a cautious and measured approach, officials have not necessarily vehemently pushed back against market expectations of nearly three hikes in 2026, starting with one as soon as the next meeting in April. The contrast with the US, where the Federal Reserve continues to push back against talk of hikes is notable. The interest gap across the Atlantic shrinks week by week, a development that may support the euro's snapback as and when the Iran war is resolved.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- G3 FX Outlook - April 2026
- Iran War FX Scenarios
- Iran War: Winners and Losers in FX
