- Risk-on run faces headwind ahead of Tuesday’s ceasefire expiry.
- Kevin Warsh's Fed chair confirmation hearing set for Tuesday.
- April PMI and March CPI the focus in major economies. Three EM central banks decide.
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War In Flux
The risk-on run in financial markets faces headwind as the US-Iran war remains in flux ahead of Tuesday’s ceasefire expiry. After declaring the Strait of Hormuz open on Friday, Iran reversed course on Saturday, placing it back under “strict control of the armed forces” in response to the ongoing US blockade.
We are sticking to our view that while the energy shock may not be over, the worst is probably behind us. The US “Open for All or Closed to All” approach to navigation for vessels transiting the Strait of Hormuz is more likely to accelerate a reopening of that crucial waterway because shared economic pain raises the incentives for all parties to reach a workable diplomatic off-ramp.
As such, end-March likely marked the bottom in risk sentiment and central bank rate expectations have room to partially revert toward pre-war levels. That implies US rate cuts over the next twelve months, alongside a scaling back of rate hike bets across most major economies. The net result is USD neutral, keeping the DXY (USD index) within its nearly one-year 96.00-100.00 range over the next few months.
Our base case is for the Fed to deliver one 25bps cut to 3.25-3.50% by year-end, in line with the FOMC’s projection and pricing from fed funds futures. The US labor market is mixed with risk skewed to the downside, real consumer spending is almost flat in the first two months of the year, and wages are growing in line with the Fed’s 2% inflation goal given productivity growth of 2%.
US March retail sales (Tuesday). Headline is expected to surge 1.4% m/m vs. 0.6% in February on higher spending at gas stations. The more policy relevant control-group sales - which exclude cars, gas, food services, and building materials – is seen rising by just 0.2% m/m vs. 0.5% in February. That aligns with the latest Fed Beige Book, which observed that “On balance, consumer spending increased slightly despite harsh winter weather in some regions and higher fuel prices.”
Fed Chair: A Non-Linear Confirmation
The US Senate Banking Committee confirmation hearing for Kevin Warsh to become the next Fed chair is scheduled for 10:00am local time on Tuesday. No date has been formally set for a vote, but the fate of Warsh's nomination is tied to the Department of Justice (DOJ) investigation into Fed Chair Jay Powell.
Republican Thom Tillis has said he will block Warsh’s nomination from reaching the Senate floor until the investigation into Powell is closed. Republicans have a 13-11 majority on the Senate Banking Committee. So, without Tillis's support a stalemate is likely.
The US Attorney for the District of Columbia Jeanine Pirro has vowed to continue the probe and said her office is prepared to appeal a federal judge’s decision to quash subpoenas tied to the DOJ investigation. Pirro has until May 4 to file her appeal.
If Pirro does not appeal, the Powell probe effectively dies – clearing the path for Warsh’s confirmation ahead of Powell’s term expiry on May 15. If Pirro appeals, the Powell probe stays alive, delaying Warsh’s confirmation beyond May 15. Online betting markets place 45% chance that Warsh is confirmed by May 15, down from a high of 92% on March 8.
Powell said last month “if my successor is not confirmed by the end of my term as Chair, I would serve as Chair pro term until he is confirmed. That is what the law calls for, that’s what we’ve done on several occasions.” Powell added “I have no intention of leaving the Board until the investigation is well and truly over, with transparency and finality.” Meanwhile, President Donald Trump threatened to fire Powell if he did not leave “on time”, setting the stage for more twists to come. Bottom line: the ongoing politicization of the Fed is a structural drag on USD.
April PMI Meets March CPI
The S&P Global April PMI readings for the US, EU, UK, Japan and Australia are due this week (Wednesday and Thursday). In March, the data rang stagflation alarm bells across major economies reflecting the US-Iran military conflict. We expect the April prints to capture some of the post-April 8 ceasefire market recovery narrative, underscoring that the worst of the energy shock is behind us.
Canada March CPI (Monday). Headline CPI is seen at 2.6% y/y vs. 1.8% in February due to the jump in energy prices. Excluding food and energy, the rise in CPI is expected to be more muted at 2.2% y/y vs. 2.0% in February, while the policy-relevant core CPI (average of trim and median) is projected at 2.3% y/y vs. 2.3% in February. In parallel, the Bank of Canada’s (BOC) Q1 Business Outlook Survey (Monday) will offer a read on how well long-term inflation expectations are anchored.
The swaps curve has trimmed BOC rate hike bets over the next twelve months from as much as 75bps on March 26 to around 40bps currently. BOC rate hike bets should ease further provided underlying inflation and long-term inflation expectation remain contained. Canada’s economy is operating below full capacity with a negative output gap between -1.5% and -0.5% of potential GDP. Bottom line: USD/CAD will likely trade within a 1.3500 and 1.3800 range in the near term.
New Zealand Q1 CPI (Tuesday). Headline CPI is expected at 0.8% q/q (RBNZ projection: 0.6%) vs. 0.6% in Q4 to be up 2.9% y/y (RBNZ projection: 2.8%) vs. 3.1% in Q4. At its last April 8 meeting, the RBNZ left the Official Cash Rate (OCR) unchanged at 2.25% for a second straight meeting and noted that if the increase in near-term inflation is temporary, the OCR can be normalized gradually to more neutral levels. The RBNZ estimates the OCR neutral range between 2.3% and 4.1%.
The swaps curve has more than fully priced in a total of 125bps of OCR increases to 3.50% over the next twelve months. Significant spare capacity in New Zealand’s economy argues for less rate hikes than markets imply. The output gap is estimated at -1.5% of potential GDP in Q4 2025 and forecast at -0.9% over 2026. Bottom line: NZD/USD will likely trade within a 0.5800 and 0.6000 range in the near term.
UK March CPI (Wednesday). Headline CPI is expected at 3.3% y/y (BOE projection: 3.0%) vs. 3.0% in February. Both core and services CPI are expected to print for a second straight month at 3.2% y/y (BOE projection: 3.1%) and 4.3% y/y (BOE projection: 4.1%), respectively.
The swaps curve has slashed BOE rate hike bets over the next twelve months from as much as 100bps on March 26 to 25bps currently. BOE rate hike bets should ease further given excess slack in the economy. The BOE estimates a negative output gap of -1% of GDP in 2026. The UK February labor market overview (Tuesday) and March retail sales (Friday) will likely point to a soggy economic backdrop. Bottom line: GBP/USD will likely trade within a 1.3400 and 1.3700 range in the near term.
Japan March CPI (Thursday). Headline CPI is expected at 1.4% y/y vs. 1.3% in February, core CPI ex. fresh food is expected at 1.7% y/y vs. 1.6% in February, and core CPI ex. fresh food & energy CPI is expected at 2.4% y/y vs. 2.5% in February. The Bank of Japan’s (BOJ) set of underlying CPI indicators for March will be released two business days after the official CPI.
The BOJ’s next policy rate decision is on April 28 and will include the Outlook Report. Our base case is for the BOJ to deliver a 25bps rate hike to 1.00% at that meeting (17% priced-in) given Japan’s positive output gap (0.45% in Q3 2025) and solid results from the latest spring wage talks. That could ultimately spark a long overdue USD/JPY pullback.
Central Bank Watch
Bank Indonesia (BI) is widely expected to leave the policy rate at 4.75% for a seventh consecutive meeting to maintain the stability of the rupiah (Wednesday).
Türkiye’s central bank (CBTR) is expected to keep rates on hold at 37.00% for a second straight meeting (Thursday). Assuming the worst of the energy shock has passed, CBTR will have room to resume cutting rates in the next few months. The swaps curve price in 600bps of rate cuts to 31.00% in the next twelve months.
Philippine central bank (BSP) is expected to raise rates 25bps to 4.50% after standing pat at its March 26 off cycle meeting (Thursday). However, it’s a close call: 14 of the 27 analysts polled by Bloomberg see a hike, the rest (13) pencil in no change. We expect BSP to keep rates on hold at 4.25% given that crude oil prices probably peaked, and the central bank signaled last month it was not concerned with the weakness in the peso.
