- Trump-Xi, US CPI, and retail sales in focus. USD downside limited.
- Australia wages and Norway CPI to back hawkish outliers.
- Pressure on Starmer to resign is so far manageable.
Greenback to Square One
USD has retraced all its war-related gains after peaking on March 31. The April 8 US-Iran ceasefire reinforced the view that peak energy supply-disruption fear had passed, turbocharging the recovery in risk sentiment and undermining USD.
Details of Iran’s response to last week’s US proposal to end the war remain scarce, but the move keeps hopes of a diplomatic off-ramp alive. US President Donald Trump and Chinese President Xi Jinping summit in Beijing (Thursday and Friday) could create another pathway toward de-escalation if the US can press China to lean on Iran.
In our view, USD downside is limited partly because stabilizing US labor demand and anchored long-term inflation expectations tilt the macro narrative back toward Goldilocks rather than stagflation. Specifically, we expect the dollar index (DXY) to hold above the lower end of its 96.00-100.00 range that’s held for nearly a year.
Non-farm payroll gains averaged +48k per month in February, March, and April. That’s above the Fed’s 2026 estimated breakeven pace of employment growth (+18k) necessary to keep the unemployment rate steady. Indeed, the unemployment rate held at 4.3% for a second straight month in April, a tick below the FOMC 2026 projection (4.4%).
In parallel, contained long-term inflation expectations should give the Fed greater confidence that the energy shock is less likely to become embedded in underlying inflation.
US April CPI takes the data spotlight on Tuesday. Headline and core inflation are expected to quicken to 3.7% y/y (from 3.3% in March) and 2.7% y/y (from 2.6% in March), respectively. Higher gasoline prices and a one-off statistical upside boost to owners’ equivalent rent (26% of CPI basket) to correct for shutdown-related missing data from October 2025 are seen keeping inflation hot in April.
As such, CPI less food, shelter & energy and the Cleveland Fed 16% trimmed-mean CPI will provide a cleaner read on the underlying US inflation backdrop. Both measures are running close to the Fed’s 2% target.
US April retail sales report is due on Thursday. Total retail sales are expected at 0.6% m/m vs. 1.7% in March supported by spending at gas stations. The more policy relevant control-group sales - which exclude cars, gas, food services, and building materials – is seen rising by a decent 0.4% m/m vs. 0.7% in March.
US consumer spending has been resilient so far, contributing to half the 2% annualized real GDP growth over Q1. Going forward, the Atlanta Fed GDPNow model estimates annualized real GDP growth of 3.7% in Q2, and real personal consumption expenditure at 1.8% vs. 1.6% in Q1.
Australia Wages and Norway CPI to back Hawkish Outliers
NOK and AUD outperformed all major currencies since the Iran war began on February 28 reflecting their countries’ positive net energy balance and their central banks leading the tightening cycle. Last week, the RBA delivered a third consecutive 25bps rate hike to 4.35% and signaled a data-dependent pause. Meanwhile, the Norges Bank unexpectedly raised rates 25bps to 4.25% and left the door open for another hike by year-end.
Australia Q1 wage price index (Wednesday) is seen supporting the RBA’s patient guidance to further hikes. Consensus expects wages to rise 0.8% q/q for a second straight month or 3.3% y/y vs. 3.4% in Q4. The RBA projects wage growth to ease to 3.2% y/y by end-June 2026.
RBA cash rate futures imply small odds (20%) of a follow-up rate hike at the next June meeting. The next full 25bps hike is implied for September. AUD/USD has cleared 0.7200, with immediate resistance at 0.7283 (the June 2022 high) standing in the way before 0.7500 comes into view.
Norway April CPI (Monday) is poised to underscore the Norges bank’s concern that “Inflation is too high and has run above target for several years.” Headline CPI is expected at 3.5% y/y (Norges Bank: 3.7%) vs. 3.6% in March and underlying CPI is seen at 3.2% y/y (Norges Bank: 3.2%) vs. 3.2% in March.
The swaps curve price in 50% odds of a follow-up rate hike at the next June meeting. USD/NOK is trading near a four-year low around 9.2100 and eyeing psychological support at 9.0000.
UK Politics Over GDP
The pressure on UK Prime Minister Keir Starmer to resign has increased following the governing Labour Party’s heavy losses at a set of local elections last week. About 30 Labour MPs have called for a leadership change, which is still below the 81 MPs needed to trigger a leadership contest. Starmer has vowed to stay on.
Regardless, the risk the Labour government pivots further leftwards has diminished, which is supportive of GBP and gilts. Reform UK emerged as the main winner from the local elections, while gains by the Green Party were relatively subdued. That suggests Labour’s voter leakage is mostly coming from its right flank rather than its left.
UK Q1 GDP (Thursday) is unlikely to move markets. Consensus is for real GDP growth of 0.6% q/q vs. 0.1% in Q4. The Bank of England (BOE) projects real GDP growth of 0.5% q/q in Q1, owing to an unusually high monthly growth rate of 0.5% in February. The swaps curve has fully priced-in a 25bps BOE rate hike to 4.00% at the July 30 meeting.
BCRP to Hold the Line
Peru’s central bank (BCRP) is widely expected to keep rates unchanged at 4.25% for an eighth consecutive meeting (Thursday). A hawkish hold is likely given inflation is overshooting the bank’s 1 to 3% target range. If so, that could provide the catalyst for USD/PEN to sustain a break below its 200-day moving average (3.4309).
