Markets are positioning for a conflict resolution, despite lingering strategic ambiguity. The New York Times reported that the US sent Iran a 15-point plan via Pakistan to end the conflict. In parallel, the Trump administration has ordered the 82nd Airborne Division to deploy about 2,000 soldiers to the Middle East.
Global stocks and bonds are rallying, Brent crude oil prices are trading heavy near $100 a barrel, and DXY is consolidating below 100.00. Ultimately, Iran’s response to the US de-escalation pivot will decide whether peak fear is behind us or still ahead. Iran is signaling no appetite for ending the conflict, suggesting a genuine top of energy shock risks remains elusive.
Until the fog of war clears, USD risks remain skewed to the upside driven by dollar funding needs in periods of financial market stress. Cyclically, we are neutral USD and expect DXY to remain anchored within a 96.00-100.00 range, in line with rate differentials between the US and other major economies. Structurally, we maintain a bearish USD view because of fading confidence in US trade and security policy, worsening US fiscal credibility, and the ongoing politicization of the Fed.
AUSTRALIA
AUD/USD is down near the lower-end of a two-month 0.6900-0.7200 range. Australia inflation was marginally lower than anticipated in February but is poised to quicken in the months ahead due to higher energy prices. Indeed, the RBA warned last week that “inflation is likely to remain above target for some time and that the risks have tilted further to the upside, including to inflation expectations.” The RBA also pointed out that “Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation.”
In February, headline CPI dipped 0.1pts to 3.7% y/y (consensus 3.8%) while the trimmed mean CPI printed at 3.3% y/y (consensus: 3.4%) for a third consecutive month. The monthly CPI is Australia’s primary measure of inflation, but the RBA continues to focus on measures of underlying inflation from the quarterly CPI. Australia Q1 CPI data is due April 29, just ahead of the RBA May 5 policy rate decision where a 25bps hike to 4.35% is 65% priced-in.
UK
GBP/USD is testing resistance at its 200-day moving average (1.3434). UK inflation remained sticky well above the BOE’s 2% target in February, leaving the bank with little room to look through the energy shock. The BOE stressed last week that a larger or more protracted energy shock, would require a more restrictive policy stance. Conversely, a short-lived shock or greater economic slack would tilt policy back toward easing.
Headline CPI printed at 3% y/y for a second straight month, which was in line with consensus and BOE projection. Core CPI unexpectedly rose 0.1pts to 3.2% y/y (consensus: 3.1%, BOE projection: 3.0%) and services CPI dipped less than anticipated to 4.3% y/y (prior: 4.4%, consensus: 4.2%, BOE projection: 4.1%).
The UK swaps curve implies 60bps of hikes in the next 12 months, down from 100bps of hikes priced-in last week. BOE rate hike bets are still too rich in our view given excess slack in the economy. The BOE estimates a negative output gap of -1% of GDP in 2026, which puts a natural cap on runaway long-term gilt yields.
EUROZONE
EUR/USD is directionless around 1.1600. ECB President Christine Lagarde emphasized again that the ECB’s response to an energy shock is conditional on the size and persistence. Small and temporary shock: look through. Large but temporary shock: measured response. Large and persistent shock: forceful tightening.
Lagarde’s warning that the likelihood of a quick normalization in energy prices is diminishing limits the ECB’s look-though capacity. Indeed, the swaps curve is pricing a forceful hiking path (75bps of hikes to 2.75% in the next 12 months).
