Economic Update

Will the ceasefire hold after weekend Strait of Hormuz tensions?

Over the weekend, Iranian naval vessels fired on an oil tanker that had previously been cleared for passage through the Strait of Hormuz, while the US navy disabled and seized an Iranian‑flagged vessel that refused to yield and turn away. Iran has since shut the Strait again, having reopened it briefly late last week. Markets reacted in predictable fashion, with risk appetite fading, the US dollar strengthening, bond yields rising and equities coming under modest pressure.

Markets still appear inclined to price in some form of diplomatic engagement between the US and Iran this week, at least sufficient to extend what remains a fragile ceasefire. There is a sense that both sides want the conflict to ease, although the urgency may sit more heavily on Washington than Tehran, in my view.

US rate expectations unlikely to shift on retail sales and consumer confidence

The US data calendar is relatively light this week. March retail sales and the final April University of Michigan consumer sentiment reading are likely to attract attention, but they appear unlikely to shift the broader rates narrative.

Comments late last week suggest the Federal Reserve is converging on a consensus to leave interest rates unchanged for longer. Risks around policy direction look broadly balanced between a hike and a cut in the near term, while skewing towards lower rates further out.

In the short term, the US dollar remains primarily driven by developments in the Middle East. Any escalation risk could underpin further USD strength, while a sustained ceasefire or progress towards a peace deal could exert downward pressure. That combination leaves scope for sizeable swings in USD pricing as headlines evolve rapidly through the week.

UK prime minister faces parliament as markets watch politics and data

UK political headlines over the weekend made for uncomfortable reading for the government. The prime minister’s decision to remove Olly Robbins as chief civil servant at the Foreign Office has failed to calm matters. Media coverage has instead focused on claims that Downing Street must have been aware of Peter Mandelson’s failed vetting, following reporting in The Independent last September.

Even traditionally supportive outlets have questioned the prime minister’s position, making today’s appearance before the House of Commons a potentially testing moment. From a market perspective, the concern centres on what follows next. Prior to the latest Middle East tensions, investors had largely responded positively to the government’s approach to economic management and public finances.

Alongside the political backdrop, this week brings a significant slate of UK data. Labour market figures for February and March, March CPI inflation and March retail sales are all due. These releases could offer a steadier near term picture. Survey data point to tentative stabilisation in the labour market, retail sales appear to have benefited from Easter timing, and while headline inflation is set to rise, core measures excluding food and fuel are expected to remain broadly stable.

Euro area surveys watched for signs of conflict‑related strain

A series of euro area surveys feature prominently this week, beginning with April’s German ZEW survey, followed by the preliminary PMI readings and Germany’s IFO business climate index. Expectations point towards softer activity, linked in part to the impact of Middle East tensions.

On their own, these surveys look unlikely to shift interest rate expectations meaningfully. The near‑term balance of risks for FX also appears tilted towards modest euro weakness against other major currencies.

That said, the ECB speech calendar remains busy. Unlike the Federal Reserve and the Bank of England, the ECB blackout period only begins in the week before a policy decision. As a result, policymakers including Nagel, De Guindos, Lane and Lagarde are all scheduled to speak. I doubt these appearances will offer any material guidance on near‑term policy action, with the ECB showing little urgency around further tightening.

Canadian data in focus while the Mexican peso lacks near‑term support

The Canadian dollar has drawn support from optimism around a possible easing in Middle East tensions, alongside constructive developments in US‑Canada cross‑border trade. Political noise around renewed separatist pressure has also receded.

This week’s focus turns to March CPI and retail sales. These releases could provide further support for the CAD. Inflation looks unlikely to rise as sharply as previously feared, while retail activity should benefit from seasonal effects that appear to have boosted March spending.

In Mexico, the peso suffered last week following weak vehicle production data, and this week offers little immediate relief. February retail sales and March unemployment figures sit towards the end of the period. Retail sales are expected to soften after a strong January, with downside risks relative to consensus. Labour market data have yet to reflect the more difficult conditions facing the manufacturing sector, suggesting any positive signal may prove temporary.