Market overview

Markets opened the week without a single defining weekend headline, but the broader backdrop remains supportive for the dollar. The Houthis’ involvement adds another layer of risk to global supply chains and raises the prospect of a wider regional conflict, keeping investors cautious and risk appetite subdued.

That defensive tone continues to favour the dollar, while currencies under pressure are prompting policymakers to consider a range of measures to slow depreciation. We are also monitoring the dollar cross-currency basis swap market for any sign of tighter funding conditions. The short-dated EUR/USD basis has edged wider, and a sharper move would likely reinforce dollar strength and put broader pressure on risk assets.

USD: Dollar demand remains intact

The main US focus this week is the labour market. JOLTS job openings, ADP employment and the March payrolls report will all shape expectations for Federal Reserve policy. Friday’s non-farm payrolls release, with consensus for 60,000 jobs and a 4.4% unemployment rate, is likely to keep markets alert to the prospect of further Fed tightening in response to the energy shock. A weaker-than-expected outcome, however, could challenge the dollar’s recent momentum.

DXY is back above 100, and a renewed test of resistance in the 100.25 to 100.50 area looks likely this week. Unless there is a clear de-escalatory signal from Iran, it is difficult to see the dollar giving up its monthly gains in the near term. Markets will also watch for any remarks from Fed Chair Jerome Powell, who is due to speak in a moderated discussion at a Harvard event later today.

GBP: Bond market nerves keep sterling exposed

Sterling remains vulnerable to further bond market volatility as investors assess the risk that the Iran conflict keeps energy prices higher for longer. The pound came under pressure into the weekend as global bond markets sold off sharply, with the UK among the harder-hit G10 markets.

UK two-year and ten-year yields rose more than those of several peers, reflecting the UK’s sensitivity as a net energy importer and its sizeable public debt burden. That combination can leave overseas investors demanding a higher premium to hold gilts, which in turn can weigh on the currency.

GBP/EUR fell to a three-week low of 1.1515 on Monday, extending the decline from the 1.1612 peak seen ten days earlier. That leaves the pair sitting near its 50-day moving average, although recent price action suggests this level may offer only limited support. If bond markets stabilise, GBP/EUR could still drift closer to 1.15. Any rebounds towards 1.1550 may prove corrective rather than a lasting turn in trend.

EUR: Rate support helps, but upside still looks limited

Narrower rate differentials between the eurozone and the US have offered EUR/USD some support, even in an environment that remains structurally negative for the pair. Even so, a 25bp ECB rate rise on 30 April is far from fully priced. Market expectations have softened from around 85% to 50%, in part due to more cautious ECB rhetoric.

On Friday, Isabel Schnabel said the ECB should neither rush its response nor overreact to recent developments. That leaves EUR/USD exposed if energy prices rise further, particularly if higher inflation expectations push real rates lower. On balance, the pair still looks biased lower, with the 1.1440 to 1.1470 area a plausible downside target.

Today’s eurozone calendar includes German March CPI and eurozone confidence data. German inflation is expected to rise to 2.9% year-on-year from 2.0%. An upside surprise could lift eurozone swap rates and lend the euro some short-term support by reviving expectations of earlier ECB tightening.

Looking ahead

• US labour data will be the key driver for the dollar this week, especially Friday’s payrolls report.
• Any widening in the EUR/USD cross-currency basis would be an early sign of tighter dollar funding conditions.
• Sterling remains highly sensitive to gilt market moves and any signs of fresh fiscal support for energy consumers.
• German CPI and broader eurozone inflation signals could shift ECB pricing and drive short-term euro direction.
• Geopolitical headlines remain critical, particularly anything pointing either to escalation or de-escalation in the Middle East.