Market overview

The Middle East ceasefire is already showing signs of strain. Tehran has accused Israel of breaches as strikes in Lebanon continue, while shipping through the Strait of Hormuz has yet to resume despite this being a key US condition. US Vice President JD Vance is expected to lead a delegation to Islamabad, with talks due to begin on Saturday.

Markets briefly tried to reverse some of March’s moves, but that shift did not last. The dollar has regained some ground and oil has rebounded towards USD 96 per barrel. A deeper reversal still looks unlikely without firmer evidence of de-escalation and a clearer agreement on the conditions needed to reopen the strait.

USD: The dollar remains driven by headlines

March’s USD strength was largely conflict-related. Higher oil prices boosted dollar demand through energy invoicing, while deleveraging added further support as investors cut positions. Even as Brent held near USD 100 per barrel, the dollar remained volatile as markets moved in and out of the de-escalation trade.

That backdrop still points to headline-driven trading. Oil has struggled to sustain a move higher, suggesting limited conviction around a deeper supply shock, while the dollar continues to react to swings in risk sentiment and Fed expectations.

The Fed minutes prompted a small hawkish reaction, with swaps now pricing only around 7bp of easing by year-end. More notable, in our view, was the emphasis on two-way war risks, including the option of faster cuts if labour market weakness starts to outweigh inflation. That leaves room for a softer repricing in Fed expectations, which would weigh on the dollar.

GBP: Sterling loses some of its rate advantage

Sterling came under pressure during the conflict as the UK’s position as a net energy importer weakened its terms of trade. At the same time, rising inflation expectations triggered a sharp hawkish repricing in Bank of England expectations, giving GBP a strong yield advantage.

That story has now reversed. GBP/USD initially benefited from improved risk sentiment and the unwinding of long-dollar positions, but the pull-back in BoE pricing is already limiting sterling’s relative performance. The pair briefly moved above 1.34, but remains below its 200-day moving average, leaving the technical picture less convincing.

April seasonality is usually supportive for GBP/USD, although this year’s geopolitical backdrop may reduce that benefit. Next week’s comments from Andrew Bailey, Catherine Mann and Megan Greene could also shape expectations for BoE policy and influence EUR/GBP.

EUR: ECB pricing may keep the euro supported

The euro is not the market’s preferred expression of improved risk sentiment, with investors favouring higher-beta and carry currencies instead. Even so, the euro could prove more resilient than other low-beta currencies because ECB pricing remains relatively firm.

Markets still price around 58bp of tightening by year-end, and we doubt that a modest fall in energy prices alone would be enough to push that materially lower. With uncertainty over oil flows still unresolved, the ECB is unlikely to move quickly towards a clearly dovish stance.

That should offer the euro some relative support. A move to 1.180 in EUR/USD still looks too ambitious for now, but sticky ECB pricing supports a return towards the 1.170 to 1.173 area.

Looking ahead

• Any sign of shipping resuming through the Strait of Hormuz would matter for oil and the dollar.
• The ceasefire’s durability remains the key market driver.
• In the US, jobless claims may matter more than backward-looking inflation data.
• In the UK, next week’s BoE speakers could shape sterling’s near-term direction.
• For the euro, resilient ECB pricing should remain a source of support.