Market overview

Risk sentiment remains constructive and markets are still leaning into a positive outcome. Reports suggest Iranian officials could head to Pakistan for talks with the US later today or early tomorrow, and investors appear comfortable assuming the current ceasefire will at least be rolled forward. President Trump’s rhetoric remains characteristically stark, framing the next step as either a deal or a much more serious escalation, but for now markets are content to stay on the front foot.

Equities are also drawing support from a renewed focus on the technology theme. Overnight, Asia added to that tone, with EQT AB raising $16bn for the largest Asia-focused private equity fund on record, while Korean semiconductor exports continued to post striking annual growth of around 50%. The combination is keeping the broader market backdrop supportive for risk assets and less supportive for the dollar.

USD: Warsh takes centre stage

The dollar’s next directional cue is likely to come from Kevin Warsh’s Senate appearance later today. Markets broadly expect a dovish tone on rates but a firmer line on balance sheet policy. That leaves investors focused on whether he signals passive run-off or active sales, which assets might be targeted, and whether tighter liquidity could eventually revive repo market concerns reminiscent of 2019. The implication is a bias towards a steeper Treasury curve.

That said, rate commentary may matter more for FX than balance sheet mechanics. If Warsh sounds comfortable with lower front-end rates, particularly with oil prices elevated and short-term inflation expectations still firm, the dollar could come under renewed pressure. Any move may still be contained, however, given the political obstacles around his nomination.

Away from Washington, today’s US calendar includes March retail sales and the weekly ADP employment release. If the Beige Book is a fair guide, activity did not materially deteriorate in March, but any downside surprise in either release would reinforce the softer dollar narrative.

GBP: Sterling stays resilient through the noise

Sterling has remained relatively steady despite gilt underperformance yesterday, which appears to reflect concern over possible changes at the top of the Labour Party. That said, the currency has not shown much appetite to price in a deeper political risk premium.

The sharp fall in the February unemployment rate should also be treated with caution. Rising inactivity suggests the headline improvement flatters the true state of the labour market, so the data alone is unlikely to justify a materially stronger pound.

Political headlines remain in play, with attention today turning to testimony from the senior civil servant dismissed over the failure to disclose the outcome of the Mandelson betting process. Even so, market pricing does not yet point to imminent upheaval. That may help explain why sterling is proving more stable than gilts. For crosses, EUR/GBP should continue to find support in the 0.8685 to 0.8700 area.

EUR: Inflows underpin the single currency

The euro continues to benefit from steady capital inflows into the region. ECB balance of payments data showed robust foreign demand for eurozone assets in February, with combined purchases of equities and debt reaching EUR280bn across the first two months of the year. US TIC data has not signalled outright liquidation of long-dated US assets, but the scale of buying into Europe suggests fresh allocation is, at the margin, lending support to the single currency.

Today’s focus is on the German ZEW survey and a run of ECB speakers this morning. President Lagarde has already signalled the central bank’s broad stance, but the market still wants confirmation from incoming data. Pricing now assigns little chance of a move later this month, but a June hike is still seen as the more likely outcome. Our bias remains for an ECB hike in June as the Governing Council looks to reinforce its anti-inflation credentials.

EUR/USD continues to trade quietly in a 1.1750 to 1.1800 range, though a dovish message from Warsh could open the way to 1.1850.

Looking ahead

• Warsh’s Senate testimony is the key event for the dollar and US rates
• US retail sales and ADP data may add to downside pressure on the dollar if they disappoint
• German ZEW and ECB speakers will shape near-term euro sentiment
• Sterling remains vulnerable to politics, but for now the market is not pricing a full-blown crisis
• EUR/GBP support at 0.8685 to 0.8700 remains an important near-term marker