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CAD
The loonie traded in a narrow range yesterday, with USDCAD holding just shy of 1.37 as the two opposing forces we flagged at the start of the week continued to offset one another. WTI near $100, supported by Trump’s “totally unacceptable” line on Tehran’s counter-proposal and reports that he is weighing a return to military operations, has provided a familiar floor under the Canadian dollar. Against that, the broader bid for the greenback on stalling Iran diplomacy and a firmer US rates backdrop has prevented any meaningful loonie outperformance. Today’s Canadian calendar is empty, leaving the loonie to take its cue from oil and Middle East headlines yet again. We expect USDCAD to remain anchored around 1.37, with risks two-sided into Trump’s expected meeting with Xi later this week.
USD
The dollar finished yesterday firmer, with the DXY closing up around four-tenths near 98.3, even as the headline market event of the day, April CPI, largely failed to deliver the reaction the print itself would normally warrant. Headline inflation accelerated to 3.8% YoY on a 0.6% MoM gain, with core CPI rising 0.4% MoM to 2.8% YoY. As we set out in yesterday’s reactive piece, much of the headline strength stemmed from energy-driven passthrough that FOMC voters are likely to discount in isolation, while a one-off correction to last autumn’s shutdown-distorted rent series flattered the core figure. The net result was little impetus for the greenback, with most of the day’s modest dollar gains instead driven by Trump’s hardening Iran rhetoric and the move higher in Brent towards $107. Today’s calendar is light with no top-tier data due, so headline risk around the Middle East and any read-across from Trump-Xi preparations should dominate. We retain our view that the dollar is biased modestly higher absent a meaningful peace breakthrough.
EUR
EURUSD finished Wednesday in the red, slipping to the low 1.17s, a roughly four-tenths fall over the session. The decline came despite a clearly better-than-feared German ZEW expectations print, which jumped to -10.2 in May from -17.2 in April, well above consensus. The current situation index, however, deteriorated further to -77.8, validating the underlying point we made on Tuesday morning: that the eurozone’s terms-of-trade pain from elevated energy costs is real, and that hawkish ECB commentary alone is not enough to offset that drag against a firmer dollar. Today’s domestic calendar is thin, though a surprise 0.3pp jump in French unemployment to 8.1% has added to the downside pressure on the single currency. With energy import costs continuing to weigh and Lagarde scheduled to speak, we look for EURUSD to remain heavy in the 1.17 region, with the path of least resistance lower while the Strait of Hormuz remains effectively shut.
GBP
Sterling extended its losing streak yesterday, with cable trading in the low 1.35s and GBPEUR holding just above 1.15, validating the asymmetric downside risks to GBP that we have flagged consistently in recent pieces. The political channel was the dominant driver, with calls for the Prime Minister’s resignation building through the session: close to 100 Labour MPs have now publicly pressed for Sir Keir Starmer to step down or set out a timetable, even as a counter-letter of support also gathers signatures. Starmer himself remains defiant, telling Cabinet yesterday that the leadership process “has not been triggered”. Today’s UK calendar is empty, albeit the State Opening of Parliament should mean a brief reprieve from Westminster headlines, at least until early afternoon. Still, we continue to expect further sterling losses if a resignation materialises and no US-Iran breakthrough emerges.