For much of the past month, markets had begun to price in the idea that the worst of the U.S.–Iran conflict might be behind us. Diplomatic talks had created cautious optimism that shipping through the Strait of Hormuz would gradually return to normal and that geopolitical risk would begin to fade from the market narrative.
That optimism took a significant hit over the weekend.
The fragile ceasefire has effectively broken down, with both Washington and Tehran accusing each other of breaching the agreement and responding with further military action. More importantly for financial markets, the disagreement is no longer simply about military operations. It has become a battle over who controls one of the world’s most important trade routes. The Strait of Hormuz remains the artery through which roughly one-fifth of global oil exports pass, and while commercial shipping has not stopped entirely, the increase in military activity means traders are once again pricing in a higher geopolitical risk premium.
Interestingly, the market reaction has been more measured than many would have expected. Oil prices have firmed, but not dramatically, suggesting investors still believe the conflict can ultimately be contained and that a complete disruption to global energy supplies remains unlikely. Nevertheless, the situation leaves markets highly sensitive to incoming headlines. If tensions continue to escalate, energy markets, inflation expectations and the US Dollar are all likely to react far more quickly than scheduled economic data over the coming week.
One market that has quietly continued to perform well is Sterling. Despite ongoing political uncertainty and a difficult global backdrop, the Pound has strengthened against several of its major counterparts over recent weeks, including the Euro, Japanese Yen and Canadian Dollar. Against the US Dollar, Sterling has found conditions more challenging due to safe-haven demand, but if geopolitical tensions begin to stabilise, there is certainly a case for GBP/USD to recover back towards the 1.34 to 1.35 region. For anyone buying US Dollars, those levels could present some attractive opportunities should they materialise.
Monday
The week begins relatively quietly with government bond auctions from both France and the United States, alongside the U.S. Monthly Budget Statement. These releases rarely move markets significantly on their own, but they provide another snapshot of government borrowing and investor demand for sovereign debt at a time when fiscal spending remains elevated.
Tuesday
Tuesday becomes much more interesting.
The morning begins with a speech from Bank of England Governor Andrew Bailey. With markets increasingly questioning the timing of future UK rate moves, investors will be listening carefully for any indication that the Bank is becoming more concerned about inflation, growth or the labour market.
Attention then shifts firmly to the United States with CPI inflation data. Monthly inflation is expected to rise by 0.3%, while the annual Core CPI rate is forecast to remain at 2.9%. After the Federal Reserve’s recent shift towards a more hawkish stance, inflation data now carries even greater significance. If inflation surprises to the upside, markets are likely to push expectations for future rate cuts even further into the distance, providing additional support for the US Dollar.
Later in the afternoon we hear from several Federal Reserve officials. With markets no longer relying heavily on the Fed’s traditional forward guidance, individual speeches have become increasingly important in shaping expectations around the future path of monetary policy.
Wednesday
Wednesday’s headline event is the Bank of Canada interest rate decision.
Markets expect policymakers to leave rates unchanged at 2.2%, although the recent rise in oil prices presents an interesting challenge. While stronger oil prices typically support the Canadian Dollar, they also create renewed inflationary pressures within the domestic economy, potentially limiting the Bank’s flexibility over the coming months.
Thursday
Thursday is undoubtedly Sterling’s biggest test of the week.
The UK releases GDP, trade balance, industrial production and manufacturing production data, providing one of the clearest assessments yet of the economy’s current health.
Monthly GDP is expected at 0.1%, while quarterly growth is forecast at 0.6%. If the UK economy delivers another positive surprise, Sterling could receive a significant boost, particularly given the improved momentum it has built in recent weeks. Conversely, disappointing figures would likely erase much of those gains as markets reassess the outlook for UK growth.
Friday
The week concludes with Eurozone Core Inflation, expected to ease to 2.4%.
Lower inflation would be welcome news for consumers and policymakers alike. However, from a currency perspective, softer inflation may reduce expectations of further ECB tightening, which could limit the Euro’s upside despite being positive news for the wider economy.
Outlook
While this week’s economic calendar contains several important releases, geopolitics remains the dominant theme. Every new headline from the Middle East has the potential to move markets far more aggressively than scheduled economic data.
That said, Sterling enters the week in a relatively strong position. If Thursday’s UK data confirms that the domestic economy continues to outperform expectations, the Pound could extend its recent gains. Meanwhile, the US Dollar remains caught between two opposing forces: safe-haven demand driven by geopolitical uncertainty and inflation data that will determine whether the Federal Reserve needs to remain restrictive for even longer.
For anyone with upcoming currency requirements, this is another week where preparation will almost certainly prove more valuable than trying to react after markets have already moved.
GBP/EUR 1.1702 GBP/USD 1.3391 GBP/AED 4.9215
GBP/AUD 1.9291 GBP/CHF 1.0818 GBP/CAD 1.8933
GBP/NZD 2.3171 EUR/USD 1.1428 GBP/ZAR 21.9079