Equities and oil are reaffirming their greater relevance for FX relative to rate differentials. A mix of resilient risk sentiment, while Hormuz concerns push crude prices up, is good for both USD and commodity currencies. But if US equities turn lower (like this morning), USD stands as the only winner. Eyes on the PMIs today alongside Gulf headlines
USD: A good moment for the dollar
Strong earnings helped US equities remain resilient yesterday despite signs of re‑escalation in the Gulf. In FX, this translated into a more pronounced rotation away from low‑yielding, energy‑importer currencies and toward high‑beta commodity FX and the dollar. However, US equity futures point to souring risk sentiment overnight, raising the chance that the USD will emerge as the sole winner.
There is still considerable uncertainty around diplomatic prospects in the Middle East. The White House said there is no deadline for the ceasefire, but continues to apply pressure on Iran to return to talks. Trump said that negotiations could restart as early as tomorrow, but we haven't heard any official indications from Iran in that regard.
The reassuring element is that at least one party – the US – is signalling a strong desire to resume negotiations swiftly. What is less reassuring is the lack of clarity around plans for reopening the Strait of Hormuz. The current environment still points to strength in USD and commodity currencies, although the latter depends heavily on a continuation of recent equity market resilience.
Today, the main macro events in developed markets are the release of S&P Global PMIs. Whilst not as impactful as the ISM for USD, it has better comparability with Europe. The US manufacturing and services gauge is expected to improve from March.
EUR: PMIs not a game-changer for the ECB
EUR/USD has room to move lower if a diplomatic path fails to emerge. That said, we did observe dip‑buying in the 1.1650‑1.1670 area earlier in April, in line with markets’ ongoing tendency to lean on the optimistic side. Similar support could emerge around those levels again in the current environment, unless risk sentiment turns materially more negative.
April PMIs are released this morning in the eurozone. Unlike the US, expectations are for further weakness, with consensus at 50.1 for the composite index. A surprise below 50.0 could have an amplified effect as it would point to economic contraction for the first time since December 2024.
But barring a big PMI disappointment, these surveys are unlikely to materially impact the ECB’s stance in a week, when they are expected to keep rates on hold. In his preview, my colleague Carsten Brzeski explains why we think the ECB will retain full optionality and likely deliver only limited implicit pushback against market pricing.
GBP: PMIs may fall into contraction
EUR/GBP dropped to the 0.867 level yesterday before starting to trend back higher overnight. The main reason was the good performance of US equities, to which the pound has a higher beta than the euro.
Today, we’ll be comparing the eurozone and UK PMIs. If consensus is right, the UK composite figure should fall just inside contraction territory (49.8). The big question remains what that means for the respective central banks. We think a bad print has greater potential to cause dovish repricing in the GBP curve rather than in the EUR curve, primarily due to the relatively less hawkish tone by the Bank of England and a much higher starting point for rates.
Our bias remains on the upside for EUR/GBP as we expect further tightening of the front-end rate spread and political risk premium may increase after the 7 May UK local elections.
NOK: The big winner in April
The Norwegian krone has staged an impressive 4.2% rally vs USD and 2.9% vs EUR in April, with gains accelerating yesterday. The market conditions we saw yesterday were ideal for NOK outperformance. US equities' resilience kept global risk sentiment afloat as oil prices increased.
We have recently identified 10.80-10.85 as a landing zone for EUR/NOK this month, but had probably underestimated risk sentiment resilience, and risks are definitely on the downside relative to those targets.
That’s especially true considering that we expect Norges Bank to hike by 25bp on 7 May, which is currently 19bp priced in. While our current forecast is that this will be a one-and-done move, the risks are for a follow-up hike later this year, and we doubt Norges Bank will close the door to more tightening in May.
Comments
Log in or sign up to join the conversation.