USD: Dollar gains as Middle East smolders
The US dollar climbed against most major peers early Tuesday, though the pound managed to hold its ground ahead of a busy data schedule, yet geopolitical headlines are leading. Oil prices jumped following Iranian attacks on UAE energy infrastructure, which effectively disrupted the April ceasefire. This escalation in hostilities has investors doubtful around April’s risk rally momentum, especially as President Trump suggests the conflict could persist for a few more weeks.
Fresh turmoil in the Gulf keeps putting pressure on energy markets as the Strait of Hormuz becomes harder to reopen. On the other side, market participants are currently acting as if de-escalation remains the base case, giving the administration some runway to find a resolution. However, the clock is ticking on that patience.
Markets also remain unconvinced that an escort‑and‑coordination framework proposed by President Trump can quickly restore normal flows through the Strait of Hormuz. President Trump’s “Project Freedom” aims to guide neutral ships out of the Gulf, with US Central Command describing support that includes guided‑missile destroyers, aircraft, unmanned platforms, and roughly 15,000 service members. Still, with mine risk, attack risk, and war‑risk insurance constraints lingering, the route remains difficult to “normalize” quickly. As brent climbed back above the $110 area, it has triggered again some anxiety across markets, especially in the fixed income market, where 30-year US Treasuries are back above 5%.
At the same time, equities have been in a world of their own, capping a remarkable April. The month delivered a powerful risk rally, with the S&P 500 up about 10.4% to a record 7,209, the Nasdaq up about 15.3%, and the Dow up about 7.1%. Investors largely treated the energy shock as noisy and temporary, and they were willing to pay up for growth and earnings visibility even while the oil tape stayed volatile. That “markets moved on” vibe has shown up in correlation, too. The Implied Correlation Index has fallen sharply from its late‑March spike (peak near 41.68 on 03/27/26) to about 12.13 recently, which fits with a market that’s no longer pricing a single, macro‑driven liquidation. As I mentioned here, “It often feels like the stock market operates in an alternate universe… It’s less an alternate universe than an alternate timeline.” Markets are looking through the headline risk, have priced in the war impact, and don’t see the conflict surviving beyond spring. Yet again, the clock is ticking, and the longer the situation remains unclear, markets will reprice and the Dollar could find some fresh momentum after end of month losses on Yen’s intervention.
CAD: Between tariffs, fiscal and inflation
Canadian manufacturers are taking a hit from recent US metal tariffs, prompting Ottawa to roll out a C$1.5 billion relief package. Managed largely by the Business Development Bank of Canada, this program offers interest-free loans to help keep trade-exposed companies afloat while they adjust their corporate strategies. As Prime Minister Carney remains focused on diversifying trade away from the US over the long term, heavy industrial hubs in Ontario and Quebec are feeling the immediate squeeze. This trade friction is just one of several headwinds currently testing the resilience of the domestic economy.
While the government steps in to cushion the manufacturing sector, its broader fiscal strategy is drawing a fair bit of scrutiny. The new Parliamentary Budget Officer recently evaluated the spring fiscal update and flagged a concerning jump in federal debt payments. Furthermore, the PBO report highlighted a distinct lack of clarity surrounding Ottawa’s major fiscal initiatives. Whether it is the planned ramp-up in defense spending or the launch of a new $25 billion wealth fund, market watchers are left wondering how the government will find the billions in promised internal savings to balance the books.
This cloudy fiscal picture certainly is the least of the concerns in the short-term landscape for the Bank of Canada, which recently opted to hold its policy rate steady at 2.25%. Governor Tiff Macklem noted that while the domestic economy continues to slowly grow, global events are throwing a wrench into the inflation outlook. The ongoing conflict in the Middle East has sent energy prices climbing, pushing inflation to 2.4% in March with expectations of a near-term peak around 3%. Macklem stressed that the central bank will stay nimble, standing ready to cut rates if US trade restrictions worsen or hike them if energy-driven inflation gets out of hand.
Despite the domestic hurdles and a soft labor market, the Canadian dollar has surprisingly gained some recent ground. The slide toward the 1.36 level is really a US dollar story, rather than a sudden burst of momentum for the Loonie. As investors price out the most extreme geopolitical risks, the greenback has steadily lost its safe-haven conflict premium. With the Bank of Canada’s trajectory largely priced in and CUSMA renegotiations acting as an overhead risk, expect the currency pair to remain choppy around 1.36 until the next employment report gives us a clearer directional cue.
GBP: Upside stalls as local elections loom
Following the long UK weekend, sterling has started the week on the back foot, pressured by a renewed escalation in Middle East tensions that has capped risk appetite and driven another sharp leg higher in oil prices. Against this backdrop, the risk‑ and energy‑sensitive pound has underperformed most major peers, with GBP/USD slipping back toward 1.35 after once again failing to hold a break above the 1.36 resistance zone highlighted in recent sessions. At the same time, the approach of UK local elections adds a domestic layer of uncertainty, keeping sterling vulnerable to downside shocks.
That said, the broader April recovery remains intact for now. Cable’s pullback looks corrective rather than trend‑breaking, with price still holding above key daily moving averages, keeping upside risks alive as long as support in the 1.34–1.35 region holds. The problem is, the balance of risks is increasingly shifting toward rates and domestic vulnerability.
Longer‑dated gilt yields have climbed sharply, with UK 30‑year yields up around 65bp since the Iran war began, nearing levels that have historically worked against sterling rather than supported it. At the front end, two‑year yields are nearly 90bp higher, but the relationship with GBP/USD has turned adverse, with the 20‑day correlation falling to its weakest since October. This suggests markets are beginning to worry that tighter financial conditions, potentially compounded by post‑election political uncertainty, could undermine UK growth, and therefore higher yields won’t necessarily support sterling like they ought to.
Options markets echo this caution, with implied volatility spiking. GBP/USD reflects a heavier mix of geopolitical and monetary‑policy risk, but political uncertainty linked to the upcoming local elections — and renewed scrutiny of Prime Minister Starmer’s position — is being expressed more directly via EUR/GBP, where one‑week implied volatility is at its richest since November.
In short, sterling remains resilient but increasingly constrained: upside is technically intact, yet higher oil prices, stretched yields, and looming political risk are raising the bar for further gains.
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Calendar: May 04 – 08
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
