USD: Ceasefire deadline tests risk conviction
Markets have turned more cautious into the ceasefire deadline, with risk sentiment fraying at the margin after last week’s euphoria. Equities have slipped from record highs, with the S&P 500 breaking a five‑day winning streak as Tehran signalled reluctance to send diplomats to Pakistan while the US maintained its blockade of the Strait of Hormuz and seized an Iranian vessel.
Despite the renewed escalation in headlines, markets continue to operate on the assumption that ceasefire talks will proceed today and that a more durable agreement remains likely in the near term. That optimism has kept the broader de‑escalation trade alive, even as visibility around Hormuz deteriorates again. The key uncertainty is not agreement in principle, but durability and how quickly shipping traffic normalises. On both counts, caution remains warranted, with a rapid return to pre‑conflict energy flows far from assured.
In rates, the rally that closed last week, triggered by a brief reopening of the Strait and renewed peace talk expectations, has left yields drifting lower as war risk premia are partially unwound. That move has been reinforced by strong earnings momentum and AI‑related optimism, not geopolitics alone. The curve has bull‑steepened, reflecting both the removal of tail risk and a reversal of conflict‑driven positioning. Attention now shifts to Kevin Warsh’s Senate hearing, with markets focused less on formal guidance and more on his inflation‑employment trade‑off. Any signal that he is willing to look through energy‑driven inflation as transitory would support the front‑end rally and weigh further on the USD; a more cautious stance on inflation persistence would favour a near‑term dollar stabilisation.
Overall, the USD outlook remains phased rather than linear. A durable ceasefire and clearer progress on Hormuz would continue to erode the dollar’s external risk premium. Beyond that, fundamentals reassert, where narrowing rate differentials argue for USD softness, but relative US growth resilience and lingering policy credibility concerns are likely to cap downside rather than allow a sustained break lower.
EUR: Trading a delicate calm
Markets continue to trade on a thread of fragile optimism, with the euro holding up against the dollar and hovering just south of the 1.18 level. Meanwhile, the currency has recently underperformed against oil‑exporting peers such as the NOK and CAD. The commodity‑FX complex benefited from crude prices being jerked higher following the weekend’s geopolitical setbacks. At the same time, muted but still constructive risk sentiment allowed terms‑of‑trade dynamics to reassert themselves more cleanly.
The bearish move in EUR/CHF over the past couple of days has also been instructive. Rather than reflecting a classic flight‑to‑safety dynamic, it appears more consistent with a re‑engagement with pre‑conflict trends, given that the franc had been disproportionately weakened against the euro since the conflict began.
EUR/USD remains below, but has so far held firm against, the 1.18 level. President Trump confirmed that the ceasefire is set to expire tomorrow evening, Washington time, while talks are due to resume today in Pakistan. A test of 1.18 would appear warranted only in the event of a formal peace‑deal announcement that includes the reopening of the Strait.
In the meantime, today’s key focus is Kevin Warsh’s testimony before the Senate Banking Committee. Markets will be alert to any dovish, Trump‑aligned rhetoric. A stance perceived as overly accommodating to pressure for rate cuts could reintroduce a risk premium into dollar pricing – particularly at a time when uncertainty around inflation risks remains elevated due to the conflict.
On the data front, we will keep an eye on the April ZEW surveys for Germany and the euro area, due for release this morning at 10:00 BST, as the conflict begins to weigh on what had initially been an uplift in sentiment at the start of 2026 – already challenged by an unconvincing macro data cadence.
GBP: Supported by peace hopes, challenged by UK politics
Sterling continues to trade primarily off Middle East ceasefire expectations, with hopes of an extended truce underpinning global risk sentiment and helping GBP hold near recent highs. The pound has responded positively to de‑escalation signals, reflecting its high‑beta profile, though gains remain tactical and highly conditional on further confirmation of a durable peace framework.
This morning’s UK labour market data failed to move markets. The unemployment rate fell to 4.9% in the three months to February, while headline wage growth eased to 3.8% y/y, marginally above expectations but the slowest pace since late 2020. Private‑sector pay growth cooled further, reinforcing the disinflation narrative. However, the release is pre‑war and increasingly stale, limiting its relevance amid forward‑looking stagflation risks. Attention is firmly on tomorrow’s CPI print, which should carry more weight for BoE pricing.
In FX, GBP/USD remains anchored to the de‑escalation trade, with a test of 1.36 plausible on firmer ceasefire signals, though scope for sustained upside beyond that level looks limited. In GBP/EUR, geopolitics matter less at the margin; clearer de‑escalation would refocus attention on domestic UK risks, leaving 1.14 as a downside target as May’s local elections approach.
UK political risk is also resurfacing as a latent headwind. Prime Minister Starmer faces renewed leadership pressure linked to the Mandelson vetting controversy, with today’s parliamentary testimony keeping uncertainty elevated. While not immediately market‑moving, the episode risks raising the political risk premium, particularly through upward pressure on long‑dated gilt yields. Combined with lingering stagflation concerns, this backdrop remains an uncomfortable mix for sterling despite its strong recent performance.
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Calendar: April 20-24
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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.
