USD: Markets are betting on containment and duration is the risk
After hitting a one‑month low of 80.56 last Friday, WTI oil has rebounded about 15%, pushing back above $90 per barrel. The US dollar index (DXY) has also turned higher, rising roughly 1% from its one‑month low of 97.6, also set last Friday. Meanwhile, equity markets are holding onto their recent gains, as noted by the spectacular rebound in the tech sector before last weekend. The rebound matters because it raises a bigger question: has the market declared victory too soon?
Right now, trading action looks consistent with a disruption that doesn’t survive the spring. In other words, investors appear to be leaning toward a 1990–91 style episode, when equities fell on invasion and oil fears, but then recovered as the path to resolution became clearer and policy helped stabilize conditions.
However, that parallel only works if today’s move remains a temporary conflict premium, not a regime‑changing shock. The risk is that oil stays elevated long enough to make the inflation shock beyond transitory and limit central‑bank flexibility. If that happens, the setup starts to look less like 1991 and more like 1973–74, when an energy supply shock quickly became persistent through prices, expectations, and policy constraints.
This distinction is crucial. Equities can rally even when the threat has not evaporated, because markets don’t price headlines, they price paths. Investors may be betting the realized disruption stays short, partial, or containable, even if the rhetoric remains intense. In practice, that often means markets assign a higher probability to harassment and episodic disruption than to a prolonged, full‑scale shutdown. That is exactly how risk tends to show up in prices: as a premium, not as an assumption of worst‑case outcomes.
Still, the Strait of Hormuz is uniquely tail‑risk heavy. Flows through the strait averaged roughly 20 million barrels per day in 2024, or about 20% of global petroleum liquids consumption, and there are limited practical alternatives at that scale. So the market’s optimism depends on one thing: containment becomes reality before higher energy prices create another entrenched-inflation problem.
That is why the current rally can be self‑limiting if diplomacy stalls. If energy prices remain structurally higher for long enough, the market’s “best‑case” path becomes harder to sustain, because today’s valuations effectively assume that policy and diplomacy ultimately cap the damage.
In that context, traders appear to be giving President Trump’s hints for patience some runway. For now, markets are acting as if the most likely timeline is de‑escalation, not escalation. The next move, however, will be shaped less by social media posts and more by the simple question markets always return to: how long does the disruption last?
GBP: Sterling at one-month high versus euro
With Brent crude back above $100/bbl, the dollar has firmed and GBP/USD has slipped back below 1.35. Even so, markets remain broadly optimistic around the Middle East conflict, and against that backdrop the broader April GBP/USD rally remains intact rather than reversing. In contrast, GBP/EUR has pushed to its highest level this month, moving back above 1.15, reflecting relative resilience versus the euro.
UK fundamentals have turned marginally more supportive at the margin. Gilt yields have edged higher, helped by the UK inflation print landing in a clear “sweet spot” at 3.3% y/y, in line with expectations. The data was firm enough to reinforce the view that BoE rate cuts are not imminent, while stopping short of reigniting acute stagflation fears. Consistent with that, money markets nudged expectations for cumulative tightening slightly higher, with year‑end OIS pricing now implying around one and a half 25bp hikes.
Political risk has also been in focus following the Mandelson affair, which briefly raised questions around Prime Minister Starmer’s grip on power. While leadership uncertainty has not fully dissipated, markets appear increasingly comfortable that an imminent change is unlikely, allowing political risk to fade into the background for now. That has provided some additional support for sterling this week, though UK politics remains a latent vulnerability, particularly as attention turns toward the May local elections.
CAD: Holding on to recent gains
Global markets continue to take their cues from President Trump, with risk sentiment holding up better than expected despite ongoing Middle East tensions and energy-related concerns. Markets appear willing, for now, to grant his calls for patience some runway, helping to sustain a constructive tone that has lifted equities globally.
This week in Canada, the inflation report did little to shift the near-term policy narrative, a reason the CAD has been able to hold onto its recent gains. Despite the noticeable jump in headline CPI, markets continue to price the Bank of Canada on hold through at least October, so the data didn’t trigger a meaningful repricing in rates, or a fresh impulse in FX.
Instead, the Canadian Dollar’s near-term tone is being set externally. Trading has been dominated by developments in the US–Iran conflict, with USD safe-haven/oil demand ebbing and flowing around headlines. In that environment, USD/CAD has remained anchored, gravitating toward and repeatedly finding support around 1.365.
That support, however, comes with a risk asymmetry: CAD stays resilient while escalation risk is contained and the broader US Dollar conflict premium continues to unwind, but it remains vulnerable to a renewed USD bid if diplomacy stalls for an extended period. For now, markets are in a wait-and-watch mode. Until there is clearer, tangible progress, geopolitical risk is likely to keep overshadowing domestic policy developments and leave USD/CAD highly sensitive to headline swings and oil creeping higher.
If diplomatic efforts gain traction and the broader USD pullback persists, USD/CAD is well-positioned to keep testing 1.365 and potentially drift toward 1.36. If the ceasefire extension comes with no diplomatic action, a cautious rebound toward 1.37 looks plausible as defensive USD demand reasserts itself.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
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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.
