The fragile ceasefire around Iran is beginning to crack. The United States is actively trying to break Iran’s blockade of the Strait of Hormuz while maintaining its own pressure. Developments on this front will be crucial for the currency market. For now, selling pressure on the Polish zloty has returned, but remains limited, with EUR/PLN still trading near 4.25.
Key points:
- The Monetary Policy Council is expected to leave interest rates unchanged.
- The Federal Reserve kept interest rates unchanged at Jerome Powell’s final meeting as chair.
- The European Central Bank is signalling a possible rate hike in the summer despite weak eurozone data.
- Local elections are approaching in the United Kingdom, increasing pressure on Prime Minister Keir Starmer.
- Oil prices remain elevated as the war involving Iran continues.
Markets are holding their breath, while currencies remain locked in narrow ranges. The Japanese yen stood out the most last week, strengthening sharply after the country’s authorities followed through on their threats of intervention. At the other end of the spectrum were Latin American currencies, with the Colombian peso performing the worst after a surprise decision by the central bank to keep interest rates unchanged. Major currencies traded in narrow ranges against one another, as a series of key central bank meetings — including the Federal Reserve, the European Central Bank and the Bank of England — offered few meaningful clues about their future policy paths.
The most important issue for financial markets this week will still be the course of the war, and the currency market is no exception. The ceasefire is now being threatened by US attempts to break the blockade of the Strait of Hormuz and by Iran’s retaliation. However, markets are not focused on the war alone. In the United States, a series of April labour market data releases is due this week, culminating in Friday’s non-farm payrolls report on 8 May. So far, the US economy appears to have remained largely resilient to the effects of the war, unlike the eurozone and the United Kingdom. Data published in the coming days may ultimately confirm this narrative.
PLN
Selling pressure on the zloty has recently returned, although the scale of its weakness remains limited, with EUR/PLN still around 4.25. Concerns over the course of the conflict in the Middle East remain the key factor, and the latest news from this front is not particularly encouraging. In addition, last week brought rather worrying inflation data for April. Instead of falling, price growth accelerated to 3.2% from 3.0% in March.
These figures raise concerns about inflation spillovers and may temper the optimism of NBP President Adam Glapiński during Thursday’s press conference following Wednesday’s Monetary Policy Council decision. We do not expect interest rates to change this week. Although markets are pricing in rate hikes, we believe this reaction is excessive. We still expect interest rates to remain stable this year, but we will closely monitor developments in energy commodity markets as well as the evolution of inflation and the labour market in the coming months.
EUR
The ECB left interest rates unchanged last week, but came close to signalling a hike in June after noting that such a move had been discussed at the April meeting. Markets are now pricing in three full rate hikes this year. The initial impact of the war on business confidence in the eurozone was stronger than we had expected. ECB President Christine Lagarde also said during her press conference that the bank had not yet seen evidence of second-round inflation effects.
GDP growth in the first quarter was disappointing, suggesting that the eurozone economy entered the period of war in Iran from an already weak position. We maintain our optimistic forecast for the single currency, but we are watching leading economic indicators very closely and hoping for a rebound in the near future. So far, second-quarter readings have not been particularly encouraging, and the scenario of another quarter of effective stagnation appears likely.
USD
The US economy continues to largely ignore the effects of the war and higher energy prices. High-frequency labour market data even suggest that job creation has rebounded. Durable goods orders continue to surprise to the upside, while business investment is being supported by huge spending on AI infrastructure.
As expected, a lack of unanimity among policymakers has become the norm at the Federal Reserve. The strong hawkish minority that has emerged will make it harder for Kevin Warsh to meet Donald Trump’s demands for lower interest rates. Chair Jerome Powell struck a rather hawkish tone during what was likely his final press conference in the role. Although we are not among those expecting US interest rate hikes this year, this hawkish shift at least points to rates staying higher for longer. At the same time, we note that war-related headlines are having a diminishing impact on the dollar, which barely reacted to the latest escalation of the conflict.
GBP
The Bank of England kept interest rates unchanged at 3.75% last week, with chief economist Huw Pill the only policymaker voting for a hike. Given the high level of uncertainty surrounding the war in Iran, we believe the Monetary Policy Committee is right to hold off on changes while it assesses the impact of the conflict on second-round inflation effects. The bank took the unusual step of presenting three forecast scenarios depending on how the war develops. While this does little to provide markets with clarity, it allows the bank to avoid prematurely signalling a policy direction at a time when it is still unclear how the jump in energy prices will affect the UK economy.
The market consensus points to two interest rate hikes by the end of this year, but keeping that option open does not amount to a commitment to act. As Governor Andrew Bailey himself acknowledged, the bank expects virtually no second-round inflation effects if the war evolves in line with its assumptions. Given weak economic growth and a soft labour market, we continue to see limited room for monetary tightening. Meanwhile, local elections scheduled for 7 May will be a major political test for the current government. A painful defeat for the Labour Party could bring Keir Starmer’s premiership to an end and make it easier for the party’s far-left wing to take control — a development that would undoubtedly be negative for the pound.
