USD: Fresh uncertainty over Middle East conflict triggers rebound    

The US dollar has staged a modest rebound at the start of this week helping to lift the dollar index back up closer to the 200-day moving average at around 98.500 after it fell to a low of 97.632 on Friday. The US dollar has been supported by fresh uncertainty over the Middle East conflict which has dampened recent optimism over further deescalation and the re-opening of the Strait of Hormuz. Tensions between the US and Iran picked up over the weekend after the US navy fired upon and boarded an Iranian-flagged cargo ship in the Gulf of Oman. It was the first seizure since the US blockade of the Strati was put in place. At the same time, it has been reported that Iran’s Islamic Revolutionary Guard Corps (IRGC) fired on multiple commercial vessels in the Strait as Iran reimposed “strict control” after briefly announcing on Friday that it has re-opened. The latest developments have cast doubt on whether further talks will take place between the US and Iran before the two-week ceasefire comes to an end tomorrow. Bloomberg has reported that it is unclear whether Iranian and US officials will meet in Islamabad with Vice President JD Vance, special envoy Steve Witkoff and the president’s son-in-law Jared Kushner scheduled to leave later today for talks tomorrow according to a White House official. In contrast, the Iranians have denied that they will participate in the talks. Iran is reportedly upset by the continuation of the US naval blockade and violation of the ceasefire agreement. Israel has reportedly continued to fight in Lebanon despite the ceasefire deal announced last week. The latest developments have contributed to the price of Brent rising back up to a high of USD97.50/barrel overnight after briefly falling to a low of USD86.09/barrel on Friday. In the foreign exchange market, the unfavourable developments have triggered setback for the high beta commodity currencies of the Australin and New Zealand dollar which had outperformed over the past week on the back of rising investor optimism over the prospect of further deescalation in the Middle East.               

GBP REVERSES GAINS VS. EUR AS BOE RATE HIKE BETS SCALED BACK 

Source: Bloomberg, Macrobond & MUFG GMR

GBP: UK political risks & lower UK yields putting a dampener on pound 

The pound has been one of the worst performing G10 currencies over the past week alongside the US dollar and euro. It has meant that cable and EUR/GBP have remained relatively stable at around 1.3500 and 0.8700 respectively. The pound has been undermined in part by the sharp decline in Uk yields over the past week as market participants have moved to scale back BoE rate hike expectations. The 2-year gilt yield has dropped by around 60bps from the high recorded in March when market participants were pricing in multiple rate hikes for this year. Current pricing for one 25bps hike by the end of this year is now more in line with our own forecasts (click here). The recent correction lower for energy prices and less hawkish comments from BoE officials have encouraged the dovish repricing. Most notably Governor Bailey stated last week that markets got ahead of themselves with rate hike bets while emphasizing that it is too early to form strong judgement. The comments strongly imply that rates are likely to be held on hold at the next policy meeting at the end of this month.

At the same time, the pound has been undermined by fresh political uncertainty in the UK ahead of next month’s local elections on 7th May. Prime Minister Starmer will reportedly make a statement to the House of Commons today to address a fresh dispute over the appointment of Peter Mandelson as US ambassador. He is expected to set out a detailed summary of events surrounding Mandelson’s vetting, following the conclusion of a fact-finding exercise which he ordered. According to a person familiar with the matter, he is expected to make clear that both he and the Commons should have been privy to the information at the time. He will then be followed tomorrow by former head of the Foreign Office Olly Robbins giving evidence to the Foreign Affairs Committee. The latest developments have re-heightened speculation over a potential leadership challenge after the local elections if the Labour party perform poorly. The Sun newspaper reported that Manchester Mayor Andy Burnham and former Deputy Prime Minster Angela Rayner held a secret meeting on Friday. So far the negative impact on the pound has been limited, but UK political developments have the potential to trigger a sharper sell-off in the month ahead.