Market Brief: Confused narratives out of the Strait of Hormuz keep markets rangebound 

Oil prices are reverting higher and the dollar is holding steady after President Donald Trump announced plans to “guide”—but not escort—shipping through the Strait of Hormuz. US Central Command, which is currently blockading Iranian ports, said 15,000 service members and more than 100 aircraft, along with warships and drones would support the initiative, yet stopped short of putting surface combatants at risk by offering convoy protection through the narrow waterway. A tanker off Fujairah reported being ⁠hit by “unknown projectiles” shortly after the US announcement, and Tehran this morning said it was implementing a new “control zone” in the Strait, with vessels expected to coordinate their movements with Iranian forces.

Global energy stockpiles are approaching their lowest levels in a decade, and market participants are warning that shortages could intensify within weeks as peak driving season gets underway. Although the burden has so far fallen heaviest on import-dependent Asian and European economies, where higher prices act as a straightforward tax on growth, the United States is not immune. Its terms of trade have improved as exports have climbed, yet refined-product prices have risen more steeply than in most other advanced economies, squeezing lower- and middle-income households that spend a disproportionate share of their budgets at the pump.

The yen is climbing once again as markets watch for a “double-tap” intervention effort from the Ministry of Finance. Authorities are believed to have spent roughly $30 billion on yen purchases last week after the dollar exchange rate breached the 160 threshold—a move that threatened to compound the inflationary impact of higher energy prices—and the currency is now trading roughly 1.5% firmer against the dollar. Tokyo has a well-established pattern of amplifying its interventions by executing them when domestic markets are closed: ahead of the same weekend in 2024, the Bank of Japan launched a similarly-scaled effort and followed it with further yen buying the following Monday, when markets were shut for the Golden Week holidays.

The euro and pound are both holding firm against the dollar as expectations for summer rate increases encourage front-running in currency markets, even as near-term risks multiply. Rates traders shrugged on Friday when President Trump threatened to raise tariffs on EU autos to 25% from 15%, and implied volatility on the pound remains low ahead of Thursday's UK elections, which are expected to deliver a drubbing for Keir Starmer's Labour Party. A rate increase is 94% priced in for the European Central Bank's June meeting, and more than fully discounted for the Bank of England’s tea party in July.

This follows a dramatic repricing of monetary policy expectations last week after every major advanced-economy central bank delivered a hawkish hold. Derivatives markets adjusted implied year-end rate paths sharply: the Bank of Canada shifted 14 basis points, with two increases now fully priced; the European Central Bank moved 15 basis points, with three discounted; and the Bank of England's expected year-end base rate inched higher to 4.32%, implying two increases and decent odds on a third. The Federal Reserve is expected to stand pat as growth and inflation data hold up—and as Jerome Powell delays his departure from the Board of Governors, limiting the extent to which Trump appointees can steer the rate trajectory.

US labour market data may play a material role in driving currency markets this week as investors seek an understanding of the forces acting on the second half of the Fed’s mandate. Tomorrow’s Job Openings and Labor Turnover report is expected to show the number of available positions remaining essentially unchanged in March even as worker confidence eroded, with the quits rate edging lower from a month prior. Thursday’s jobless claims print should follow last week’s update in remaining extremely low, suggesting that demand and supply conditions are still in a healthy balance. Net hiring numbers in Friday’s April non-farm payrolls report are seen slipping to roughly 60,000, but the unemployment rate could edge lower to 4.2% from 4.3% previously.

Taken in sum, markets are set for another volatile week, with inflationary headwinds competing with strong growth underpinnings to break simplistic trading narratives. Absent a breakthrough in the Middle East, currencies seem unlikely to break out of current ranges, but could see violent trading action nonetheless.

Market Overview

Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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