Market Brief: Market caution returns as US plans extended Iran blockade

Oil benchmarks and the dollar are extending yesterday’s gains after the Wall Street Journal said US president Donald Trump is preparing to maintain an indefinite blockade against Iranian shipping, rather than accepting Tehran's peace proposal or resuming military attacks. Barrels of Brent crude are trading for more than $114, while West Texas Intermediate changes hands for $103, and the greenback is reversing last week’s losses as hopes for a diplomatic resolution to the conflict fade. Equity futures, by contrast, are climbing ahead of the open as investors anticipate strong earnings from a number of technology behemoths, including Alphabet, Amazon, Meta, and Microsoft, all due to report after the closing bell.

Crude prices were little moved yesterday by the United Arab Emirates' announcement of its departure from OPEC, suggesting traders don’t see the decision affecting global energy flows in the near term. The country, long chafing under production constraints imposed by the Saudi-dominated cartel, is widely expected to ramp up output once the Strait of Hormuz reopens, but the remaining OPEC members are also likely to do the same, meaning the supply outlook has not shifted dramatically—today’s shortages are seen ending with a deluge.

The Canadian dollar is trading sideways ahead of this morning's Bank of Canada decision, which should see Governor Tiff Macklem deliver a steady-as-she-goes message. Although policymakers are keeping a wary eye on inflation risks from the energy shock sweeping the global economy, weak domestic demand, falling home values, and a moribund investment backdrop are seen as containing price pressures for now. Green shoots are emerging: last week's first-quarter Business Outlook Survey showed sentiment improving as trade tensions ease, sales growth picks up, and public spending rises, with nascent signs of a recovery in investment and hiring intentions, albeit from weak levels. We think the currency could mount a fairly solid recovery rally once the Middle East conflict is resolved*.

The Federal Reserve is universally expected to leave rates on hold while offering very little in the way of forward guidance this afternoon, yet risks are tilted toward a subtle hawkish tone emerging in both the statement and the post-decision press conference as it becomes more difficult to defend the central bank’s longstanding easing bias. Yesterday's Conference Board survey showed consumer confidence improving in April despite the tariff war. Economic surprise indices remain in positive territory, and figures due tomorrow are expected to reveal a first-quarter rebound from the shutdown-driven slowdown at the end of last year. Job creation has slowed, yet labour markets remain tight, with no sign of serious deterioration in unemployment. Perhaps most importantly, core inflation is elevated and price pressures look set to intensify as higher energy costs ripple through supply chains.

Market reaction could, however, hinge on questions about Chair Powell’s future. He is likely to be pressed on whether the Justice Department's decision last week to close its investigation is sufficient grounds to relinquish his seat on the Board of Governors when his term as chair expires in May. In theory, he could remain on the board until January 2028, and last month insisted he had "no intention of leaving" until the probe was "well and truly over, with transparency and finality"—conditions that have not been definitively met. The Justice Department has referred the matter to the Fed's Office of the Inspector General, and communications from the White House have left considerable ambiguity over whether the president intends to keep applying pressure.

In our view, potential currency-market outcomes are binary in nature. Were Powell to signal his intent to depart, both yields and the dollar could come under pressure as investors reposition for a more accommodative policy trajectory under a Trump-appointed majority. More likely perhaps, he will choose to stay for now in an effort to defend an institution he sees as facing an existential threat. That should bolster perceptions of policy continuity while lending support to front-end yields and the greenback.

The euro and pound are on the defensive ahead of tomorrow's back-to-back central bank decisions, even though they are likely to feature hawkish turns from policymakers on either side of the Channel. With inflation pressures building and expectations rising across the region, officials are likely to cautiously signal some tightening ahead—aligning with market pricing for at least two increases each by year-end—but rate differentials are playing a relatively minor role in currency markets, with headlines from the White House and the Middle East dominating trading activity and limiting appetite for directional position-taking**.

Please note that (unusually) I won’t be sending reaction notes*** after today’s central bank decisions due to unavoidable scheduling conflicts. Apologies for the inconvenience.

*The secret to happiness in marriage and FX trading is the same: keeping expectations really, really low.

**This is just a pretentious way to say that very few are willing to place big bets on exchange rates when positions can be wiped out in less than a heartbeat by unexpected geopolitical developments.

**At least this way markets won’t prove me wrong within minutes. It’ll now take at least a day.

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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