ACM Update 20-04-26
Sterling-Dollar nudged up further last week as February GDP figures from the UK exceeded forecasts and ceasefire optimism grew in the Middle East. The pair achieved a high last seen prior to the Iran war. IMF forecasts for the British economy for the rest of the year though aren’t as optimistic.
This week brings a flurry of UK data from unemployment, government borrowing, inflation and retail sales. In the US, the Fed Chair-Designate, Kevin Warsh, is testifying in front of the Senate. Discussions on Iran will continue to drive the Dollar.
The US currency continued to be heavily influenced by events in the Middle East last week. As a ceasefire agreement was reached and the much-publicised Strait of Hormuz “reopened”, markets breathed a sigh of relief. The safe haven Dollar moved again to a “risk-on” position, weakening the Dollar Index.
Oil prices fell as a result by over 10% at one stage. This led to fears of runaway US inflation calming down, despite the recent spike. President Trump praised the diplomatic negotiations with Iran, whilst claiming victory. He also declared the US currently has “no inflation” on Thursday, before a day later addressing the “fake inflation” was just driven by fuel and energy price spikes from the Iran war.
The changing geopolitical and inflationary positions led to a change in rate cut bets from financial markets. Traders proceeded to ramp up bets for rate cuts later in 2026, quickly pricing in a 50:50 chance of one cut by the end of the year. This was up from roughly 25% at the start of the week, and a reversal to the expectation of hikes a week or so prior.
Despite the recent March US inflation release hitting a two-year high of 3.8%, investors for now looked past the spike given core inflation remained at 2.7%. These readings exclude food and energy prices. One Fed policymaker, John Williams, made it clear in a speech that whilst the longer-term outlook included rate cuts, the current uncertainty would produce little in the way of forward guidance.
The Federal Reserve’s latest data publication, the Beige Book, was also released. This comes a fortnight before the 29th April policy meeting. The figures showed “slight to moderate” economic growth in most regions, with declines in some others.
On the inflation side, businesses noted feeling the pinch on higher costs for steel, copper and chemicals, driven by events in the Middle East and tariffs. The uncertainty also led to a widespread wait and see approach to hiring across many sectors of the economy. There was also some support offered to the Dollar by robust Q1 corporate earnings figures from major US banks such as Goldman Sachs.
A lot of the USD direction will depend on how long the current ceasefire lasts though. If a more permanent deal for peace is reached, we can expect the Dollar to lose further ground.
Movements on GBP-USD last week can be seen below:
Last week saw the first bit of positive economic growth news out of the UK in a while. The February GDP figure recorded a well-above-expectation 0.5% monthly uptick, whilst January was upwardly revised to 0.1% expansion. The February release from the ONS (Office for National Statistics) was the biggest monthly rise in more than two years. It is obviously important to note that these figures are from prior to the outbreak of the Iran war.
But the picture for the rest of the year isn’t quite as rosy. The latest predictions from the IMF (International Monetary Fund) saw downward revisions to the prospects of all G7 nations, with the exception of Japan. The UK figure was slashed by the most though as the 2026 forecast made in January of 1.3% became 0.8% in the latest publication.
The larger UK downgrade was owing to the war in Iran meaning fewer interest rate cuts and the expectation that higher energy prices and their impacts, would linger into next year. As a net importer of energy, the UK is particularly vulnerable. Inflation of 3.2% in 2026 was predicted by the Fund for the UK, whilst globally it warned that a prolonged conflict risked a global recession.
The Pound’s rally did see some headwinds though after comments from Bank of England Governor, Andrew Bailey. He maintained his recent call that markets were getting ahead of themselves to be predicting interest rate hikes this year. His stance remains that the Bank will take a cautious stance and not rush into any rate decisions.
Other Bank policymakers also spoke at events. The ever-hawkish Catherine Mann stated that UK inflation wouldn’t be hitting 2% in the near or long term. Megan Greene argued that the impact of the Iran war is inflationary, at a time when UK economic growth was already weak. She believes the Bank needs to act promptly, not wait for “definitive data”.
In Europe, Middle East de-escalation hopes were also a big driver. The single currency was boosted by the optimism of a potential peace agreement, which saw it gaining ground against the Dollar. Oil and energy price drops are also beneficial to the bloc as a net importer.
But in the short-term inflation concerns remain high, especially after March’s inflation figure hit 2.6%. This was a rise from 1.9% the month before. This led to markets pricing in a supposed 80% chance of a rate hike from the 30th April meeting.
However, this sentiment changed after comments from various corners of the ECB urging caution. These comments broadly played down the likelihood of an immediate rate hike, due to a lack of clarity on the ongoing effects of the war on inflation.
One of these was Christine Lagarde, speaking as part of her attendance at the IMF meetings in Washington DC. She noted the war posed growth concerns for the continent, as well as the inflationary worries. She stated that whilst prices had risen, they remain close to the ECB’s baseline scenario rather than their adverse one. This suggests a rate hike next week is unlikely.
Europe was also on the receiving end of a slashed growth forecast from the IMF. The continent as a whole saw a 2026 revision to 1.1% as it battles energy price shocks. The minutes from the latest ECB meeting were also published. These were from the meeting on March 19th, thus are now somewhat outdated given geopolitical developments in the interim. As such they caused little movement.
GBP-EUR movements last week can be seen in the chart below:
The week ahead:
Monday – ECB Lagarde speech (17:40)
Tuesday – UK Unemployment/Average Earnings (07:00), US Retail Sales (13:30), Fed Warsh Senate Testimony (15:00)
Wednesday – UK CPI Inflation (07:00), BoE Breeden speech (09:05), EUR Consumer Confidence (15:00), ECB Lagarde speech (18:30)
Thursday – UK Public Sector Net Borrowing (19:00), UK/EU/US Services & Manufacturing PMIs (08:15-14:45)
Friday – UK Retail Sales (13:30)
With the next round of interest rate meetings to come next week, the next few days will be focused on any data that may assist the relevant central banks in their policy decisions. The meetings next week are (all BST):
Federal Reserve – Wednesday 29th April @ 19:00
Bank of England – Thursday 30th April @ 12:00
European Central Bank – Thursday 30th April @ 13:15
The UK has the largest number of data releases this week. These will give indications on how the economy has been performing under the uncertainty of the Iran conflict. Wednesday’s CPI inflation release is projected to show March inflation having bounced up to 3.3% from 3.0% in February. Given the fuel price spikes and the fact Eurozone inflation jumped considerably, there is potential for an even higher inflation print than the forecast.
Government borrowing, retail sales and unemployment data are also released throughout the week. A speech from the Bank of England’s Deputy Governor, Sarah Breeden, could also shed light on her policy thoughts in advance of the following week’s meeting.
Aside from the data, there is also the ongoing topic of Sir Keir Starmer’s leadership to cause GBP instability. Uncertainty about his position at the top is not helping confidence in the currency.
Once again, USD movement will be driven by events in the Middle East. Whether a ceasefire can be reached or not will be the main Dollar driver this week. Most of the US data events come on Tuesday, with the latest retail sales numbers set to indicate if there has been a domestic spending slowdown since the start of the Iran war.
Fed Chair-Designate, Kevin Warsh, will also be testifying in front of the Senate. There is still some debate as to whether he will take over when Jerome Powell’s term expires at the end of May. Powell has stated he will stay on whilst proceedings against him are ongoing, if Warsh is not yet sworn in by that point. Needless to say, the President has suggested the option to fire Powell remains a possibility.
In Europe, Consumer Confidence and a couple of speeches from Christine Lagarde will be the main headline grabbers.
With the Dollar continuing to be driven by geopolitical factors more than market data, exchange rates remain more difficult to predict than ever. For any pending transaction requirements, reach out to the Aston team to discuss in more detail.
Have a great week.
