FX Outlook: First Inflation Test

Today, we’ll find out how much US inflation jumped in March. We expect almost one percentage point, to 3.4%, in line with consensus. Core CPI should only rise modestly, and the Fed may not give too much weight to the headline figure for now. Still, it might make it a bit harder to add bearish US Dollar bets today, barring encouraging developments on peace talks and Hormuz

USD: Can Inflation Lead to a Faster Peace Deal?

Markets aren’t being provided with clear direction at the moment. There is a strong sense that the ceasefire is fragile, with ongoing Israeli attacks in Lebanon proving a key friction in US-Iran negotiations. However, investors aren’t ready to price in a re-escalation, and some optimism is being placed on announced Israel-Lebanon talks next week.

DXY keeps hovering just below 99.0. These levels clearly embed plenty of optimism, but another leg lower for USD is on the cards once, or if, a permanent peace deal is agreed and Strait of Hormuz flows resume. High‑beta currencies stayed in favour yesterday, with Antipodeans and Scandies leading the G10. The Australian dollar and Norwegian krone look particularly well-placed if de‑escalation supports risk sentiment, while energy supply recovers only gradually and prices prove sticky on the downside. Both currencies should also benefit from at least one domestic rate hike over the coming months.

Today’s key area worth watching outside of Middle East headlines will be the US CPI report for March. We are aligned with consensus in expecting a 0.9ppt monthly jump in headline CPI to 3.4% year-on-year, while core CPI should accelerate only modestly from 0.2% to 0.3% month-on-month. What matters for the Federal Reserve are second-round effects, visible – if anything – in core inflation after a few months from the initial energy shock. As such, today’s release should not be a game‑changer for Fed pricing unless inflation surprises meaningfully on the upside.

It is also worth watching the domestic political backlash from higher inflation. Some Republicans have voiced discontent over the war and rising gasoline prices, which could increase pressure on President Donald Trump to push for a peace deal. Anyway, with hot inflation grabbing headlines, the bar for another dollar drop should be a bit higher today, even if Middle East developments remain the primary driver.

EUR: Ruling Out an April Hike

Pricing for a 30 April hike from the European Central Bank is now only 6bp. That mirrors not just the de-escalation (55bp remains priced in by year-end), but probably the view that the ECB won’t have enough evidence to act, and the energy price outlook may still be uncertain in three weeks’ time.

June and September look like the market’s preferred windows for rate hikes, although a follow‑up move in July after a June hike is around 50% priced.

What matters most at this stage is the stickiness of tightening expectations. As discussed on several occasions, we expect pricing to remain above 50bp unless the ECB delivers explicit dovish signals, even if oil prices ease somewhat further.

That backdrop leaves the euro well-placed, in our view, to outperform other low‑yielders such as the Japanese yen and the Swiss franc. For EUR/USD, we look for some stabilisation around or slightly below 1.170 for now, with a good deal of positives already in the price.

CAD: Jobs Data in Focus Today

Canada releases jobs data for March today. Consensus is for a +15k payroll change after the very soft -83k February print. But the bigger signal for the Bank of Canada tends to come from the unemployment rate rather than the quite volatile monthly jobs swings. The BoC’s pain threshold appears close to 7% unemployment – levels at which it was previously cutting and maintaining a dovish stance. The recent decline to 6.7% has given the Bank scope to turn slightly more hawkish, even before the war, so accelerations from here could offer a reason to cautiously unwind hike bets.

In our view, risks for CAD front-end rates are skewed to the dovish side in the coming weeks. Markets are pricing around 40bp of tightening by December, which looks too aggressive considering the BoC has not signalled much appetite for hikes, and attention may soon shift to USMCA renegotiations – a major downside risk for Canada’s activity and jobs.

USD/CAD remains dominated by war headlines for now, and continued de‑escalation should allow a move to 1.370. We retain a moderate bearish bias on USD/CAD, but expect CAD to be outpaced by the likes of AUD and NOK.

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