Ceasefire Collapse Keep FX Markets on Edge This Week.
Summary
US CPI for March came in at 3.3% year-on-year, a sharp jump from 2.4% in February and the highest reading in nearly two years, driven almost entirely by a 10.9% surge in energy prices
A two-week ceasefire between the US and Iran collapsed over the weekend after peace talks in Islamabad ended without agreement, with President Trump announcing a US Navy blockade of the Strait of Hormuz as of Monday morning
The Bank of England next meets on 30 April, with rates currently held at 3.75% and UK CPI at 3.0%, leaving the MPC with limited room to ease while energy costs remain elevated
Last week began with relief. A two-week ceasefire announced on Tuesday sent equity markets sharply higher, with the S&P 500 posting its best weekly gain since November, and oil prices falling more than 10% on the prospect of the Strait of Hormuz reopening. That optimism proved short-lived. Twenty-one hours of talks in Islamabad ended without agreement on Sunday, with the US stating that Iran declined to commit to abandoning nuclear weapons development. President Trump announced overnight that the US Navy would begin a blockade of the Strait of Hormuz from Monday morning, reversing the week's risk-on mood entirely and injecting a fresh wave of uncertainty into markets as the new week opens.
The inflation picture that emerged from Friday's CPI release added further complexity. US CPI rose 3.3% in the year to March, up from 2.4% in February, with a 10.9% monthly surge in energy prices accounting for the bulk of the move. Core CPI, which strips out food and energy, rose 2.6% annually, in line with expectations and offering some reassurance that the energy shock has not yet fully fed into broader price pressures. Even so, the headline figure will make it considerably harder for the Federal Reserve to justify any near-term easing, and with the conflict now re-escalating, there is little reason to expect energy costs to retreat in the coming weeks.
February's core PCE, released Thursday, came in at 3.0% year-on-year, easing slightly from January's 3.1% and in line with forecasts. The Federal Reserve's preferred inflation gauge remains well above the 2% target, and the March PCE reading, when it arrives, will capture the full force of the energy spike. The FOMC minutes from the March meeting, also released last week, confirmed that policymakers are closely monitoring whether energy-driven inflation proves transitory or becomes more entrenched. That question has become significantly more pressing following this weekend's developments.
For sterling, the picture is similarly constrained. UK CPI stands at 3.0%, already above the Bank of England's target, and with the next MPC decision due on 30 April, markets are pricing the probability of a hold at close to 90%. The energy inflation narrative has complicated what had previously looked like a relatively straightforward path toward further easing, and any additional rise in oil costs following the breakdown of talks will make that path narrower still.
Events to Watch This Week
Tuesday 14 April: US PPI (March)
Thursday 16 April: Eurozone CPI Final (February) and Philadelphia Fed Manufacturing Index
Wednesday to Friday: Middle East developments and any market response to the blockade announcement
Tuesday's PPI release will be watched closely as a leading indicator of where consumer inflation is heading. February's producer prices rose 3.4% annually, the sharpest increase in a year, and March is expected to show further acceleration given the energy price environment. Any significant upside surprise would add to the pressure on the Fed and could drive further dollar strength. The Eurozone CPI confirmation on Thursday is expected to finalise February's reading of 1.9%, though markets will be more focused on how energy costs feed into the March and April figures as the conflict evolves.
The most significant driver of markets this week will not be the data. The US Navy blockade of the Strait of Hormuz announced this morning represents a material escalation and the potential for sharp, sudden moves across energy, equity and currency markets is high. Businesses with upcoming international transfers should ensure their exposure is not left unmanaged. Contact the Orbis dealing team to discuss your position.
