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Geopolitical risks heightened after Iran and Russia attacks. Will the USD benefit?

Last week, Russia hit civilian targets in Ukraine, knocking out a key Kyiv power station, and further bombed Kharkiv, which is close to the border with Russia. The US and UK responded with sanctions on Russian metals (aluminium, copper, and nickel), which led to a 6% jump in aluminium prices at this week’s open of exchanges.

Iran also launched a significant number of drones and missiles against Israel, as they had said they would, in retaliation for the attack on the Iranian consulate in Syria. Although 99% of projectiles were shot down by a combination of US, UK, Israeli, Jordanian and Saudi Arabian aircraft and air defences, this risks escalating tensions in the region.

The USD strengthened in the run-up to the attack, with GBPUSD and EURUSD reaching five-month lows, and USDJPY reaching a 33-year high. Will the USD continue to benefit, or is the geopolitical news fully priced in? Stronger US economic data and associated risks of more inflation in the short term, plus other non-macroeconomic factors, suggest further USD strength is a risk.

Speaking of macroeconomic updates, expect a number of important US and UK releases this week

From the US, I think most focus will be on the industrial production data for March, due on Tuesday, followed by the April Federal Reserve Beige Book on Wednesday. The Beige Book is the Fed’s latest analysis of current economic conditions, which could add insight into when interest rate cuts are coming.

The UK’s latest labour market data will be released on Tuesday. Expect a mixed bag, with average earnings growth continuing to slip, employment rising – but unemployment also increasing.

Wednesday’s consumer prices data for March should report a further decline in headline and core CPI (Consumer Price Index) inflation, back towards target. But this release will be nowhere near as interesting as next month’s, when the effects of the energy price cap reduction will be key.

Finally, on Friday, March retail sales figures are released. These could disappoint versus consensus expectations, albeit the early Easter holiday might offer support to food retail sales volumes. Risks to the GBP are to the downside, with the case for a UK rate cut increasing, in my opinion.

Euroland could benefit from an improvement in the surveys, but the ECB is still on course to cut interest rates in June

After last week’s non-event that was the European Central Bank (ECB) Governing Council meeting, this week sees FX markets return their focus onto economic data. Already this week, Euroland February industrial production data recorded a 0.8 % month-on-month increase, although given the 3% fall in January, we’re still below December’s figure.

Tuesday sees the release of German ZEW economic sentiment survey figures for April. This should report a rise in expectations and current situation indices, and I think these could outperform Bloomberg consensus forecasts. There could be some support for the EUR after this release. There are also February Euroland construction output figures and March German producer prices data due, but I doubt these will materially alter the outlook for EUR interest rates, or the currency.

Peru’s surprise rate reduction won’t be repeated this week. It’s oh so quiet…

After an array of central bank meetings in the past two weeks, which offered the odd surprise or two, this week sees nothing due from central banks around the globe. So there won’t be any repeat of the central bank of Peru’s surprise 25 basis point interest rate reduction, like we saw last week. That caused a bit of a jump in USDPEN, but the markets broadly took the decision in their stride and quickly reversed the original rally. I still think emerging market currencies are vulnerable to renewed USD strength.

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