On April 20, Federal Reserve Governor Christopher Waller stated on Friday that the Middle East conflict could drive up inflation in the short term, posing significant challenges for monetary policymakers. However, he also noted that if the situation can be resolved quickly, there remains a possibility of another interest rate cut later this year. In a speech prepared for Auburn University, Waller said, "The longer energy prices remain elevated and the Strait of Hormuz remains obstructed, the greater the risk that inflation will spread across a wide range of goods and services, supply chain impacts will gradually emerge, and real economic activity and employment will begin to slow." He pointed out that if high inflation coincides with a weakening labor market, he would have to balance the risks between the Fed's dual mandate to determine the appropriate policy path. If inflation risks outweigh labor market risks, this could mean keeping the policy rate unchanged at the current target range.
In addition, a recent survey of economists shows that despite rising inflation caused by energy shocks from the Middle East conflict, the Bank of England is expected to keep interest rates unchanged throughout 2026. The survey indicates that economists have raised their inflation forecasts for each quarter of 2026, expecting inflation to peak at 3.3% in the second half of the year. Nevertheless, economists predict the Bank of England will likely maintain the benchmark rate at 3.75% until the first quarter of 2027, with two 25-basis-point cuts expected later next year. This survey result diverges significantly from market pricing. Traders currently anticipate a 25-basis-point rate hike by the Bank of England before September, with about a 45% probability of another hike before the end of the year. Before the outbreak of the Middle East conflict, the market had expected the Bank of England to cut rates this year.
Key data to watch today includes Germany's March PPI annual rate and Canada's March unadjusted CPI monthly rate.
US Dollar Index The US Dollar Index rebounded after hitting a low on Friday, closing slightly higher for the day. It is currently trading around 98.30. Progress in US-Iran negotiations, which improved market risk sentiment, dampened demand for the dollar as a safe-haven asset and lowered expectations for Fed rate hikes, initially pressured the index to a 7-week low. However, supported by short covering and lingering concerns over Middle East uncertainties, the dollar index recovered and ended the day with gains. Today, focus is on resistance near 98.80, with support around 97.80.
EUR/USD The euro rose before retreating on Friday, closing slightly lower for the day. It is currently trading around 1.1750. Improved risk sentiment initially supported the euro, pushing it to an 8-week high. However, profit-taking and ongoing Middle East uncertainties led to a pullback, resulting in a lower close. Additionally, delayed expectations for a European Central Bank rate hike also exerted some downward pressure on the pair. Today, resistance near 1.1850 and support around 1.1650 are key levels to watch.
GBP/USD The pound traded within a narrow range on Friday, closing slightly lower. It is currently trading around 1.3500. Technical selling pressure near the 1.3600 level, along with persistent Middle East uncertainties, weighed on the pair. However, expectations for a Bank of England rate hike later this year limited the downside. Today, resistance near 1.3600 and support around 1.3400 are in focus.
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