Monthly Foreign Exchange Review

Iran‑related developments continue to dominate global markets, with the closure of the Strait of Hormuz representing a material escalation in geopolitical risk. Oil traffic through the strait has halted. A formal ceasefire remains in place, but markets have no clarity on duration or resolution. The takeaway: Elevated price uncertainty across currencies, energy markets, rates, and stocks.

Energy prices have responded aggressively. Crude oil has moved decisively above $100, trading to above $110, and the forward curve has shifted into extreme backwardation, signaling acute physical shortage. Market participants report credible evidence of official intervention in futures markets. Gasoline prices have surged sharply, with the national average exceeding $4.30. There may be price spikes in oil.

Inflation remains stubbornly high and increasingly difficult to interpret. Some “core” inflation measures are near 2%, while other recent month‑over‑month prints imply significantly higher inflation closer to 8% annualized! PCE price index, widely used as the main inflation number, printed 3.5% in late April.  

Labor market conditions are a puzzle. Initial unemployment claims are at their lowest levels since 1969(!), and continuing claims have fallen to cycle lows, which signal a tight labor market. At the same time, employment growth has cooled materially, with upcoming payroll forecasts near 60k and weak payroll numbers the last several months. The large disconnect between claims data and employment surveys is quite uncommon.

The US economy showed sluggish GDP, but there were signs of the economy picking up steam. GDP numbers are slow but not recessionary at 2%. Other numbers show strength. Personal spending is high 0.9%, and durable goods recovered to 0.8%. Weak housing may be the culprit behind low consumer confidence, and sluggish growth in existing home sales continues to be among the weakest on record at 3.98.

The USD weakened modestly in April after strengthening sharply in March. The dollar—and currencies in general—appeared largely unaffected by Iran and oil developments during the month, suggesting range‑bound conditions. Nonetheless, relative yields, liquidity, and safe‑haven status continue to provide underlying structural support to the USD, particularly during volatility spikes.

Rate expectations are now firmly anchored around no rate movement for the next 12 months. The Fed held rates steady at 3.5% on 4/29. Persistent inflation uncertainty and geopolitical risks continue to limit policy flexibility. Warsh confirmation now seems to be guaranteed, which may upend rate expectations.

May Outlook: FX markets to remain highly headline‑driven and tactical. Energy prices are the dominant macro risk transmission channel, and the Iran situation could de‑escalate rapidly or persist for months. The US benefits from partial insulation via domestic energy production, while energy‑importing economies remain extremely vulnerable. Watch for sudden market shifts—this is the environment we are in for May 2026.

Summary: There may be sharp, one-direction market reactions to geopolitical and energy headlines in May. Currencies have stepped back from sustained moves until there is more Iran situational clarity and its impact on energy prices and economic activity. Expect this to continue in May.

EURUSD:

Source: Bloomberg Finance LP

EURUSD traded modestly higher during April, reflecting Europe’s high vulnerability to higher Middle East energy prices. The pair jumped roughly 2% to the midpoint of the April trading. Eurozone inflation jumped to 3.0%, driven by energy, while growth stalled. The ECB held rates at 2.0%, constrained by stagflation risks.

ECB rate hike for June at 86%.

USDCAD

Source: Bloomberg Finance LP

USDCAD traded lower during April, reflecting $90 oil prices and Canada’s insulation from Middle East energy disruptions. The pair fell roughly 2% toward the bottom of its recent range. Stable BoC policy and fading USD safe‑haven demand supported CAD outperformance. Canada economy chugging with retail sales growing, but a tariff policy revamp could change this at any moment.

USDMXN

Source: Bloomberg Finance LP

USDMXN traded lower during April as Mexico’s economic tailwinds pushed their economy forward. Unemployment stayed low at 2.4%, retail sales continued to expand modestly, and inflation eased slightly to 4.53% while remaining elevated. Although Q1 GDP contracted, Banxico held rates at 6.75%, preserving attractive carry support for the peso.

USDCNY

Source: Bloomberg Finance LP

USDCNY recovered to make new lows in April as China delivered solid Q1 growth near 5% while inflation remained subdued around 1%. Consumption was uneven while unemployment was steady, and this solid growth prompted the PBOC to hold policy rates and rely on targeted credit support, even as elevated U.S. tariffs and erratic U.S.–China trade relations capped near‑term yuan upside.

GBPUSD

Source: Bloomberg Finance LP

UK economic momentum remained weak in April as inflation stayed elevated near 3.3%, growth hovered just above zero, and consumer demand softened amid falling retail volumes. The Bank of England held rates at 3.75% on an 8–1 vote, while renewed U.S. tariff threats and trade uncertainty added pressure to sterling and external sentiment.

USDJPY

Source: Bloomberg Finance LP

Japan’s economy showed fragile momentum in April: inflation hovered near 1.5% with core measures above 2%, unemployment stayed low around 2.7%, and growth remained modest as consumption lagged. The BOJ held rates at 0.75% on a hawkish split vote, while intervention warnings triggered a sharp four‑yen USDJPY reversal.

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