There are still no major signs of an easing in the deadlock between the United States and Iran. Over the weekend, President Trump rejected Tehran’s response to the peace proposals.
Key points:
➢ The Polish zloty gained slightly on a wave of optimism.
➢ The U.S. NFP report suggests that the impact of the war on the world’s largest economy remains limited.
➢ ECB officials are paving the way for an interest rate hike in June.
➢ Local elections in the United Kingdom have dealt a major blow to Prime Minister Starmer.
Markets are beginning to adapt to the situation. Oil prices remain high, although they have recently fallen due to a combination of weaker demand and increased production in other countries. U.S. equities continue to reach record highs, while European stocks remain behind. The dollar, meanwhile, appears to be returning to a trend of gradual depreciation against most currencies. The key EUR/USD pair is now close to levels seen before the outbreak of the war, while some emerging market currencies seen as sentiment barometers — such as the Brazilian real — have strengthened significantly in recent weeks.
As peace negotiations continue to move slowly and laboriously, attention should once again turn to the impact of the closure of the Strait of Hormuz on the real economy. The most important question is whether the jump in energy prices will lead to a broad-based increase in price pressures. The U.S. inflation report for April, due on Tuesday, 12 May, will be one of the first releases offering insight into this issue. Economists expect only a modest increase in the core measure, but uncertainty remains high. Bond markets around the world are volatile and show little patience for negative inflation surprises. The week will also bring March production data from the eurozone on Wednesday, 13 May, and from the United Kingdom on Thursday, 14 May.
PLN
News concerning the conflict in the Middle East remains crucial for market sentiment and therefore also for the Polish zloty. The Polish currency gained on last week’s wave of optimism, but sentiment is now cooling again. Domestically, attention focused on the Monetary Policy Council meeting, at which interest rates were left unchanged, in line with expectations.
The tone of Governor Adam Glapiński, however, was clearly less optimistic than before. He suggested that interest rate hikes are more likely than cuts, although he also stressed that they do not necessarily have to happen. In our view, rates are likely to remain unchanged in the near term, but their future path will largely depend on developments in the Middle East. In this context, upcoming data on inflation in Poland will also be worth watching, including Friday’s report on April inflation. Preliminary, less detailed figures showed an unexpected rise to 3.2%.
Two developments from last Friday are also important. First, the SAFE agreement was signed, under which Poland is set to receive up to EUR 43.7 billion in low-interest loans. This is good news for the budget and for companies in the defence sector, among others. Second, the rating agency S&P affirmed Poland’s rating at A- with a stable outlook, pointing, among other things, to the country’s high savings rate, which limits risks related to rapidly rising public debt. The agency also does not expect the war in the Middle East to have a significant impact on Poland’s GDP growth. In this context, it is worth noting that preliminary GDP data for the first quarter will be released this Thursday, 14 May. Activity is expected to have slowed slightly compared with the previous quarter, but should still remain solid.
EUR
Comments from European Central Bank policymakers have recently become more hawkish. Most members of the Governing Council are stressing the need to remain vigilant regarding second-round inflation effects stemming from the sharp rise in energy prices. Expectations of an interest rate hike at the next meeting in June are taking shape, while the contrast with the Federal Reserve’s uncertainty is narrowing the interest rate differential on both sides of the Atlantic. This will be a key support factor for the euro in the medium term, and we expect the gradual depreciation of the dollar to continue into 2027.
In the short term, the single currency remains highly vulnerable to the war in Iran, which is already having a disproportionately negative impact on the eurozone economy. April PMI indicators show that the economy is contracting. The upcoming peace talks will therefore be crucial for the EUR/USD exchange rate. News of a temporary agreement could bring additional gains for the euro. However, given that markets already seem to be pricing in a considerable amount of good news, we see significant room for depreciation if negotiations break down.
USD
April nonfarm payrolls data is another in a series of reports suggesting that the U.S. economy has so far barely felt the effects of the war in Iran and the resulting surge in energy prices. The pace of job creation increased, and the three-month average of 48,000 net new jobs per month is inconsistent with the narrative of a cooling labour market, especially as the labour force is no longer growing due to lower immigration and an ageing population. This only confirms the signals coming from weekly jobless claims, which have recently been falling.
Scenarios of an artificial intelligence-driven labour market apocalypse do not appear to be materialising. Employers seem to view AI more as a complement to workers than as a replacement. The good economic news, however, did not help the dollar much last week. As we have observed for the past year, the currency’s depreciation, somewhat paradoxically, appears to go hand in hand with relatively strong U.S. data.
GBP
The pound is performing very well in the wake of the May local election results in the United Kingdom, partly because the Labour Party’s defeat had been widely expected and was already reflected in market pricing. Investors are betting that Labour’s setback will not yet bring Keir Starmer’s premiership to an end, but pressure on him is likely to increase in the coming days, with many backbenchers already calling for his resignation. So far, none of his potential rivals from the party’s left wing has taken formal steps to replace him, although there have been rumours that figures such as Angela Rayner and Wes Streeting are testing the waters.
It is precisely the possibility of a shift to the left that markets fear most, as this could imply higher taxes, increased government bond issuance and a higher fiscal risk premium on UK assets. Meanwhile, macroeconomic data has largely surprised to the upside, although economists question whether this may be due to statistical anomalies in the seasonality of data following the COVID-19 pandemic. As a result, Thursday’s March GDP growth reading on 14 May has become more important.
Authors: Enrique Díaz-Alvarez, Matthew Ryan and Roman Ziruk, analysts at Ebury.
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