Happy Friday. Oil prices and the dollar are paring their losses this morning after dropping sharply yesterday on reports of a tentative agreement between the US and Iran. According to multiple sources, the two sides have agreed to extend their ceasefire by 60 days, schedule a fresh round of negotiations on Iranian nuclear materials, and reopen the Strait of Hormuz within a month. But Tehran has not confirmed the text, President Trump has not yet signed off, and after a series of false dawns investors are growing more cautious as the session progresses*. Although both global crude benchmarks are down almost 10% on the week, they are edging higher this morning, equity markets look set to surrender some of yesterday’s gains, and after a string of whiplash moves, the trade-weighted dollar is virtually unchanged from last Friday’s close.
Measures of implied volatility have collapsed across asset classes, reflecting confidence that Washington and Tehran are aligned in wanting an end to the conflict. But the greenback remains above (arguably overvalued) pre-war levels, and the next leg lower may have to wait until there is clear evidence of a resumption in commercial shipping through the Strait of Hormuz. For now, that evidence is non-existent.
This morning’s Canadian gross domestic product report may trigger a short-lived market reaction, but should leave monetary policy expectations essentially unchanged. The economy probably returned to growth in the first quarter, expanding at an estimated annualised rate of around 1.6% and reversing the 0.6% contraction recorded in the final three months of 2025. Momentum probably remained positive in April, but only barely. That leaves the economy running with a substantial degree of slack, avoiding the sort of demand-led inflationary overheating that might force the Bank of Canada’s hand. Policymakers have room to keep rates on hold for now, and are likely to take it.
Next week will bring three key data releases, each carrying the potential for exchange rate moves:
An acceleration in euro area inflation could clinch the case for a June rate hike from the European Central Bank, even as the details cast doubt on the likelihood of two further moves before year-end. Headline price growth is expected to reach 3.2% in the year to April, giving officials—who have plainly abandoned their stance of “looking through” commodity-led inflation—ample justification for tightening policy in the near-term. But with the situation in the Middle East showing signs of improvement, stability in core inflation could help ease fears of broadening price pressures, limiting the need for an aggressive course of rate increases—and lending the euro some support through an improvement in the growth outlook.
Friday’s Canadian jobs report is something of a wild card**. Canada has shed a cumulative 112,300 positions this year and the unemployment rate has crept up to 6.9%, as businesses pull back on hiring in the face of trade uncertainty and an ongoing implosion in home values. Another negative print could add to the headwinds facing the Canadian dollar, while a strong one might reignite hopes for a meaningful turnaround in both the economy and the loonie as government policy shifts, higher energy prices, and a still-robust export backdrop translate into renewed hiring.
Finally, the May non-farm payrolls report will carry clear implications for Federal Reserve policy and the dollar’s direction heading into the summer. A third consecutive month of strong job creation—particularly if driven by hiring outside the healthcare and education sectors—could lead investors to price in further tightening this year, reinforcing the positive rate differentials currently keeping the dollar supported. Conversely, evidence of a softening in labour markets could knock out a key pillar of the hawkish argument on the Fed’s rate-setting committee and see markets pricing in greater downside risks. Most of the data in recent weeks lean toward the former, but yesterday’s weak income and spending numbers should have traders considering the latter as a real possibility.
*Fool the markets once, shame on the administration; fool the markets 91 times in a row, shame on the markets.
**Forecasting Canadian job numbers has become a way for economists to show they have a sense of humour***.
***This is something economists are—for some reason****—desperate to do.
****It’s probably the lack of party invites.