The dollar is advancing against its major rivals, buoyed by Friday’s stronger-than-expected payrolls report and yet another collapse in US-Iran peace talks*. Days after the Trump administration triggered a relief rally in financial markets by dangling a peace offer, Tehran yesterday released a response that reportedly demanded an end to the US naval blockade, a lifting of sanctions, a cessation of military operations, and formal recognition of Iran’s control over the Strait of Hormuz—while deferring the nuclear question entirely. President Trump dismissed these terms as “totally unacceptable”. Front-month crude prices are up 2.5% from Friday’s close—with Brent trading at $103 a barrel and West Texas Intermediate nudging $98—and yields are pushing higher as inflation expectations climb. Equity futures are setting up for a strong open as robust earnings and rising artificial intelligence spending provide powerful tailwinds.
Declines against the dollar look relatively uniform across major currencies despite their idiosyncratic differences. Defying alarmist headlines, the pound is mirroring oil price-driven moves in the euro, Swiss franc, yen, and Australian dollar even after Labour’s historic rout in last week’s local elections raised the prospect of a leadership challenge against Keir Starmer. In a speech this morning, the prime minister acknowledged voter frustration but said he had learned from the policy challenges of his first two years in office and signalled a “new direction for Britain” built on tighter links with the European Union. “The last government was defined by breaking our relationship with Europe,” he said, “This Labour government will be defined by rebuilding our relationship with Europe, by putting Britain at the heart of Europe, so that we are stronger on the economy, stronger on trade, stronger on defence”.
The Canadian dollar is an exception, slightly outperforming the greenback as rising oil prices lend support, unwinding some of Friday’s outsized losses. According to data published by Statistics Canada ahead of the weekend, unemployment rose in April and the economy shed 17,700 jobs, marking the worst start to a year since the pandemic. After a sharp pullback, monetary tightening expectations are edging higher, with roughly 40 basis points in rate hikes now priced into swap curves before year end—a development that suggests traders are aligned with us in expecting modest signs of recovery to emerge in the coming months.
April’s non-farm payrolls report surprised to the upside, with the US economy creating 115,000 jobs—nearly twice the consensus estimate—even as the unemployment rate crept higher to 4.34% from 4.26% and wage growth moderated slightly. The data further undermined the case for rate cuts, and futures markets are no longer pricing in a move before the end of 2027.
Tomorrow’s April inflation report could prove something of a damp squib. Monthly headline price growth is expected to have eased to 0.6% from 0.9%, with gasoline costs playing a less extreme role, having risen 7% in April—versus 21% in March. Signs of an energy shock spillover into core prices may also look muted as other categories and methodological quirks provide offsets: the underlying measure is seen rising 0.3% in the month, up from 0.2% prior, with the annual rate edging up to 2.7% from 2.6%.
With inflation now the Federal Reserve’s primary concern however, any surprises will carry added weight. Policymakers do not target headline price growth directly—they tend to focus on the separate core personal consumption expenditures index—yet they worry that an unanchoring in consumer inflation expectations could unleash a wider price spiral and force rates higher. An upside shock in the headline index—something above 3.7% on a year-over-year basis—could trigger sharp moves in fixed income and currency markets.
*If this feels familiar—administration officials spinning a positive narrative on Iran for an Axios reporter, markets rallying, Tehran swiftly demolishing the premise—it is because we have watched the same sequence unfold repeatedly. Lucy’s game of football with Charlie Brown has nothing on current market dynamics.