The Daily Brief

Sterling climbed back above $1.33 in Tuesday’s session, recouping ground it had lost earlier in the day when markets were still bracing for the possibility of US strikes on Iranian civilian infrastructure. The pound finished the session up around 0.5% against the dollar, its best daily performance in over a week, as the late-breaking ceasefire announcement unwound the safe-haven premium that had been compressing cable since early March. The deeper story for sterling remains the tension between the Bank of England’s caution and the market’s conviction.

Governor Bailey told Reuters last week that investors were “getting ahead of themselves” by pricing in multiple rate hikes, and J.P. Morgan subsequently cut its forecast to a single increase in June rather than the two it had previously expected. Markets, however, continue to price roughly two hikes this year — a dramatic reversal from the two cuts anticipated before the conflict. The disconnect between the MPC’s dovish signalling and the market’s hawkish positioning is the defining feature of sterling risk right now.

The economic backdrop is deteriorating in ways that complicate the rate debate. UK business activity grew at its slowest pace in six months in the March PMIs, while manufacturers’ input costs saw their sharpest monthly acceleration since 1992. February CPI held at 3.0%, but that data predates the energy shock entirely — the BoE’s own staff expect headline inflation to hit 3.5% by the third quarter. Bailey has been clear that the economy is operating below potential and that businesses lack pricing power, but the energy pass-through is coming regardless.

The BoE’s next decision falls on 30 April. Around 90% of economists expect a hold, but five of fifty polled anticipate a hike. If the ceasefire holds and oil prices continue to retreat, the pressure on the MPC eases considerably — but if the Islamabad talks collapse after two weeks, sterling faces a renewed squeeze between inflation expectations and growth deterioration. The April 30 meeting will be shaped entirely by what happens at the negotiating table over the next fortnight.

For those managing sterling-denominated payments or receivables, the ceasefire has compressed implied volatility for the first time in weeks. The window to lock in rates or restructure exposure at less punitive levels is open, but it is explicitly time-limited — two weeks of calm priced against a backdrop that could reverse on a single headline from Islamabad.

The Dollar Index sits just below 100 this morning after sliding 0.3% overnight, as the ceasefire announcement stripped out the acute safe-haven bid that had powered the greenback for five consecutive weeks. US crude plunged more than 16% from its intraday peak to below $94 a barrel, and Treasury yields dropped as traders unwound the inflation-premium trades that had defined the March-to-April regime shift. S&P 500 futures surged over 2.5%, and Dow futures spiked roughly 1,000 points in the immediate aftermath.

The dollar’s recent strength has been a product of two mutually reinforcing forces: its status as the world’s preferred liquidity destination in times of crisis, and America’s structural advantage as a net energy exporter. The ceasefire weakens the first pillar — risk appetite is recovering — but the second remains intact. Even with Brent retreating, US crude is still up more than 70% since the start of the year, and the EIA now expects the Brent-WTI spread to peak at $15/barrel this month as production disruptions persist.

The Federal Reserve has been conspicuously patient throughout the conflict. Chair Powell signalled in March that it was too early to assess the economic fallout, and futures now price a 70% probability that the Fed holds all year with no hikes and no cuts — a dramatic shift from the two cuts priced before the war. Fed Governor Barr reinforced the hold narrative last week, noting inflation remains above target and the Middle East conflict adds uncertainty on both sides of the mandate. The March CPI release on Friday will be the next hard data point, though it largely predates the oil shock’s full impact.

Brown Brothers Harriman captured the structural tension neatly: the dollar benefits from an energy shock that simultaneously undermines the economies of its trading partners, but the longer the conflict persists, the more it threatens US domestic demand through higher fuel costs and tighter financial conditions. A prolonged standoff is dollar-positive on flows but ambiguous on fundamentals. A genuine resolution is dollar-negative on safe-haven unwind but positive for global growth — and ultimately for trade volumes.

With DXY consolidating at the top of its multi-month 96–100 range, the next move depends entirely on whether the Islamabad talks produce substance or theatre. For those with dollar-denominated obligations, the ceasefire has softened the greenback enough to create breathing room — but the structural bid beneath the currency remains as long as the Strait operates under Iranian coordination rather than genuinely free passage.

The rand surged in early Wednesday trade, pushing through 16.45 against the dollar as the ceasefire announcement unleashed the sharpest single-session rally since before the war began. The currency had opened Tuesday around 16.93, weakened to 17.04 as markets braced for US strikes on Iranian civilian infrastructure, and then began recovering late in the session as the Pakistan-brokered deal took shape. The overnight move extends that recovery dramatically — a swing of nearly 3.5% from the intraday low — driven by collapsing oil prices, a softer dollar, and a sharp rebound in precious metals. The rand remains above pre-conflict levels around 15.70, but the distance has narrowed considerably.

The South African Reserve Bank held the repo rate at 6.75% at its March meeting in a unanimous decision, pausing what had been a tentative easing cycle. Governor Kganyago was unambiguous about the inflation outlook: fuel inflation is expected to exceed 18% in the second quarter, headline CPI is projected to accelerate to 4%, and the SARB has revised its 2026 inflation forecast from 3.3% to 3.7%. The bank modelled two conflict scenarios — a short two-month disruption and a prolonged one-year scenario — and both implied the need for higher interest rates. The easing cycle is dead for now; the question is whether hikes follow.

The SARB’s stance is now explicitly hawkish. The bank left the door open for hikes if inflationary pressures intensify, and signalled that rates will remain elevated for the foreseeable future to protect its new 3% inflation target — a target adopted only months ago and already under threat from the energy shock. The easing cycle that delivered two quarter-point cuts in late 2025 has been firmly halted, with the revised quarterly projection model now pointing to just one further cut this year, down from two previously. If the conflict persists and fuel costs entrench in broader prices, the next move could be upward rather than down.

The ceasefire offers a potential reprieve. If oil prices sustain their retreat below $100 and the Strait reopens meaningfully, the April fuel price adjustment — which was projected to add R5–R9 per litre to petrol and diesel prices — could be partially offset. But the damage already in the pipeline is considerable. Investec’s chief economist has warned that second-quarter growth momentum faces serious headwinds from fuel-driven inflation depressing retail, wholesale, and vehicle sales.

For those moving capital into or out of South Africa, the rand’s move from 17.04 to 16.45 in under twenty-four hours is a reminder of how violently the currency reprices on geopolitical shifts. At current levels, the rand is trading at its strongest since before Trump’s escalation threats last week — a window that may not persist if the Islamabad talks falter. The SARB’s next meeting in late May will have access to April CPI data and a clearer picture of whether the fuel shock is feeding through to broader expectations; that meeting will set the tone for the rest of the year.

The ceasefire triggered the sharpest single-session move across asset classes since the war began. Brent crude plunged from above $117 to below $95 — a 15% swing that erased much of the previous week’s escalation premium. US WTI fell even more sharply, sliding more than 16% to below $94. S&P 500 futures surged over 2.5%, Nasdaq 100 futures jumped nearly 3%, and gold spiked 2.5% as the metal recaptured its safe-haven narrative from the dollar. Across asset classes, the message was uniform: the market had been carrying far more conflict risk than the headline index levels suggested.

The energy architecture of this crisis remains fundamentally unresolved. Even under the ceasefire terms, the Strait of Hormuz will only reopen under Iranian military coordination, not as free passage. TD Securities estimates that nearly one billion barrels have been lost from global supply since the blockade began in early March, comprising roughly 600 million barrels of crude and 350 million of refined products. The EIA now expects Middle East production shut-ins to worsen from 7.5 million barrels per day in March to 9.1 million in April before gradually easing. Infrastructure damage from five weeks of strikes on both sides means that even a complete ceasefire would take months to restore normal supply flows.

Central bank divergence has become the structural theme of the post-conflict landscape. The Fed holds; the ECB has opened the door to hikes if inflation persists, with President Lagarde explicitly acknowledging that “measured adjustment” could be warranted; the BoE sits in a holding pattern with Bailey pushing back against market pricing; and the BoJ left the door open to a hike as soon as April. Markets had been pricing rate rises across Europe, Britain, Japan, and Australia while expecting the Fed to stay flat — a divergence that powered dollar strength and compressed risk-asset valuations globally.

The stress is not confined to energy. The S&P 500’s “death cross” in late March — the 50-day moving average crossing below the 200-day — signals technical deterioration that a two-week ceasefire alone won’t repair. UBS cut its year-end S&P target to 7,500. Goldman’s latest institutional survey shows growing concern about private credit vulnerabilities, and Ares Management’s recent move to cap withdrawals at a private debt fund has amplified those fears. The energy sector is up 34% in 2026, but the rest of the market is carrying the weight of higher rates, weaker demand, and geopolitical uncertainty.

The Islamabad talks beginning Friday will determine whether this ceasefire becomes a genuine off-ramp or another in a series of false dawns. The oil curve remains deeply backwardated, suggesting the market expects high prices to persist even as the front-month drops. For those with trade-flow exposure, commodity-linked receivables, or energy-intensive supply chains, the next two weeks offer a rare window of reduced volatility — but the underlying structural risks remain firmly in place until the Strait reopens without conditions.