Economic Update

Strait of Hormuz deadline approaches as tensions rise

The deadline for the re opening of the Strait of Hormuz approaches, yet recent developments suggest limited movement on the ground. Reports indicate further Iranian missile and drone strikes on GCC countries, with energy infrastructure again targeted. Financial markets have responded in a familiar pattern, with yields moving higher, equity indices lower, and risk appetite subdued.

Uncertainty around any potential escalation continues to weigh on sentiment. Market participants remain focused on whether the situation stabilises or whether new military or political actions introduce additional volatility. For now, the conflict continues to shape global risk pricing and sector‑specific pressures.

UK inflation and retail sales data likely to underline economic fragility

The Bank of England’s decision last week to leave interest rates unchanged aligned with market expectations, but subsequent remarks from the Governor reminded markets that recent repricing may have moved ahead of the Committee’s position.

This week’s data releases will offer further context. CPI and PPI figures for February, the final readings before the energy‑market impact of the Middle East conflict becomes fully visible, are expected to show subdued headline, core and services inflation. Retail sales for February are likely to reflect weaker volumes, with adverse weather conditions and labour‑market pressures playing a role.

While these indicators will provide a clearer view of the pre‑conflict domestic environment, the provisional March PMIs and the GfK consumer confidence survey are expected to highlight more immediate effects. The pound remains vulnerable to downside pressure against the US dollar, while movements against the euro continue to generate volatility without establishing direction.

Euro Area PMIs and German IFO survey to reflect broader slowdown

Recent commentary from some European Central Bank Governing Council members has pointed towards the possibility of policy tightening as early as the April meeting. However, incoming data makes that outcome unlikely.

Provisional March manufacturing and services PMIs for the Euro Area are expected to show slowing activity, while the German IFO survey is likely to record weaker conditions in both the current assessment and expectations components. These developments would undermine the case for tighter policy, although concerns about imported inflation persist due to global energy uncertainty.

Additional geopolitical considerations are emerging, with the US President suggesting that European NATO members may face greater responsibility for ensuring safe passage in the Strait of Hormuz. Any need for a further increase in defence spending would add pressure to an already strained regional outlook. Against this backdrop, the euro is likely to remain under pressure when compared with the US dollar.

Downside risks to the US economy are building as equity volatility persists

The US economy is not insulated from developments in the Gulf. US‑based multinationals are experiencing renewed pressure on orders and earnings, while subsidiaries operating abroad face more uncertain growth conditions. Domestic equity markets remain volatile, and expectations for Federal Reserve rate cuts have faded as market pricing shifts towards the possibility of hikes later in the year.

Export‑oriented businesses may encounter further challenges if shipping routes come under additional strain. Caution among households and firms could also weigh on major purchases, adding to the risks facing growth.

The US dollar continues to benefit from its safe‑haven characteristics, although inconsistent political messaging has added to market volatility. Uncertainty remains the most consistent feature in the near term.

MXN faces potential pressure from Banxico decision as Canada’s challenges persist

Consensus expectations suggest the Banco de México could reduce interest rates at this week’s meeting, with a narrow majority of surveyed analysts forecasting a cut to 6.75 per cent. Elevated economic and inflation uncertainties provide a case for caution, and the peso could come under increasing pressure if the central bank opts for a reduction at this stage.

Canada continues to face structural domestic challenges. Higher yields have hindered a recovery in the housing market, a key driver of discretionary consumption. While the Bank of Canada is unlikely to loosen policy soon, the outlook does not support tightening either. For now, the Canadian dollar appears stable, supported by the energy sector even as broader economic momentum remains weak.