Economic Update

May 11, 2026

Iran and US reject proposals, markets react but volatility moderates

The US and Iran have rejected each other’s proposals, extending a pattern that markets have absorbed over recent weeks. Oil and the USD moved higher, while equities softened, although the scale of the reaction was more measured than in earlier episodes.

Market pricing suggests participants are adjusting to a cycle of escalation and pause, rather than assigning a single directional outcome. Attention may now shift to the US President’s upcoming visit to China, where talks could be dominated by tariffs and energy security considerations.

While there have been no confirmed breaches of the ceasefire, the breakdown in negotiations keeps the probability of renewed tensions elevated. Current conditions indicate limited appetite for a resumption of hostilities, although the situation remains sensitive to further developments.

US data to test inflation and consumption dynamics

April non-farm payrolls exceeded expectations, with employment rising by 115k compared with forecasts of 65k. However, broader labor market indicators presented a more mixed picture, with underemployment rising to 8.2% and labor force participation edging lower.

Market reaction to the data was relatively contained, with geopolitical developments exerting a greater immediate influence on the USD.

Focus now turns to April CPI, PPI and retail sales. Headline inflation is expected to increase, but attention is likely to center on core measures and whether price pressures are broadening. Indications of wider inflation persistence could influence expectations for Federal Reserve policy.

Retail sales data will provide insight into consumption trends, particularly whether growth reflects increased volumes or higher prices. Outside of geopolitical drivers, the USD may respond to any adjustment in rate expectations. 

UK political pressure builds following election setbacks

The UK government has signaled another policy reset after losses in local elections, including weaker performances in both Welsh and Scottish contests. This marks a fourth reset in under two years for the current administration.

Backbenchers have become more vocal, with indications that the leadership could be challenged this week. Political developments are drawing attention alongside ongoing macroeconomic challenges, including cost pressures, labor market softness and subdued growth.

In the near term, political uncertainty may prompt GBP underperformance. The pound is unable to draw strength from domestic factors, and may remain more responsive to developments elsewhere. 

ECB speakers expected to guide rate expectations

Survey data continues to indicate subdued economic activity across the Euro Area. However, inflation dynamics, particularly those linked to energy prices, remain central to the ECB’s policy framework.

With limited data releases this week, attention is likely to focus on remarks from Chief Economist Lane and President Lagarde, alongside the latest economic bulletin. These communications may reinforce expectations around further tightening, while also offering perspective on the longer-term policy trajectory.

Recent EUR strength has reflected periods of USD softness, although questions remain over the durability of this move given the relative growth profile of the Euro Area.

North American outlook highlights divergence

April vehicle production data from Mexico will be monitored following earlier indications of a decline in output and exports. A further contraction could weigh on growth expectations and place pressure on the MXN in the near term.

More broadly, FX movements remain sensitive to geopolitical developments, which may outweigh domestic data in the short term.

In Canada, recent labor market data points to ongoing economic softness, with employment declining by over 100k across the first four months of the year. Inflation remains comparatively elevated, although underlying domestic pressures appear subdued in the context of weaker activity.

USDCAD’s move above 1.37 reflects this divergence. The near-term outlook will depend on whether external factors or domestic conditions take precedence in shaping direction.

Author 

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.