Economic Update

May 5, 2026

Heightened Middle East tensions lift oil and volatility risks

Over the past 72 hours, tensions between the US and Iran have intensified, with military activity reported in the Strait of Hormuz and the UAE experiencing its first Iranian-linked attack since the ceasefire came into effect. The US has confirmed plans to escort stranded oil tankers through the Strait, while Iranian forces fired missiles towards a US warship, although US officials stated that neither missile struck its target.

Markets have responded in familiar fashion. Oil prices moved higher, the US dollar strengthened and US equity markets softened, while Treasury yields edged modestly higher. The combination of upside inflation risks and potential headwinds to growth has once again entered the market narrative. Against that backdrop, several US politicians have called for a tougher military response.

Whether events escalate further or prompt renewed diplomatic engagement remains unclear. What does seem more likely is heightened volatility across FX, bond and equity markets while geopolitical risks remain elevated.

US payrolls data remains the central near-term test

US markets remain firmly focused on this week’s labor market releases, culminating in April’s non-farm payrolls report on Friday. Recent signals have pointed to a cooling trend, with fewer job openings and a decline in voluntary job switching, even as headline employment growth has proven uneven.

The past three months illustrate that volatility clearly. January figures surprised to the upside, February disappointed sharply and March rebounded. Taken together, average job growth over the first quarter stood near 80,000 per month. An April outcome materially above that pace would likely prompt an initial positive response in the US dollar.

That said, the Federal Reserve may place greater emphasis on broader labor market measures, including unemployment, underemployment and wage growth. Any evidence of softening in those indicators could temper market reaction, even in the presence of a stronger headline payroll number.

UK tourism tax debate and political noise add pressure to sentiment

A report from Oxford Economics has assessed the impact of a proposed 5% tax on overnight stays in the UK, a measure estimated to raise around £1.8bn annually. Based on survey evidence from roughly 10,000 respondents, the report suggests that the tax would reduce overall tourism spending and place up to 33,000 jobs at risk. The findings point to limited fiscal upside relative to the potential economic cost to the sector.

History suggests that measures of this nature often struggle once the broader economic consequences come into focus. One is reminded of the short-lived pasty tax, which did not survive sustained public and industry opposition.

Alongside this, media speculation over a potential cabinet reshuffle following local and regional elections has added an additional layer of uncertainty. Reports have suggested possible changes at the Treasury, with alternative candidates touted for the role of Chancellor. Any perception of a material shift in fiscal stance could unsettle financial markets. In that scenario, sterling and gilts could come under pressure, particularly if investors perceive higher spending, borrowing or taxation risks. While higher yields can support the pound, that relationship tends to weaken if fiscal credibility comes into question.

Mixed Euro Area signals leave the euro searching for direction

Final April manufacturing PMI data for the Euro Area confirmed the provisional estimates, with no improvement in the headline reading. That masked some brighter spots, notably stronger readings from Spain and the Netherlands. Adding nuance to the picture, the Sentix investor confidence survey surprised to the upside, with sentiment improving when a further decline had been expected.

The euro gained limited traction from these developments. It edged modestly higher against sterling, largely reflecting broader pound weakness, while movements against the US dollar remained restrained.

Attention now turns to upcoming national industrial production figures. Recent releases have disappointed, but a rebound in April remains plausible. A firmer showing could provide additional support for the euro against sterling, although sustained gains versus the dollar may prove more difficult without an easing of geopolitical risks.

Canada and Mexico data in focus for regional currencies

Canada’s employment report for April, due on Friday, follows mixed signals from recent data. The SEPH survey indicated a cumulative decline of around 60,000 jobs over the three months to February, contrasting with more resilient headline labor market figures. The April release may offer greater clarity.

Canada also faces broader downside risks from higher oil prices and ongoing US tariff measures. A slowdown in hiring could undermine the recent recovery in the Canadian dollar, while evidence of continued labor market resilience would likely reinforce recent gains.

In Mexico, attention centers on Thursday’s Banxico policy decision. Economists widely expect a 25bp rate cut, despite signs of firming inflation. April CPI data, released shortly beforehand, will carry added significance. If core inflation appears contained, policymakers may feel comfortable looking through near-term headline pressures. With the move well anticipated, markets will assess whether the decision alters near-term risks for the peso.

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.