US FX WRAP: Dollar sold on hopes for US/Iran negotiations

USD: The USD fell on Friday amid constructive geopolitical updates that drove a risk-on macro environment, with equities and Treasuries rallying, crude lower and bullion gaining. The only data releases of note were the final University of Michigan sentiment data for April, where the headline topped expectations but still declined from the prior reading. Inflation expectations rose, with the one-year ahead reading at 4.7% from 3.8% prior, just below the 4.8% consensus, while the longer-term measure rose to 3.5% from 3.2%, above the 3.4% consensus. While geopolitics will remain the overarching driver for the USD, next week is packed with key events, including the FOMC, expected to be unchanged, PCE inflation data, where energy-driven upside is expected, and Q1 GDP growth figures, seen picking up from Q4. Traders will look to the data to assess how much further the stagflationary narrative gains traction and the implications for Fed policy.

EUR: The EUR snapped a three-day losing streak on Friday amid geopolitical optimism. Talks between the US and Iran are set to resume via intermediaries initially, with a possible trilateral meeting between the US and Iran, potentially on Monday, to be assessed after the initial talks. While markets welcomed the news, reports noted that behind-the-scenes discussions on the Strait of Hormuz and uranium enrichment are continuing. The news drove risk-on macro trading to the USD's detriment. Attention next week will remain on geopolitics, but there are key EUR-related events, namely the ECB's April meeting, where traders will look for guidance on whether the central bank is moving towards lifting rates over the summer.

JPY: The yen strengthened on Friday, largely underpinned by geopolitical optimism that drove flows out of the USD. Japanese inflation data overnight showed CPI rebounded in March, rising by 0.4% M/M from -0.2% previously, with the annual rate climbing to 1.5% Y/Y from 1.3%. The ex-food and energy measure eased to 2.4% Y/Y from 2.5%, while the core rate rose to 1.8% Y/Y, in line with expectations and up from 1.6% previously. The rise in CPI came as the Middle East conflict lifted energy costs. The BoJ is also set to meet next week, but recent reports suggest the central bank will keep rates unchanged at the meeting. Traders will watch for any guidance on future hawkishness, with recent reports suggesting the central bank will still signal a readiness to lift rates and is set to raise its inflation projections.

GBP: As with other major FX, the pound gained on Friday as the USD weakened on geopolitical optimism. In the premarket, data showed UK retail sales rose by 0.7% M/M in March, above expectations for no growth, while the annual rate was 1.7% Y/Y, above the 1.3% expected but down from 2.5% previously. The ex-fuel measure rose 0.2% M/M, in line with expectations, with the annual ex-fuel rate easing to 1.7% Y/Y, below the 2.0% expected and down from 3.4% previously. The ONS said volumes sold online and in stores increased as motorists filled up on fuel after petrol prices surged amid conflict in the Middle East. Sterling traders will also look to next week's MPC policy announcement. The central bank is expected to maintain rates as it awaits further information on the impact of the Middle East conflict, though analysts said the decision could again be subject to policymaker dissent.

NZD: The Kiwi continued to see upside in the wake of this week's CPI data, which topped expectations. Money markets began pricing in further RBNZ rate hikes after the release, and many now expect the central bank to lift rates by its July meeting.