The Three Central Banks: UAE, Stagflation and a Window for Dollar Sellers

This is the most consequential central bank week of the year so far. The Federal Reserve announces today, the European Central Bank announces tomorrow, and the Bank of England announces Thursday. The decisions land into a macro picture that has shifted materially over the past 48 hours, with the United Arab Emirates announcing its withdrawal from OPEC, Brent crude breaking $115 for the highest level since June 2022, the Dollar Index recovering to a three-week high near 98.9, and German inflation data for April due as the ECB sits down to deliberate.

The piece we wrote on Friday argued that the dollar was under structural pressure that was not going away. That argument still holds. What has changed is that the dollar has caught a near-term bid on safe-haven flows and on the Fed transition resolving cleanly. For businesses selling dollars, this is a window to act inside a structural trend that we expect to reassert itself in the second half of the year.

This piece sets out what we are watching this week, why the UAE story matters more than markets initially priced, and where sterling sits in the picture.

The United Arab Emirates announced on Tuesday that it will leave OPEC and OPEC+ effective 1 May, ending a 55-year membership of the cartel. The UAE is OPEC's third-largest producer, behind Saudi Arabia and Iraq, and intends to ramp production from 3.4 million to 5 million barrels per day by 2027.

Markets initially read the move as supply-positive, with Brent pulling back from $112 to around $104 in Tuesday afternoon trading. By Wednesday, that interpretation had reversed sharply. Brent closed Wednesday at $115.29, up 3.62 percent on the session and rising for the eighth consecutive day. The reframing is straightforward: with the Strait of Hormuz still effectively closed, the UAE's near-term ability to bring additional supply to market is constrained. What has materially changed is OPEC's ability to coordinate a cohesive supply response to the Iran shock. Rystad Energy described the new picture clearly: a structurally weaker OPEC, with less spare capacity concentrated within the group, will find it increasingly difficult to calibrate supply and stabilise prices. That is the read markets are now pricing.

Goldman Sachs has upgraded its Q4 2026 Brent forecast to $90 from $80, the fourth upward revision since the war began. JPMorgan continues to flag a $150 overshoot if the Hormuz disruption extends. The Energy Information Administration sees Brent peaking around $115 in Q2 before easing to $88 by Q4, with the EIA itself acknowledging that the Hormuz reopening will be partial through late 2026.

The headline implication is that the energy shock is now more structural and more persistent than markets were pricing two weeks ago. That changes what each central bank has to navigate this week.

The reason the UAE story matters is that it lands in a macro picture that is genuinely stagflationary across the major economies.

Germany's inflation rate jumped to 2.7 percent in March from 1.9 percent in February, the highest reading since January 2024. The driver was a 7.2 percent annual rise in energy prices, the first annual increase since December 2023, with motor fuel up 20 percent and heating oil up 44 percent. The German HICP flash estimate for April lands today, and given Brent has been above $100 for most of April with the spike to $115 this week, the print is unlikely to surprise to the downside.

Germany also halved its 2026 GDP growth forecast to 0.5 percent last week. Italy revised its forecast lower. The German ZEW survey collapsed by 16 points in a single month. The combination of rising inflation and falling growth is the textbook setup that European policymakers have not faced in this configuration since the early 1980s.

The UK is in a similar position. CPI for March was 3.3 percent, with services inflation at 4.5 percent. The OBR has revised UK growth down to 1.1 percent for 2026. Unemployment is being held down by rising inactivity rather than by job creation, which masks underlying labour market weakness.

The United States is the relative outlier in degree but not in shape. Headline inflation is being lifted by energy. Real wages fell 0.6 percent in March. Long-term unemployment is at 25 percent of the total. Growth indicators are softening even before the full effect of the energy shock has worked through.

Stagflation is a hard environment for central banks because the policy response to inflation is the opposite of the response to weakening growth. Central banks faced with this dilemma typically choose to fight inflation first because they are institutionally scarred by the 1970s episode when they did not. That instinct is what is currently supporting the ECB's hawkish signalling and the Fed's reluctance to cut.

Whether that instinct holds, or softens as the growth data deteriorates, is the question hanging over the three decisions this week.

The Federal Reserve, today. Markets are pricing a 100 percent probability of a hold. The federal funds rate stays at 3.50 to 3.75 percent. This is expected to be Powell's final meeting as Chair before Kevin Warsh is confirmed and takes over from mid-May. Warsh's Senate Banking Committee vote happens today at 10am ET, with full Senate confirmation expected to follow within days. EY-Parthenon expects Warsh in place for the June FOMC.

The decision matters less than the press conference. The signal to watch is whether Powell treats the energy shock as transitory or structural. A transitory framing keeps the door open to cuts in the second half of the year and is dollar-negative. A structural framing pushes the cut path further out and supports the dollar in the near term. There is also an open question about whether Powell will signal his intention to remain on the Federal Reserve board as a governor after his term as Chair ends. Either decision shapes how markets interpret the Fed's institutional independence over the coming year.

Our base case is a balanced hold. Powell has historically been careful not to box in the FOMC at moments of transition, and with Warsh inheriting the chair within weeks, the rhetorical room to lean hawkish is constrained. We expect Powell to acknowledge the energy shock but to keep the door open to cuts later in the year without committing to timing. That is modestly dollar-negative against the recent firming, because markets have been pricing in some hawkish framing that a balanced hold would not deliver.

The European Central Bank, tomorrow. Markets are pricing a hold but with hawkish signalling. The ECB held its deposit rate at 2.0 percent at the 19 March meeting, and Lagarde has signalled willingness to raise rates if the inflation impulse from the oil shock proves more than transitory. The 30 April meeting comes without updated staff projections, which historically has made the ECB more reluctant to move at the meeting itself. But the rhetorical signal Lagarde sends will move EUR/USD by one to two cents in either direction.

The interesting question is whether the German inflation print this morning shifts the rhetoric. If German HICP comes in materially above the 2.8 percent March reading, the hawks on the Governing Council will gain ammunition. If it comes in at or below, the doves can argue that the inflation impulse is being absorbed and that the growth picture warrants caution. Italy and Germany cutting growth forecasts in the past week strengthens the dovish case substantively, even if it does not move the rhetorical position immediately.

Our base case is a hawkish hold. Lagarde holds at 2.0 percent because moving without updated staff projections is institutionally awkward, but uses the press conference to signal that the Governing Council is prepared to hike at June if the inflation impulse persists. The German inflation print this morning will shape how confident she can be in that signalling. EUR/USD would push higher on this combination, possibly toward 1.18 to 1.19, with the euro benefiting from the rate differential repricing. We do not see USD strengthening against the euro from current levels under any plausible outcome this week.

This pushes back the timing of our view, set out on Friday, that the ECB will eventually be forced to reverse the hawkish framing as growth deteriorates. It does not change the substance of that call. The reversal we expect happens later in the year, in our view at the September meeting once Q3 growth data confirms the underlying weakness.

The Bank of England, Thursday. Markets are pricing a hold. Bank Rate stays at 3.75 percent. The interesting signal will be the vote split. UK CPI at 3.3 percent gives the hawks reason to delay cuts. The labour market data, with the headline unemployment fall driven by inactivity rather than job creation, gives the doves reason to look through the inflation prints. A close vote suggests the committee is divided and that a cut later in the year is in play. A unanimous hold suggests the next move is further out.

The press conference will also be watched for any signal on how the BoE views the energy shock relative to the broader UK growth picture. Bailey has historically been more willing than Lagarde to acknowledge growth concerns explicitly. If he does so this week, sterling could see modest pressure in the immediate aftermath but the medium-term picture would clarify, which is the more important signal for businesses.

The Dollar Index sits at 98.9, a three-week high, having gained for several sessions on safe-haven flows and on the Fed transition resolving cleanly. The dollar has clearly caught a near-term bid. That bid is not, in our view, the beginning of a sustained move higher.

The structural pressures we wrote about on Friday have not gone away. Gulf states are stress-testing the petrodollar system through swap line requests. The UAE leaving OPEC has fragmented the architectural framework that has supported coordinated dollar invoicing of oil for fifty years. The Fed transition is resolving but with a successor whose every decision will be read through the lens of whether it represents independent monetary policy or accommodation of White House pressure. The cumulative weight of these pressures is real, and it is what has kept the Dollar Index well below the levels a textbook safe-haven trade in this environment would imply.

Against the euro specifically, we do not see the dollar strengthening from current levels. EUR/USD at 1.17 looks like a floor rather than a ceiling. A hawkish ECB hold this week pushes it higher. A dovish ECB hold leaves it broadly stable as the dollar's own structural weakness reasserts itself. The asymmetry is in the euro's favour, even if the size of the move is modest.

What has shifted in the past week is that the cyclical supports for the dollar against other crosses have strengthened temporarily. Energy prices moving higher means the Fed has less room to cut in the very near term. Iran refusing to accept the latest US proposal means the geopolitical bid persists. Warsh confirmation moving through the Senate cleanly removes one source of uncertainty. None of these changes the structural picture. They change the timing of how it unfolds.

Goldman Sachs forecasts Brent at $90 by Q4. If that view holds, the inflation impulse fades, the Fed's path back to cuts becomes clear, and the dollar's structural weakness reasserts itself through the autumn. That is the channel for the move we expect, and it is now a Q3 to Q4 story rather than a near-term one.

GBP/USD is currently around 1.34, having softened from the 1.355 highs as the dollar firmed. The sterling argument we set out on Friday still holds in its substance: the BoE has more flexibility than the Fed or the ECB over the coming quarters, the major banks remain constructive on GBP/USD with Goldman at 1.38, UBS at 1.40 and Morgan Stanley at 1.47 by year-end, and sterling benefits from the relative position even when the UK's own story is unremarkable.

The combination we expect this week, a balanced Fed and a hawkish ECB, is broadly supportive of sterling's relative position. The Fed balanced hold softens the dollar modestly, which lifts GBP/USD back toward 1.345 to 1.35. The ECB hawkish hold supports the euro but the BoE on Thursday will be the deciding factor for GBP/EUR. If Bailey holds and signals comfort with the current rate while acknowledging the energy shock, sterling holds its position against both the dollar and the euro. If he leans hawkish, sterling firms further. If he leans dovish, sterling softens against both.

What the past week has clarified is that the sterling appreciation is unlikely to be linear. The dollar's near-term firming creates a window in which GBP/USD may consolidate or pull back modestly before the structural move resumes. For businesses managing dollar sales over the coming quarters, the practical implication is that the timing of layered forward cover matters more than it did two weeks ago. Locking in cover at current levels still captures rates that the major banks see as unsustainable, but the case for staggering execution rather than going in heavy at any single level has strengthened.

GBP/EUR remains in the more nuanced bucket. If the ECB signals a hike on Thursday, the euro spikes against sterling on the rate differential repricing. If the ECB holds and softens the hawkish framing, GBP/EUR has room to push higher. The German inflation print today is the swing factor.

Three observations for finance directors this week.

The energy shock is now structural rather than transitory. Brent at $115, OPEC fragmenting and the Hormuz disruption extending mean the inflation pressure on every major central bank is more persistent than markets were pricing a fortnight ago. That changes the rate path for all three banks, and it changes how businesses should think about hedging into the second half of the year.

The dollar's near-term strength does not change the structural picture. The Dollar Index at 98.9 is well below the levels a textbook safe-haven trade would imply, and the underlying credibility pressures on the dollar are accumulating rather than fading. For dollar exposure that needs to be covered over the next six to twelve months, current levels are still meaningfully better than where the major banks see the pair heading.

The press conferences this week matter more than the decisions. All three central banks are expected to hold. What each says about the energy outlook, the growth picture, and the relative weight of inflation and growth concerns in the rate-setting process will reshape positioning over the next quarter. Businesses with material exposure should be paying attention to the rhetoric, not just the rate.

The structural change we wrote about on Friday has not been disproved by the past week. It has been complicated. The dollar has caught a bid, the energy shock has intensified, and OPEC has fragmented at exactly the moment the world needs it functioning. Each of those is a fragment of a larger picture in which the architecture of the past 50 years is visibly reshaping. The implications for currencies, for inflation, and for sterling's position are real and developing. The right posture is patience inside a clear structural view, with execution timed around the catalysts rather than chased after them.