Lungs develop in a complex mechanical microenvironment: high-pressure luminal fluid causes positive transmural pressure (ΔP) between the lung lumen and pleural cavity. Reduced ΔP decreases airway branching but the mechanism remains unclear. Now, Celeste Nelson and colleagues use a microfluidic explant system to investigate how ΔP affects lung development. The authors use bioinformatic data generated from lung explants exposed to low (20 Pa) or physiological (200 Pa) pressure to identify target genes regulated by ΔP. Focusing on retinoic acid (RA) signalling, which is enriched under physiological ΔP conditions, they use in situ hybridisation and single-cell RNA sequencing to show that RA signalling components are expressed in distinct lung compartments. RA signalling acts downstream of ΔP and the mechanosensory protein Yap; increasing ΔP in explants through chemical treatment increases RA signalling activity, and Yap knockout in vivo decreases RA signalling activity. Furthermore, chemical inhibition of RA itself decreases branching and airway smooth muscle differentiation in lung explants. Finally, computational simulations of the developing airway produce similar results to experimental data. Together, these data provide a mechanism by which ΔP stimulates Yap-dependent activation of RA signalling, which induces the airway smooth muscle differentiation necessary for lung branching.