### United States
The US economy isn’t performing as poorly as expected despite a contraction in Q1 GDP, which initially suggested a bottoming out for the dollar. However, optimism surrounding potential US-China trade talks and anticipation of the upcoming US jobs report has applied downward pressure on the dollar. We’re skeptical of imminent trade talks, especially after the US issued new sanctions against countries purchasing Iranian oil, with China being the largest buyer. Additionally, new tariffs on small packages from China are set to take effect. The US dollar is weaker against most G10 and emerging market currencies, with higher exceptions only observed in Mexico, Türkiye, and Russia. Notably, the dollar is at its lowest level against the offshore yuan since March 20. In equity markets, Asia Pacific rallied with Hong Kong shares of mainland firms rising nearly 2% and Taiwan’s Taiex surging by 2.7%. Europe’s Stoxx 600 index, up by almost 0.9%, marks its ninth consecutive gain, while US index futures are marginally up. In fixed income, European 10-year yields generally rose 2-3 basis points, except for UK Gilts which saw a drop of nearly six basis points. The US 10-year Treasury yield slightly declined to 4.20%. Gold prices rebounded to around $3,265 after previously holding at $3,200, its lowest value since mid-April. West Texas Intermediate (WTI) oil prices reached nearly $60 amid ongoing US-Iran tensions but retracted below $59 following the sell-off on anticipation of the upcoming OPEC+ meeting.
The Dollar Index breached a key technical level yesterday, suggesting a potential rise towards 102.40. However, it showed no follow-through buying and retreated around 99.80. A further dip could lead to disappointment, especially with focus on the upcoming jobs report for April. Bloomberg’s survey suggests a median job growth of 138k, with 125k from the private sector. Despite a lower “whisper number”, expectations for next week’s FOMC meeting remain constant, with a 62% probability of a rate cut anticipated in June. Despite the Q1 GDP contraction being seen as a statistical fluke influenced by tariffs, the futures market indicates expectations of nearly four rate cuts this year, focusing on the unemployment rate’s potential influence over the Fed’s decisions.
### Eurozone
Yesterday saw the euro falling to nearly $1.1265, brushing the 20-day moving average for the first time in close to a month. If it closes below this point, it could provide technical evidence of a bearish trend, potentially marking another two-cent decline soon. However, it trades near $1.1350 in the European morning. The eurozone’s preliminary April CPI was slightly higher than expected, with a 0.6% month-over-month rise, keeping the yearly rate steady at 2.2%. The core rate increased to 2.7% from 2.4%, matching the year’s high. Market confidence persists that the ECB will cut key rates in next month’s meeting, though the pace of easing is likely to slow. The swaps market forecasts a rate cut in Q3 and a roughly 55% chance of another cut in Q4. The final April manufacturing PMI confirmed a fourth straight monthly increase, reaching 49.0, still below the 50 threshold separating expansion from contraction since June 2022.
### United Kingdom
Sterling appears toppish, albeit less distinctly than the euro or other currency patterns. It remains firm near $1.3310 in the European morning. However, breaching the $1.3235 area, last week’s low, could indicate a further two-cent pullback. The upcoming Bank of England meeting on May 8 could mark a pivotal event for the UK, with a quarter-point rate cut broadly expected, reducing the base rate to 4.25%. A year-end rate of 3.5% is anticipated in the swaps market, down from slightly below 4.0% in early April. The British Retail Consortium warns that the 6.7% minimum wage hike and GBP26 billion payroll tax increase could drive prices higher, especially for food. The Reform Party surfaced as the big winner in the recent local elections, gaining a parliamentary seat from Labour, leading to potential internal conflict within both Labour and the Conservatives.
### China
China indicates caution yet progress as its Commerce Ministry evaluates possible trade talks with the US following expressions of American willingness. While this lifts risk appetites, skepticism remains due to recent US threats of retaliation over Iranian oil purchases and impending de minimis tariffs on smaller imports. The tension mounts as shipping pressures loom over the US, decreasing the likelihood of immediate trade relief. Mainland markets will stay closed until next Tuesday, with the dollar dipping to about CNH7.2345 against the yuan, marking a significant low since March 20. This comes amid hope for ending the diplomatic embargo, further influencing the dollar’s positioning against other major currencies.
### Japan
Japan’s March unemployment inched up to 2.5% from 2.4%, while the job-to-applicant ratio improved to 1.26 from 1.24. Post-BOJ meeting, the swaps market maintains a conservative outlook for tightening, down to eight basis points this year from a substantial 40 basis points in March. Crucial to yen’s near-term outlook is the dollar’s technical showing, which hints at potential strengthening to JPY148.00-50. Various options around JPY146 are said to expire soon. Finance Minister Kato ambiguously mentioned Japan’s US Treasury holdings as potential leverage in talks but noted that foreign exchange remains undiscussed in bilateral engagements.
### Canada
The US dollar’s recent retreat to a six-month low against the Canadian dollar hints at potential gains amidst broader US dollar strengthening. If US dollar losses from last month are reversed, targets may initially focus on the CAD1.3925 area and later CAD1.4000. Friday’s close saw the greenback retesting the CAD1.3800 zone. Next week is slated for the services and composite PMI alongside March’s goods trade report, culminating in the April jobs report, forecasted to show a 25k recovery in jobs after March’s 33k drop, stabilizing the unemployment rate at 6.7%.
### Australia
As Australia gears up for its national election, which is expected to favor the incumbent Labor Party, investor conjecture leans towards preferring a coalition government over a minority one. While providing fiscal support, Australia announced relevant policies prior to the election—contrasting with central banks notably the BOJ—that continue easing more aggressively relative to peers. The Australian dollar saw resistance after reaching a four-month high near $0.6450, yet trades nearer session peaks amid renewed US-China trade optimism. Despite this, the recent rally from April 9 sees potential correction, notably towards the $0.6200-45 range.
### Mexico
The dollar appears to be setting a base against the peso, though it may signal an extended consolidation phase. The dollar maintains firmness near MXN19.6550, with a breakthrough above MXN19.78 potentially triggering further upward movement towards MXN20.00-MXN20.10 as an initial target. Key reports due include April’s manufacturing PMI, IMEF surveys, and March’s remittance figures. Given the potential seasonal nature of remittance fluctuations, March’s $5 billion estimates maintain a year-to-year positive outlook from early 2024.
