# United States
The dollar is closing the week on a downbeat note, depreciating against most global currencies except for the Turkish lira and Hong Kong dollar. Among the G10 currencies, only the Australian dollar has not increased by at least 1%, while sterling, bolstered by stronger-than-expected retail sales, reached a three-year high at approximately $1.3500. The combination of tariffs and budget issues is poised to break a four-week upward correction period for the Dollar Index, despite market anticipation pushing the Federal Reserve’s next rate cut to Q4.
In the realm of equities, Asia Pacific markets mostly rallied, excluding China, Taiwan, and South Korea. Meanwhile, Europe’s Stoxx 600 remained largely unchanged both for the day and the week, and US index futures leaned toward a slightly heavier outlook. The S&P 500 ended a six-day rally and entered a three-day downturn. Bonds benefitted from bids, including the long end of the Japanese curve, despite firm April national CPI figures. European benchmark yields fell by 1-2 basis points, and the 10-year US Treasury yield decreased slightly more than a basis point to 4.51%.
Gold remains firm within yesterday’s range, nearing $3330 after closing last week slightly above $3200. July WTI crude reversed from $64.20 mid-week and saw a $4 drop by yesterday’s lows. It consolidates quietly today around $61.00.
The Dollar Index was on a recovery trajectory before the stronger-than-expected preliminary PMI further extended the gains, even as yields paradoxically fell. It resurfaced above 100.00 for the first time this week yesterday. However, sales in both Asia and Europe positioned the index fraying support around the low set on Wednesday, a little below 99.35, which is also roughly the (61.8%) retracement from the April 21 low (~97.90).
A report on April’s new home sales, following a 7.4% jump in March—the biggest gain in five months—projects a 4% decline, bringing the seasonally adjusted annual figure to 695k, about 5.5% lower than in April 2024, typically not a market-mover. Next week’s highlights include durable goods orders, with expected slowing in Boeing orders impacting the headline figure while shipments jump. The April PCE deflator release could reveal a slight slowdown, depending on rounding.
# Eurozone
The euro peaked on Wednesday near $1.1380, corresponding to a 61.8% retracement of the decline over the past month. It retreated yesterday, dropping to almost $1.1255 in North America before recovering to nearly $1.1355 today. The five-day moving average is crossing above the 20-day moving average. Last week, it settled slightly below $1.1165, marking the fourth consecutive weekly decline following a four-week advance. The movement primarily reflects broader fluctuations in the dollar, yet Germany’s Q1 GDP revision from 0.2% to 0.4%, driven by stronger consumption and investment, likely also provided support.
The ECB is expected to cut rates at its June 5 meeting amid growth and inflation projections reductions. ECB President Lagarde has suggested the neutral rate is around 1.75%, aligning with market expectations for the deposit rate by the end of the year (currently at 2.25%). Moody’s is set to review Italy’s sovereign rating today, currently on negative watch at the lowest investment grade (Baa3). Next week’s economic diary is focused mostly on surveys and money supply/lending figures.
# United Kingdom
After setting three-year highs on Wednesday (~$1.3470), sterling consolidated strongly, spending most of yesterday above $1.34. It emerged as the strongest G10 currency by settling marginally higher on the day. The dollar’s weakness and stronger-than-expected UK retail sales lifted sterling to $1.35 today. While this may bear psychological importance, the next significant chart resistance lies around $1.3650.
April’s UK retail sales jumped 1.2% in volume terms, surpassing expectations. March’s 0.4% increase was revised to just 0.1%, implying that UK retail sales have risen over 9.5% at an annualized rate during the first four months of the year. Throughout the Jan-Apr 2024 period, UK retail sales increased by over 5% annually. With rising core CPI and services and robust retail sales, the swaps market is anticipating a less aggressive Bank of England path, forecasting a year-end base rate near 3.82%. The UK has a light economic calendar next week.
# China
The dollar recovered from a four-day low yesterday near CNH7.1940 and approached CNH7.2050 by the session’s end. It has been sold to a new six-month low today near CNH7.1745. The next key technical area could be CNH7.1460-CNH7.1500. The PBOC set the dollar’s reference rate at CNY7.1919 (CNY7.1903 yesterday, CNY7.1938 a week ago).
China’s model, comprising extensive state-owned companies, favors competition for market share through bank lending, in contrast to the Anglo-American model’s reliance on capital markets for profit-driven activities. Industrial profits for April are due next Tuesday following a 2.6% year-over-year increase in March and a 3.5% decline by March 2024. China’s PMI is scheduled for May 31, with the risk inclined to the downside.
# Japan
The dollar reversed a three-day decline against the yen yesterday, rising this week despite a large US 10-year yield decline since last Thursday. The dollar peaked on May 12 near JPY146.85 but selling pressure re-emerged today, pushing it back to JPY143.15, bringing yesterday’s low near JPY142.80 into view.
US CPI and PPI reports overshadow the Fed’s inflation target, the PCE deflator, much like the eurozone’s preliminary CPI overshadows the final estimate. Tokyo’s CPI is typically a reliable indicator for the national figure. Tokyo’s April CPI showed a large jump (3.5% vs 2.9% headline and 3.1% vs 2.2% core). The national headline figure converged with Tokyo’s at 3.6%, unchanged from March, with the core rate standing at 3.5% (up from 3.2%).
The swaps market discounted around 15 basis points of tightening for this year, slightly less than a week ago, remaining flat since last month. At the end of next week, Tokyo’s May CPI will be reported alongside April’s industrial production and retail sales. Japan sees a dramatic increase in long-term bond yields, with the 30-year bond yield rising for four consecutive weeks, closing in on German levels (3.02%-3.11%). Japan’s 40-year bond yield increased for the seventh consecutive week, reaching nearly 3.55%.
Banks in Japan seem minimally strained as the Topix index of bank shares rose for the third consecutive week, climbing almost 11.5% over these weeks. Japanese insurers, however, may feel more exposed to the ultra-long end, with the five-week, nearly 17% rally ending this week with a 3.1% pullback.
# Canada
The US dollar consolidated quietly yesterday between approximately CAD1.3850 and CAD1.3890, slightly higher, breaking a three-day losing streak. Sellers subsequently drove the greenback to a new weekly low closer to CAD1.3800, needing to break free from the CAD1.38-handle for significance. Earlier this month, the annual low was set near CAD1.3750.
Canada’s retail sales, supported by the strongest auto sales in March since 2018, saw the Bank of Canada estimate a 0.7% overall increase, likely preempting US tariffs. Excluding autos, retail sales could have dropped by 0.1%, following a 0.5% rise in February. This week, firmer-than-expected core CPI measures persuaded the market to downgrade the likelihood of a rate cut next month (June 4), not anticipating a fully discounted rate cut until September.
Next week, the first estimate of Q1 GDP takes center stage, with Bloomberg’s survey projecting a 1.8% annualized pace (down from a 2.6% figure in Q4 2024). For Q2, the median forecast indicates contraction risk, with possible stagnation in Q3.
# Australia
The Australian dollar showed weakness yesterday, settling below Wednesday’s low while still remaining within the broad consolidation range established since mid-last week, approximately $0.6385-$0.6470. It trades near the upper end of this range, reaching nearly $0.6465 in Europe today. Last week’s high was near $0.6500.
Australia’s economic diary is quiet until mid-next week’s monthly inflation report. The Reserve Bank of Australia’s 25 basis points rate cut this week revealed consideration for a half-point move. The odds of a July cut increased from just under 25% to around 60%. The overnight cash target rate is at 3.85%, with the swaps market forecasting a year-end rate near 3.15%, slightly over 15 basis points lower than a week ago.
# Mexico
The dollar peaked yesterday near MXN19.46 following a stronger-than-expected CPI for the first half of May, where the headline rate surged to 4.20% (from 3.90%), surpassing the target range cap for the first time this year. The core rate remained just below 4%. Despite the dollar’s rebound against the euro and yen yesterday, it dropped back below MXN19.30 before the session’s end, hitting lows late in the session. It has been sold to almost MXN19.2550 today, close to this week’s previous low around MXN19.25.
The dollar carry-trade remains popular, with potential toward MXN19.00-MXN19.10 seen. Confirmation in next week’s central bank report, possibly revising growth forecasts again, is sought. Recently, the growth projection was halved to 0.6%, possibly optimistic compared to the IMF’s 0.3% contraction forecast. The peso’s resilience remains evident. While Mexico’s trade surplus is expected to have narrowed last month as it typically does sequentially in April, March’s surplus—almost three-quarters larger than March 2024—was likely inflated by efforts to pre-empt US tariffs.
