### United States
The US dollar is experiencing a mixed performance today, exhibiting softer movements within narrow trading ranges but gaining strength against the yen and Swiss franc. Recent weak US economic indicators, such as the ADP employment report, ISM services data, and the anecdotal Beige Book, have bolstered market confidence in the likelihood of at least two Federal Reserve interest rate cuts this year. As a result, many emerging market currencies are appreciating against the dollar today. However, the overall foreign exchange market activity remains relatively calm with mostly narrow trading ranges. Investors are eagerly anticipating the outcome of the European Central Bank meeting and tomorrow’s US employment report.
In the equities market, most major indices are trending upwards. In the Asia-Pacific region, Japan and Australia have not joined today’s rally. Europe’s Stoxx 600 index is advancing for the third session in a row, while US stock futures are indicating a firm tone. Bond markets are seeing high demand, with Japan’s 30-year bond auction receiving a not-so-enthusiastic bid-cover ratio of 2.92, though yields have dropped by nearly four basis points to 1.45%. European benchmark yields are generally 3-4 basis points lower, while the 10-year US Treasury yield is marginally softer around 4.34%. Meanwhile, gold remains strong at the higher end of this week’s trading range below $3400, and July’s WTI crude oil prices are trading within the range of $62.50-$63.15, after being capped this week below $64.
The US dollar underperformed yesterday due to the unexpectedly low ADP private sector job estimates (37,000 vs. an expected 114,000), weaker-than-anticipated ISM services data marking the first sub-50 reading since June 2024, and a Beige Book that highlighted the economic and policy uncertainties weighing on growth. In North America, the Dollar Index trended lower, nearing the three-year low between 97.90 and 98.00 reached last month. Trading remains subdued today, hovering below the 99.00 level. The US trade deficit for April narrowed significantly to $87.6 billion, compared to $162.3 billion in March, attributed to a rush to avoid new tariffs that resulted in a record 20% drop in goods imports and a 3.4% rise in exports. The overall trade balance report for April is expected to show a further contraction to around $66 billion, down from $140.50 billion. Additionally, the release of Q1 productivity and unit labor costs will provide further insight into economic trends, with productivity anticipated to have contracted by 0.8% and unit labor costs projected to have jumped 5.7%.
Weekly jobless claims data could draw attention after last week’s report showed a surprising 14,000 rise to 240,000 in the week through May 23, marking the first increase in four weeks and the second-highest since early October of the previous year. Nevertheless, tomorrow’s national jobs report, which expects slower nonfarm payroll growth of around 130,000 compared to 177,000, could exert more significant impact. The unemployment rate, having stood at 4.2% in March and April, will be closely watched as it matches last year’s high. In addition, the Atlanta Fed’s GDP tracker will be updated later today, having been raised on Monday to 4.6% from 3.8%.
### Eurozone
The euro exhibited a strong performance settled above $1.14 yesterday. Options amounting to 2.4 billion euros, struck at this level, are set to expire today. The currency is maintaining its position above $1.1400 but has faced resistance rising above $1.1435. A break above $1.1455 could target the three-and-a-half-year high set last month near $1.1575, and potentially extend the upward momentum by another cent. The ECB is widely expected to announce another quarter-point interest rate cut today in light of sub-2% aggregate May CPI figures, dispelling any lingering doubts.
Two key issues are in focus: updated economic forecasts, and forward guidance. It’s reasonable to expect the ECB to trim its growth and inflation forecasts. In March, the ECB predicted economic expansion of 0.9% in 2024, 1.2% in 2025, and 1.3% in 2027, with CPI at 2.3% this year, 1.9% in 2026, and 2.0% in 2027. Comparatively, the IMF’s latest forecasts estimate 0.8% growth this year and align with the ECB’s outlook for the next two years. The IMF’s CPI projection is 2.1% for 2024, also converging with the ECB in 2026 and 2027. In terms of forward guidance, ECB President Christine Lagarde is expected to exercise caution, suggesting that a pause may be warranted barring unforeseen shocks. Consequently, it seems a rate cut in July is unlikely, although September may be a closer decision due to new forecasts being released.
### United Kingdom
The British pound strengthened to $1.3580 against the backdrop of a weakening US dollar. Today, it is trading within a narrow range just below that level, hovering between $1.3540 and $1.3575. Last week’s high was near $1.3595, and breaking above $1.3600 could bring March 2022 highs of approximately $1.3645 into focus, with the upper Bollinger Band slightly higher today. The 2022 peak was recorded in January at about $1.3750. The UK reported a slight increase in auto registrations, serving as a proxy for auto sales, and marked the third consecutive rise in the construction PMI, which remains below 50, as it has since the end of last year.
### China
The broader weakness of the US dollar has resulted in it falling for the second consecutive session against the Chinese yuan, finding an eight-day low near CNH7.1700. While it has stabilized today, the dollar has pushed to approximately CNH7.1820. Last week’s low, the lowest since last November, was close to CNH7.1615. In response, the People’s Bank of China appears to have lowered the reference rate for the dollar after having increased it in the past two sessions (CNY7.1865 vs. CNY7.1886). Caixin’s services PMI showed a slight uptick to 51.1 from 50.7, but a much weaker-than-expected manufacturing PMI reading (48.3 vs. 50.4 in April) was sufficient to drag the composite PMI lower to 49.6 from 51.1, marking the first break of the 50 mark since the end of 2022.
Challenges from the ongoing trade dispute with the US persist, as container shipments to the US have declined further. Tensions surrounding critical technology sectors, such as chips, minerals, and magnets, have intensified. Nonetheless, China is making strides in developing its domestic chip industry, which is being forced to innovate in different ways. Meanwhile, replacing China’s capacity in critical minerals—and their processing—and magnets remains a greater challenge for the US to achieve in the short- to medium-term.
### Japan
The US dollar initially climbed to a three-day high yesterday near JPY144.40, but softer US economic data and a 10-basis-point retracement in the US 10-year yield presented too much pressure, despite the recent slackening correlation. The dollar was subsequently sold down to nearly JPY142.60 and registered a marginal new low today near JPY142.50 before recovering to JPY143.40. Tuesday’s low was closer to JPY142.40, with the JPY142 area offering support.
In Japan, labor cash earnings were steady at 2.3% year-over-year in April, improving over the same period in 2024, when they rose by 1.6% year-over-year. Despite this growth, after adjustments for inflation, real cash earnings continued to decline, falling by 1.8% for the year through April, compared to declines of 1.2% in April 2024, and 3.2% in April 2023. This decline in real earnings is likely impacting household spending, which is scheduled for release tomorrow and expected to slow to 1.5% in April after growing by 2.1% in March.
### Canada
Though the Bank of Canada upheld its current policy stance yesterday, indications reveal that the easing cycle is not over. Nonetheless, the Canadian dollar has gained ground given the heavier performance of the greenback today, rising to its strongest level since last October. The US dollar approached CAD1.3650 and remains contained for now, exhibiting vulnerability as upside capacity is capped near CAD1.3685. The lower Bollinger Band is near CAD1.3625 today, and technically speaking, there’s minimal robust support until approximately CAD1.3600, which isn’t particularly strong.
Canada’s April merchandise trade balance report is awaited, particularly after recording a nearly C$2 billion trade deficit over February and March combined. This, however, was fully offset by the nearly C$3.1 billion surplus in January, resulting in a small C$1 billion goods surplus for Q1 2025. Notably, a minor deficit was noted in Q1 2024. Additionally, Canada’s IVEY PMI, often more volatile and higher than the composite PMI, is also due soon. The index registered at 47.9 in April, dropping from 51.30 in March, with the first back-to-back declines since July-August 2024.
### Australia
The Australian dollar rallied above $0.6500 in North American trading yesterday but once again struggled to sustain its standing above this level. It is currently attempting a rise again and is trading around $0.6515 in late European morning turnover. Last week’s high was slightly over $0.6535, falling just shy of the $0.6550 resistance target, representing a 61.8% retracement of losses from last October (~$0.6940) to April’s low (~$0.5915). Australia recorded a goods trade surplus earlier today, narrowing from March’s A$6.9 billion—the largest since January 2024—to A$5.4 billion, still above last year’s average (~A$5.7 billion). Exports slowed, declining by about 2.4% after surging by 7.2% in March (the highest gain since April 2022), while imports rose by 1.1% following a 2.4% contraction in March. Separately, household spending ticked up by 0.1% in April after falling by 0.3% in March, translating to an annualized growth rate of 2.4%. During the first four months of 2024, household spending increased at an annualized rate of around 3.3%.
### Mexico
A softer US dollar, declined US rates, and robust equity markets provided support for the Mexican peso yesterday, pushing it to its highest level since last October. The US dollar edged close to MXN19.1625 before steadying in a narrow trading range between MXN19.1895 and MXN19.2135. The peso has been experiencing a gradual decline from its high of MXN19.7820 in early May, and further opportunities toward the MXN19.00 level are evident. Mexico reported a substantial 10.8% surge in May auto sales, though the reality might not be as striking given the report’s lack of seasonality adjustments. Historically, auto sales have grown every May since 2006, making this the sixth instance of over 10% increases. May’s auto sales were about 0.4% lower compared to the same period in 2024.
In Brazil, the composite PMI slipped lower, maintaining levels below 50 for the second consecutive month. Disappointing real-sector data and the softer recent PMI print could lead markets to rethink the probability of an interest rate hike in the upcoming June 18 central bank meeting. The dollar approached BRL5.61 yesterday, confronting the important support level of BRL5.60. This level has been breached in intraday trades a few times here in Q2 but never conclusively settled below it.
