Global currency markets are navigating a complex backdrop defined by divergent central bank messaging, geopolitical tensions, and shifting correlations between major asset classes. The past week witnessed a critical inflection point as five G10 central banks delivered hawkish holds, reshaping expectations for monetary policy trajectories throughout 2025. Meanwhile, the US dollar has entered a consolidation phase after testing key technical levels, reflecting both the strength of the American economy and the growing hawkish tilt across developed market central banks.
United States
The Federal Reserve delivered a hawkish hold at its recent meeting, with three regional presidents dissenting in favor of a more neutral policy stance rather than one carrying an easing bias. Despite this dissent, the Fed remains the only major G10 central bank where the market is still pricing in a meaningful chance of a rate cut later this year, albeit a small probability. The swaps market revised the projected year-end Fed funds rate higher by approximately 10 basis points following the decision, a more modest adjustment compared to other major central banks. The dissenting votes, while generating considerable market commentary, appear more procedural than substantive in nature. Other FOMC members demonstrated sympathy toward a more neutral stance, but the majority favored waiting given the significant uncertainties surrounding the scale and duration of geopolitical developments in the Middle East. A change in the policy statement, arguably, would have aligned better with the updated Summary of Economic Projections expected in June.
The dollar’s performance reflects two key supporting legs. First, geopolitical considerations favor the United States, which appears uniquely positioned among developed economies to manage the supply shocks stemming from Middle East tensions. Second, economic data has validated this advantage. The US economy is experiencing a notable surge in capital expenditure and inventory rebuilding, with S&P 500 earnings remaining robust. The economy delivered a solid first quarter performance, expanding at a 2.0% annualized rate. By comparison, the eurozone expanded by less than 0.5% annualized, while the Japanese economy is expected to have grown by 1.2%. US government spending in the first quarter rose 4.4%, marking the largest increase since the third quarter of 2024. Eurozone government spending grew at less than half that pace, underscoring the divergence in fiscal support across developed markets.
The week ahead presents a data-rich environment for US markets. The most market-sensitive high-frequency release is the April employment report. The median forecast in Bloomberg’s survey calls for an increase of 100,000 jobs following the revised March figure of 178,000, which remains subject to further revision. The unemployment rate is expected to tick back up to 4.4% from 4.3%. Average weekly hours slipped to 34.2 from 34.3, resulting in a 0.2% decline in aggregate hours worked. The March reports carry more than passing interest given the 2.0% initial estimate of first quarter GDP. Real final sales to private domestic parties, which excludes trade, inventories, and government spending, rose 2.5% after a 1.8% advance in the fourth quarter of 2024. Mid-week, the US Treasury will make its quarterly refunding announcement. Previously, the Treasury anticipated borrowing $109 billion, though the refunding of tariff revenue may boost its overall borrowing needs.
The Dollar Index entered last week having created a gap following a sharply lower opening in early April. The index tested that gap but failed to close it, recording a bearish outside down day. There was no immediate follow-through selling, but the DXY posted another downside reversal on April 30 and recorded a two-week low before the weekend near 97.70. The index stabilized and recovered to almost 98.25 by week’s end. The 98.35-98.55 area represents the next important technical resistance level. This consolidation phase reflects the complex interplay between strong US economic fundamentals and the hawkish positioning already reflected in Fed rate expectations.
Eurozone
The European Central Bank delivered a hawkish hold that meaningfully shifted market expectations for monetary policy tightening. The swaps market repriced to expect 76 basis points of tightening by year-end, up from approximately 57 basis points at the end of the previous week, representing a 19 basis point upward revision. This repricing occurred despite ongoing economic headwinds and modest growth dynamics in the eurozone. The euro demonstrated sensitivity to multiple factors during the period, with particularly pronounced correlations emerging relative to US Treasury yields and risk sentiment.
Over the past 30 trading sessions, the euro has exhibited sensitivity to changes in US two-year yields that rivals its sensitivity to oil price movements. The inverse correlation between euro movements and US two-year yields stands at approximately -0.40 to -0.45, representing the most extreme oil correlation reading since September. This correlation was near zero at the end of February before reaching a three-month extreme in March near -0.47. The euro also demonstrates particular sensitivity to the prevailing risk environment. The rolling 30-day correlation between euro changes and VIX movements reaches approximately -0.51, the most inverse reading in a year. This represents a dramatic shift from the January through early March period, when this correlation was positive, indicating that euro strength now accompanies risk-off dynamics.
Economic data releases during the week include final PMI readings, which typically elicit modest market reaction, and March aggregate retail sales figures, which will be of only passing interest. The focus instead turns to Germany’s March factory orders and industrial production figures, which will be scrutinized for confirmation of the recovery signaled by recent PMI data. Germany’s March manufacturing PMI rose to 52.2 from 50.9 in February, marking the first above-50 reading since Russia’s invasion of Ukraine and suggesting tentative improvement in European manufacturing conditions.
The euro reached an eight-session high before the weekend near $1.1785, but was pushed back to nearly $1.1715 following the US announcement that it would raise tariffs on light vehicles from the EU to 25% from 15%. The five-day moving average appeared poised to fall below the 20-day moving average, but improved price action prevented this technical breakdown. Other momentum indicators are not generating strong directional signals. Although the US two-year premium over Germany edged higher over the past three sessions, on a weekly basis it was essentially flat. A break below $1.1700 would weaken the technical tone and potentially signal further euro weakness.
United Kingdom
Sterling demonstrates an unusually tight correlation with the Dollar Index, with the rolling 30-day correlation exceeding -0.90 and the rolling 60-day correlation only slightly lower. This strong inverse relationship appears to primarily reflect sterling’s robust correlation with the euro, with both currency pairs exhibiting correlations slightly below 0.90 across both 30-day and 60-day timeframes. This suggests that sterling weakness is largely driven by broader dollar strength rather than idiosyncratic UK factors.
The Bank of England’s recent hold on interest rates triggered a significant repricing of rate expectations in the swaps market. The odds of a rate hike at the next BOE meeting declined to approximately 56% from almost 69% at the end of the previous week, a substantial 13 percentage point drop. With the base rate currently at 3.75%, the swaps market now projects year-end rates near 4.40%, up from approximately 4.27% at the end of the previous week, representing a 13 basis point upward revision.
The UK’s economic calendar includes final April service and composite PMI readings, along with the April construction PMI. While the services, manufacturing, and composite PMIs remain above the 50 boom-bust threshold, the UK’s construction PMI has not exceeded that level since the end of 2024, pointing to weakness in that sector. The local elections scheduled for May 7 may shape political discourse given Prime Minister Starmer’s apparent political vulnerability, though the direct market impact of these elections is likely to be limited.
Sterling powered through the $1.36 cap last week that had constrained it earlier in April. This breakout corresponded to the 61.8% retracement of sterling’s losses since the peak in late January near $1.3870, a five-year high. The $1.3670-$1.3700 area now represents the next hurdle for cable. The currency reached almost $1.3660 before the weekend and then reversed lower, leaving a potentially bearish shooting star candlestick in its wake. A break of the $1.3530-55 area could signal a return to last week’s low near $1.3455, establishing a lower trading range.
China
The People’s Bank of China strongly guides the exchange rate, and as the dollar firmed broadly across major currency pairs, Chinese officials appeared to be consolidating the efforts that had driven the yuan to a three-year high. The dollar tested chart resistance near CNH6.85 in the middle of last week but was turned back. The PBOC set the daily fixing at a marginal new low this past Monday at CNY6.8579, but net-net the currency pair has remained little changed over the past two weeks, reflecting official efforts to stabilize the exchange rate.
China’s mainland markets were closed ahead of the weekend and will reopen Wednesday, temporarily limiting market access to PBOC guidance and potentially deterring significant moves in the USD/CNY pair. The economic calendar for the week includes the RatingDog (previously Caixin) service and composite PMI for April, due on May 6. The RatingDog iteration historically runs hotter, or stronger, than the official PMI generated by the China Federation of Logistics and Purchasing. During the week, April reserves, lending, and trade figures may be reported, providing insight into economic momentum and capital flows.
The dollar tested chart resistance near CNH6.85 in the middle of last week and was turned back. While the broadly heavier dollar tone would suggest losses against the yuan, the mainland holiday will deny the market access to PBOC guidance, which may deter significant moves. Last week’s dollar low was slightly below CNH6.82, while the month’s low was closer to CNH6.8060. The dollar settled lower for the fourth week in the past five, reflecting the broader consolidation in the greenback.
Japan
The Bank of Japan delivered the least convincing hawkish hold among the five G10 central banks that met last week. The swap market barely changed its expectations for the extent of anticipated BOJ tightening this year, with the projected year-end tightening rising by only 22 basis points. The BOJ voted 6-3 to hold rates steady, with the press conference characterized as notably uninspiring. In the face of this milquetoast policy messaging, combined with the Federal Reserve’s hawkish hold and firm US interest rates, the market aggressively pushed the dollar to around JPY160.70.
This move triggered a sharp escalation of Japanese official rhetoric and reports of material intervention by the BOJ. While initially skeptical of these reports, preliminary estimates suggest that the BOJ may have sold approximately $34.5 billion, which would be slightly more than its average operation in 2024. This intervention succeeded in spurring a powerful short squeeze of the yen, sending the dollar down to about JPY155.50, which nearly met the 61.8% retracement objective of the dollar’s rally from the year’s low recorded in late January around JPY152.10. Notably, unlike earlier in the year when the US participated in verbal intervention supporting the yen, the US Treasury did not appear to comment on or support Japan’s intervention effort this time. The action will reinforce the significance of the JPY160 area as a key level in the market’s collective consciousness.
With Japanese markets closed for three trading sessions at the start of the week ahead, consolidation represents the most likely scenario. The pricing in the swap market for the next BOJ meeting in June was little changed last week, hovering around 65%, suggesting modest expectations for policy tightening at that juncture. If the JPY155.50 area represents the lower end of the current trading range, the JPY157.50 area, which marked the lower end of the previous range, may now offer resistance.
Japan reports March labor data at the end of next week, a release that many, including BOJ officials, consider crucial to understanding consumption dynamics. However, the relationship between labor earnings and consumption is more complex than simple resource availability would suggest. In February, inflation-adjusted real labor cash earnings rose 1.9% year-over-year, marking the first back-to-back positive reading since the end of 2024. Yet despite this improvement, real household spending fell 1.8% year-over-year after a 1.0% decline in January. This apparent disconnect suggests that consumption is a complex cultural phenomenon encompassing values, living space, and preferences that extends far beyond simply having available resources, which are necessary but insufficient conditions for spending increases.
The dollar reached JPY160.70 on April 30 before what now appears to have been material intervention. The powerful yen short squeeze sent the dollar down to approximately JPY155.50, nearly achieving the 61.8% retracement objective from the year’s low near JPY152.10 recorded in late January. With Japanese markets on holiday until next Thursday, the market may be content to consolidate within the established range.
Canada
The Canadian dollar climbed on the back of US dollar weakness and the broader risk-on environment that lifted the S&P 500 and Nasdaq to record levels. The 30-day correlation between the USD-CAD exchange rate and the Dollar Index dipped below 0.50 in late April for the first time since early January, suggesting that loonie movements were becoming driven by factors other than broad dollar strength. However, this correlation quickly rebounded to around 0.70 before the weekend, the highest level in approximately six weeks, indicating a return to more typical USD-CAD-to-DXY relationships.
The USD-CAD’s inverse correlation with the S&P 500 has reached -0.52, the most extreme reading since September, though it finished last week near -0.47. The correlation with the VIX stands around 0.30. Interestingly, the 30-day correlation between changes in WTI crude oil and the USD-CAD exchange rate was inverse from early November through mid-March. However, since then the correlation has flipped and now stands near 0.30, indicating that higher oil prices are currently associated with a weaker Canadian dollar, a reversal of the earlier relationship.
The swaps market is now fully discounting two rate hikes by the Bank of Canada this year, up from expectations of one hike and almost a 30% chance of a second just one week prior. This dramatic repricing reflects the hawkish central bank messaging from the recent G10 meetings and suggests growing expectations for Canadian monetary tightening.
Canada’s economic calendar includes April services and composite PMI readings. These figures stood at 47.2 and 47.6 respectively in March, warning of economic weakness. The IVEY PMI was also below 50 at 49.7 in March, and the April reading is due. Canada reports its March merchandise trade figures as well. In the first two months of 2025, Canada recorded a goods deficit of C$9.9 billion, a stark reversal from the C$2.1 billion surplus recorded in January-February 2024. In February, Canada’s imports surged to a record level, fueled by an increase in gold purchases. Canada’s trade surplus with the US narrowed to C$1.7 billion, the smallest since May 2020. However, Canada is making progress diversifying its trade away from the US. Trade with other countries reached a record in February, with exports to the rest of the world ex-US rising by 10.5% while imports increased by 1.6%. The week concludes with the April jobs report. In the first quarter of 2026, Canada lost 67.5k full-time positions compared to a loss of about 41.3k full-time posts in Q1 2025. The unemployment rate improved to 6.7% in March 2026 from 6.8% in March 2025, though this improvement appears to reflect a decline in the participation rate from 65.3% to 64.9% rather than genuine job creation.
In the middle of last week, the US dollar tested the upper end of its recent range near CAD1.3710-15, where it held. The greenback was subsequently sold to CAD1.3550 before the weekend, the lowest level since March 10. The US dollar has been sold through the trendline connecting the January and March lows, though the greenback finished the week above this trendline. The trendline begins the new week near CAD1.3590. The USD-CAD posted what may represent a bullish hammer candlestick, suggesting potential near-term support. Near-term potential may extend back toward CAD1.3630-50.
Australia
The Australian dollar is highly sensitive to the overall direction of the greenback. The rolling 30-day correlation of changes in the aussie and changes in the Dollar Index is inverse by approximately 0.75, representing around the most extreme level for the past two years. The exchange rate demonstrates greater sensitivity to changes in the US two-year yield at approximately -0.60 than to changes in Australia’s two-year yield, which counter-intuitively is also inversely correlated with the exchange rate at approximately -0.10. There is also a notable risk component, with changes in the aussie and the S&P 500 showing approximately 0.60 correlation over the past 30 sessions, the upper end of a five-month range. The 30-day rolling correlation with gold stands around 0.55 after peaking in early February near 0.80.
The Reserve Bank of Australia meets on Tuesday and is likely to hike rates for the third time in 2025. The Australian dollar reached new four-year highs before the weekend, in part anticipating this rate hike. A few hours before the RBA’s meeting concludes on May 6, March household spending will be reported. February household spending rose at a 4.6% year-over-year pace, and the central bank has cited consumption as a consideration in their two rate hikes thus far in 2025. The base effect in March and April will likely cushion the impact of disruptions spurred by Middle East tensions. Previously, the analysis leaned against a third consecutive rate hike, but given hawkish RBA rhetoric, the rise in inflation expectations, and the jump in March and Q1 CPI reported last week, a rate hike appears likely. The futures market is pricing in almost an 80% chance of a hike. On Thursday, March trade figures are due. The January-February merchandise trade surplus stands at approximately A$7.95 billion compared with A$7.62 billion in the first two months of last year. Exports are up about 3.3% through February, reversing the -1.9% decline recorded in January-February 2024, while imports are off 2.1% compared with -0.5% in the year-ago period.
The Australian dollar held above the lower end of its recent range near $0.7100 in the middle of last week and launched a challenge on the upper end near $0.7200. It recorded a new four-year high ahead of the weekend near $0.7230. The momentum indicators are stretched, perhaps leaving the aussie vulnerable to “buy the rumor, sell the fact” activity surrounding the RBA meeting.
Emerging Markets
The Mexican peso represents an important emerging market barometer with distinct sensitivities to both risk sentiment and broader dollar dynamics. Changes in the dollar against the Mexican peso exhibit approximately the same 30-day rolling correlation with both the S&P 500 and the JP Morgan Emerging Market Currency Index, with inverse correlations of approximately -0.70 to -0.75. The correlation between the exchange rate and the Dollar Index stands around 0.70, reaching the highest level since September earlier this month when it briefly exceeded 0.80.
The week ahead represents an important period for Mexico. Thursday is the most significant day, with April CPI due in the morning and the central bank meeting concluding in the afternoon. Headline and core CPI are running above the top of the 2-4% target band, as they were in March when the central bank cut its overnight rate target by 25 basis points to 6.75%. The central bank held out the possibility of another rate cut, and both the swaps market and all ten economists surveyed by Bloomberg expected this cut to be delivered at the current meeting.
The dollar reached a three-week high against the Mexican peso at the end of April near MXN17.5840 but pulled back ahead of the weekend. A base appears to have been forged in the MXN17.32-MXN17.37 area. The dollar bottomed on April 17 near MXN17.1275. A convincing push below MXN17.30 could re-target the low, suggesting potential near-term support dynamics.
Global Markets
Equity markets globally reflected the risk-on sentiment that supported emerging market currencies and commodity-linked assets. Asian equity indices posted gains, with the momentum extending into European trading before US futures climbed to record levels, with both the S&P 500 and Nasdaq achieving new all-time highs. This broad-based equity strength supported risk appetite and contributed to the weakness in the US dollar observed throughout the week.
Sovereign bond markets reflected the divergent monetary policy messaging from G10 central banks. US Treasury yields remained firm, with the two-year yield maintaining its premium over comparable German yields despite modest changes on a weekly basis. The repricing of rate expectations following the central bank meetings resulted in higher year-end rate projections across most major developed economies, with the exception of the Fed, where the adjustment was more modest. This divergence in repricing reflects both the relative hawkishness of non-US central banks and the market’s continued pricing of a small probability of Fed easing later in the year.
Gold demonstrated its typical inverse relationship with the US dollar during the period, benefiting from greenback weakness. The precious metal’s correlation with risk sentiment remained positive, supporting prices as equities rallied. Silver moved in tandem with broader precious metals, reflecting similar dynamics of dollar weakness and risk-on sentiment.
Crude oil markets, particularly WTI and Brent, remained influenced by geopolitical considerations related to Middle East tensions. The war-related supply concerns continued to support energy prices, though the correlation between oil and various currency pairs shifted during the period. The Canadian dollar’s correlation with WTI flipped from inverse to positive, indicating that higher oil prices now associate with a weaker loonie, a reversal of earlier relationships. The euro’s sensitivity to oil prices, while still present, was overshadowed by its heightened sensitivity to US Treasury yields and risk sentiment, with the correlation reaching extreme levels by historical standards.
Volatility, as measured by the VIX, remained relatively contained despite the geopolitical backdrop, with the index reflecting the risk-on environment that characterized the week. The inverse correlation between the euro and VIX reached approximately -0.51, the most extreme in a year, indicating that euro strength accompanied risk-off dynamics. Meanwhile, sterling’s tight correlation with the Dollar Index continued to dominate its price action, with the currency pair’s movements largely derivative of broader dollar weakness rather than idiosyncratic UK factors.
