United States
The dollar faced headwinds last week despite robust employment data, as two primary drivers weighed on the greenback. First, geopolitical optimism surrounding a potential wind-down of Middle East hostilities and hopes for an open Strait of Hormuz sparked risk-on sentiment across markets. Second, speculation that the Bank of Japan intervened to support the yen on April 30 and possibly again on May 6 created additional downward pressure on the dollar. The inverse correlation between changes in the Dollar Index and the S&P 500 over the past 30 sessions reached nearly -0.75 last week, marking the most extreme reading since October 2022. Meanwhile, the correlation between DXY and the two-year US yield held near 0.45, at the upper end of its six-month range.
From a technical perspective, the Dollar Index remained range-bound throughout the week. The index traded within Thursday’s range of approximately 97.80 to 98.30, which itself nested within Wednesday’s range of 97.60 to 98.35. Momentum indicators failed to generate significant directional signals, suggesting the greenback remains stuck in consolidation. The most critical technical level to watch is 97.50, which represents the 61.8% retracement of the rally from the late January low near 95.55 to the end of March high near 100.65. A break below this level could signal a move toward the 96.75 to 97.00 zone. On the upside, last week’s high near 98.60 offers initial resistance.
Despite strong jobs data showing the US economy added jobs in back-to-back months for the first time since April and May of the prior year, the greenback struggled to gain traction. This resilience in employment proved insufficient to overcome the confluence of geopolitical relief and suspected yen intervention.
Looking ahead, the week presents several headline risks that traders should monitor closely. The April Consumer Price Index is expected to rise approximately 0.7% on a monthly basis, compared to 0.9% in March, which would lift the year-over-year pace to between 3.8% and 3.9%. The core CPI is expected to be more moderate, potentially rising 0.2% for a 2.8% year-over-year rate. The week concludes with the May Empire State manufacturing survey, April retail sales data (which should be supported by higher gasoline prices), and April industrial output figures (which fell 0.5% in March). With the next FOMC meeting scheduled for June, this week’s economic data poses headline risk but may have limited immediate impact on monetary policy trajectory.
A federal trade court issued a narrow 2-1 ruling preventing the US from collecting Section 122 tariffs that the Trump administration adopted to replace tariffs imposed under the International Emergency Economic Powers Act, which the Supreme Court had ruled illegal. This development adds another layer of policy uncertainty for markets to digest.
Eurozone
The euro demonstrated considerable resilience last week, benefiting from an inverse relationship with dollar weakness and positive risk sentiment. The rolling 30-day correlation between changes in the euro and the Stoxx 600 equity index stands near 0.50, representing its most robust level since the third quarter of 2024. Conversely, changes in the euro and German two-year yields maintain an inverse correlation of approximately -0.35 over the 30-day period. This dynamic suggests that higher German yields have not supported the euro, a relationship that has persisted since the onset of the Ukraine war and represents an inversion from the positive correlation that existed from January through the end of February. The same pattern holds broadly across the 60-day correlation as well.
From a data perspective, first-quarter eurozone figures appear largely irrelevant to current investor positioning. The most relevant upcoming release is Germany’s ZEW sentiment survey. Media coverage has focused extensively on Chinese exports to Europe, yet the most immediate shocks stem from the US tariff war and broader geopolitical tensions in the Middle East, which have depressed investor sentiment and economic outlooks across the region. The US raised tariffs on EU vehicle exports to 25% from 15% last week, adding to near-term pressures. Nevertheless, data released last week showed that Germany’s trade surplus in the first quarter was actually slightly larger than in Q1 2025, with the rolling 12-month surplus reaching a five-year high in March. While Chinese imports remain significant, the immediate pressure originates from US tariff actions.
From a technical standpoint, EUR/USD reached a three-week high in the middle of last week, trading a few hundredths of a cent below $1.18. Neither the disappointing March contraction in German industrial output nor the initial US jobs data released before the weekend managed to push the euro lower. The euro settled firmly and made new session highs slightly below $1.1790 in the final minutes of last week’s trading. Last month’s highs were positioned in the $1.1825 to $1.1850 range. The lower end of that range corresponds to the 61.8% retracement of the euro’s decline from the late January high near $1.2080 to the mid-March low near $1.1410. This retracement level represents a key technical target for euro bulls seeking to extend gains.
United Kingdom
Sterling demonstrated impressive strength last week, ranking among the top-performing G10 currencies ahead of the weekend despite political headwinds. Changes in sterling over the past 30 sessions show a strong inverse correlation with the Dollar Index of approximately -0.90, nearly matching the correlation with the euro, which is the largest component of the DXY. This relationship makes intuitive sense, as sterling benefits when the dollar weakens broadly. Sterling also exhibits an inverse correlation with US two-year rates of roughly 0.36, which is expected. However, a less intuitive dynamic emerged: sterling has become inversely correlated with UK two-year yields, reaching almost -0.60 last week—the most extreme reading since October of the prior year and now hovering near -0.50. This inverse relationship had been positive from mid-December to early March, representing a significant shift in market dynamics.
Labour’s poor performance in Thursday’s local elections failed to generate meaningful fallout for sterling or UK interest rates ahead of the weekend. Prime Minister Starmer dismissed calls for his resignation, allowing the political narrative to fade quickly from market focus. The nearly four basis point decline in the UK’s 10-year Gilt on Friday led the broader rally in benchmark yields across the G10, except for Australia and New Zealand, where yields edged higher.
Looking ahead to the coming week, the highlight is Q1 GDP data along with March details. Bloomberg’s median forecast calls for 0.3% quarterly growth, which if accurate would represent the strongest quarter since Q1 2025 and better than the previous two quarters combined. Consumption appears to be strengthening, government spending has nearly doubled from the Q4 2025 pace, and net exports have improved, all supportive factors for the growth narrative.
On the technical side, the $1.36 area capped sterling last month and corresponds to the 61.8% retracement of sterling’s losses from the late January high near $1.3870 to the end of March low near $1.3160. Cable reached almost $1.3660 on May 1 and settled above $1.36 before the weekend for the first time since Valentine’s Day, recording session highs near $1.3535 in late turnover. Support was found near the 20-day moving average, which stood around $1.3540 at the start of the new week, and the pound has not settled below this level for just over a month. Momentum indicators have stalled but may not prevent sterling from extending its gains in the coming days to retest last month’s highs. The next resistance area is identified around $1.3700.
China
Beijing has been actively facilitating yuan appreciation through adjustments to the dollar’s daily reference rate, which reached new three-year lows last week. The central bank’s campaign to guide the yuan higher continues with deliberation and purpose. On a weekly basis, the dollar’s reference rate has fallen three times since the end of November, reflecting a consistent policy bias toward stronger currency valuations.
The 30-day rolling correlation of changes in the Dollar Index and the dollar against the offshore yuan reached almost 0.87 in early May, representing the most robust reading in a decade and now settling near 0.77. The 100-day correlation, hovering around 0.65, is the highest observed in just over a year. These elevated correlations suggest that Beijing views the yuan’s strength as aligned with the dollar’s broader directional weakness, allowing the central bank to achieve appreciation goals while maintaining plausible deniability regarding direct intervention.
There can be only one fundamental explanation for Beijing’s acceptance of such a strong pace of yuan appreciation among regional peers: the ruling apparatus within the CCP structure views this currency strength as serving China’s interests. Numerous possibilities exist for why this policy stance has been adopted, including the costs of not doing so. Nevertheless, the dollar’s broad directional movement remains important to monitor as a contextual factor.
From a data perspective, China is expected to report April lending figures over the course of the week. However, the most reliable data points will be April CPI and PPI on May 11. China’s deflation appears to have ended, with both CPI and PPI showing positive year-over-year changes in March, suggesting a potential inflection point in pricing dynamics.
On the technical front, USD/CNH settled below 6.80 ahead of the weekend for the first time in three years, marking a significant milestone in the yuan’s appreciation journey. The next important chart area to monitor is around 6.70, which represents the low from Q1 2023. A break below 6.80 signals that the PBOC’s guidance campaign is achieving meaningful results and that further appreciation may be in store if current policy settings persist.
Japan
If the Bank of Japan did indeed intervene to cap dollar strength, its timing proved impeccable. The central bank sold dollars near a multi-year high, and the subsequent drop in US yields and oil prices sent the greenback back to levels not seen since just before the Middle East war began. Yet one cannot help but wonder whether the decline in US rates and oil prices alone would have achieved similar results, albeit in a more orderly fashion. The suspected intervention on April 30 and possibly again on May 6 appears to have been effective in driving the yen higher and limiting further dollar appreciation.
The US 10-year premium over Japanese yields has compressed to four-year lows near 185 basis points. This represents a dramatic compression from the recent peak in early 2025 near 350 basis points. Despite this compression, TIC data reveals that Japanese investors increased their holdings of US Treasuries from approximately $1.06 trillion at the end of 2024 to $1.24 trillion as of February. The dollar value of these holdings increased every month last year except December but rose again in January and February, suggesting continued demand for US fixed income despite the yield premium compression.
US Treasury Secretary Bessent will be in Tokyo in the coming days and has indicated that discussion of the weak yen will be a priority. This diplomatic engagement represents an important signal regarding the US administration’s views on currency valuations and may provide context for understanding the divergent response to Japanese intervention this week compared to verbal intervention in January. Notably, the Federal Reserve checked prices in January—an unusual move—and revealed it was doing so on behalf of the Treasury, which was highly unusual. This time, the market response has been muted, potentially reflecting the fact that the BOJ has not raised rates this year, creating a different policy context.
Bank of Japan Governor Ueda was careful not to pre-commit to raising rates at his press conference after the board decided on a 6-3 vote to keep rates steady. The data due in the coming days does not appear likely to have much impact on the BOJ’s decision at the next meeting scheduled for mid-June. Releases expected this week include March household spending, current account data, and April PPI figures.
From a technical perspective, the dollar fell from 160.70 yen on April 30 to a low last week near 155 yen on the back of the suspected intervention. The 155.40 area corresponds to the 61.8% retracement of the greenback’s rally from the late January low near 152.10 to the multi-year high at the end of April. Since the low was recorded, the greenback has held below 157 yen, establishing a new trading range. This consolidation suggests that intervention efforts have successfully arrested the yen’s weakness and established a floor for the currency pair.
Canada
The Canadian dollar remains sensitive to the US dollar’s overall directional movement. The rolling 30-day correlation of changes in the greenback against the loonie and the Dollar Index stands near 0.65, representing approximately the best reading since November of the prior year. The nearly 0.5 correlation between USD/CAD and the S&P 500 demonstrates risk sensitivity as well, confirming that the loonie tends to weaken when risk appetite deteriorates and strengthen when equity markets rally.
A counterintuitive dynamic warrants attention: the US dollar tends to rise against the Canadian dollar when oil prices increase, with the 30-day correlation reaching almost 0.25. Additionally, USD/CAD shows a positive correlation of approximately 0.22 with Canada’s two-year yield, suggesting that higher Canadian rates paradoxically support the US dollar against the loonie. These relationships suggest that commodity and rate dynamics create complex cross-currents that don’t always align with conventional expectations.
Portfolio capital inflows to Canada dried up significantly last year, falling to a net C$118.25 billion from C$193.20 billion in 2024. However, in the first two months of 2026, net inflows rebounded to C$53 billion, representing nearly 45% of last year’s total inflow volume. This rebound suggests renewed investor interest in Canadian assets. The March figures are due at the end of the week and could provide further insight into capital flow trends.
From a technical standpoint, USD/CAD began last week below 1.36. On May 1, it reached 1.3550, the lowest level since March 10, suggesting strong downward momentum. After diverging employment data before the weekend, the greenback recovered to the upper end of its three-week range, trading a little above 1.3700. A convincing move through 1.3715 would target 1.3760 and then possibly the 1.3800 to 1.3815 area. Momentum indicators are curling up from oversold territory, and the five-day moving average appears poised to cross above the 20-day moving average in the coming days, potentially signaling a technical bounce.
Australia
The Australian dollar offers a higher-yielding, risk-on alternative to the US dollar, and this positioning has driven strong performance. The Aussie’s 30-day inverse correlation with the Dollar Index reached -0.85, representing the most extreme reading in nearly two years. The fundamental narrative supporting the Australian dollar centers on a hawkish central bank that has lifted rates three times this year, with the market convinced additional hikes remain possible. However, a nuanced dynamic deserves attention: the 30-day correlation between changes in Australia’s two-year yield and the Australian dollar’s exchange rate is also inverse, albeit slightly. This inverse relationship has persisted since early March, representing a shift from the modestly positive correlation that existed for the previous three months. This suggests that higher Australian yields have not uniformly supported the currency, complicating the traditional rate-positive narrative.
With the third consecutive rate hike now behind the Reserve Bank of Australia and only a small chance of a rate hike in May, this week’s data are unlikely to change many minds regarding future policy. The Q1 wage price index is too old as the market approaches the middle of Q2. May’s consumer inflation survey by the Melbourne Institute may prove more interesting. In April, the diffusion index stood at 5.9%, the highest reading since late 2022, suggesting that inflation pressures remain more broad-based than headline figures might suggest.
From a technical perspective, AUD/USD reached its best level since June 2022 in the middle of last week, trading near $0.7280. The aussie subsequently pulled back to $0.7200 before finding new bids. Momentum indicators have flatlined since becoming over-extended, suggesting that near-term consolidation may be necessary before further gains materialize. However, the firm close ahead of the weekend suggests that demand has not been satiated. There is little on the charts until closer to $0.7500, but that level seems somewhat distant without a correction or consolidation phase. The technical picture suggests that the aussie may need to digest recent gains before attempting to push higher.
Emerging Markets
Mexico’s currency market has demonstrated notable strength despite a dovish rate cut delivered by Banxico last week. The dollar-peso exchange rate is sensitive to the greenback’s broad direction, with a 30-day correlation with changes in the Dollar Index near 0.70. However, the peso shows even greater sensitivity to the risk environment, with an inverse correlation to changes in the S&P 500 near -0.75. A particularly striking development emerged in the correlation between USD/MXN and changes in WTI crude oil. The 30-day correlation reached 0.60 last week, the most extreme reading in four years. This represents a dramatic shift from the inverse correlation that existed in the month before the Middle East war began, reflecting how geopolitical concerns and energy price dynamics now dominate the peso’s trading patterns.
Mexico reports March industrial production figures and April vehicle production and export data this week. Through February, industrial output contracted by approximately 0.6% at the start of the year, though in the first two months of 2025, it grew by around 2%, suggesting some recent stabilization. Vehicle output increased in Q1 by about 3.8% over Q4 2025, though compared with Q1 2025, it was off marginally. Vehicle exports slowed slightly on a quarterly basis, but March exports rose by 25% for the third consecutive monthly increase, indicating renewed momentum in this key sector. The Mexican economy contracted by 0.8% in the first quarter, and it may take more than the next two quarters to fully recoup these losses.
The dovish rate cut delivered by Banxico last week—with the door left open to one more cut in the cycle—did not deter peso buying. Ahead of the weekend, the dollar posted its lowest close since before the Middle East war started, trading near 17.18 pesos. The price action looked particularly poor for the dollar. The five-day moving average crossed back below the 20-day moving average after getting whipsawed in late April. Last month’s low was positioned near 17.1275 pesos. The low since the run-up to the 2024 Mexican election was recorded on February 18 near 17.0865 pesos, providing a potential longer-term target if current momentum persists.
Global Markets
Across global asset classes, several significant developments emerged that warrant attention from a macro perspective. Crude oil markets experienced substantial repricing as investors grew optimistic about a potential resolution to Middle East tensions. June WTI crude fell by 7% to around $95 per barrel, reversing a significant portion of the gains accumulated over the previous two weeks, when prices had risen more than 22%. July Brent crude tumbled by approximately 6.6% to $101 per barrel, also retreating from the nearly 24% rally recorded in the prior two weeks. This repricing reflects market participants’ belief that the ceasefire, despite some violations, is likely to hold and normalize energy supply dynamics.
Benchmark 10-year yields fell through the G10 except for Australia and New Zealand, where they edged higher. This pattern reflects the risk-on sentiment driven by geopolitical relief and the expectation that energy prices and inflation pressures may moderate. The broad decline in long-duration yields across most developed markets suggests that investors are repricing the inflation and growth outlook in light of reduced geopolitical risk premiums.
The equity market backdrop has been supportive, with the inverse correlation between changes in the Dollar Index and the S&P 500 reaching nearly -0.75 over the past 30 sessions, the most extreme since October 2022. This relationship indicates that dollar weakness has coincided with equity strength, a dynamic that typically reflects risk-on sentiment and reduced safe-haven demand for the greenback.
Norway surprised many by becoming the first European central bank to hike rates, a hawkish move that stood in contrast to the broader easing bias evident in other developed markets. The krone appreciated by 1% the following day, Friday, to lead the G10 currencies, demonstrating that rate differentials and monetary policy divergence continue to drive currency valuations even in a risk-on environment. This move underscores the ongoing importance of central bank policy divergence as a driver of currency market dynamics.
Gold and precious metals markets have been influenced by the combination of lower real yields, reduced geopolitical risk premiums, and dollar weakness. The repricing of energy commodities and the shift toward risk-on sentiment have created a mixed backdrop for precious metals, with investors balancing inflation concerns against the appeal of equities in a lower-rate environment.
Looking ahead, the geopolitical backdrop remains a key variable for markets. While the Middle East situation appears to be stabilizing, the G-2 meeting between Trump and Xi scheduled for the end of the week is unlikely to impact markets in the short term, according to current expectations. Trump has indicated that he maintains a good personal relationship with Xi, and expectations should be kept minimal regarding near-term outcomes. Some reports suggest that Beijing officials view Trump’s threats regarding Greenland as more telling of the new world order than the US war on Iran, though the latter clearly remains more immediately disruptive to energy markets. There is a possibility of re-establishing a permanent facility to communicate on economic issues broadly or on artificial intelligence specifically, but concrete outcomes should not be expected.
The week ahead will be dominated by economic data releases, particularly US and China CPI figures, which represent the economic highlights. However, political developments and geopolitical factors may ultimately prove more influential for market direction than economic releases, particularly given the current risk-on environment and the reduced sensitivity to traditional economic data that has characterized recent trading patterns.
