United States
The US dollar consolidated overnight as geopolitical tensions between the United States and Iran resurfaced, reversing earlier losses that had accumulated during the North American afternoon session. A drone strike attributed to Iranian proxies in Iraq provided fresh support for the greenback, though the broader market environment remained mixed with equities and bond prices advancing despite elevated risk considerations. The greenback maintained a slightly firmer bias while trading within narrow consolidation ranges, reflecting investor caution ahead of the extended holiday weekend.
On the policy front, significant developments are scheduled for today. Warsh will be sworn in as the next Federal Reserve chair, marking a key transition in monetary policy leadership. Additionally, Governor Waller is scheduled to address the economic outlook at 10:00 am ET, providing important forward guidance on the Fed’s stance. These speaker events carry weight for traders positioning ahead of the holiday period.
Economic data releases today include the final University of Michigan consumer confidence survey. The preliminary reading revealed a record low consumer sentiment level of 48.2, a deeply concerning metric that underscores consumer anxiety. To contextualize the severity, this reading fell below the 55 level that held during the Great Financial Crisis and below the 70 level maintained during the pandemic—an extraordinary development. The preliminary report also showed one-year inflation expectations softening to 4.5% from 4.7%, though this remains elevated from pre-war levels of 3.4%. The five-to-ten-year inflation projection slipped marginally to 3.4% from 3.5%, compared with 3.3% before the recent escalation.
Inflation expectations embedded in the financial markets have shifted noticeably. The five-year breakeven inflation rate, measured as the yield differential between conventional US Treasury securities and Treasury Inflation-Protected Securities, stands at approximately 2.65%, representing an increase of roughly 20 basis points since the Iran tensions began. The ten-year breakeven sits slightly below 2.50%, up approximately 23 basis points over the same period. These movements suggest markets are pricing in a persistent inflation premium tied to geopolitical risk.
Liquidity conditions are expected to deteriorate significantly in the North American afternoon as the US Treasury market closes early ahead of the holiday. This early closure will compress trading windows and amplify the impact of any significant data or news flow. The combination of reduced liquidity, elevated geopolitical risk, and the holiday weekend suggests traders should anticipate wider spreads and potentially exaggerated price movements in the final hours of the session.
Eurozone
The euro faced considerable selling pressure yesterday, declining to a new marginal low since April 7 as market participants digested stronger-than-expected US May PMI data. The euro proved to be the only G10 currency that failed to appreciate during the session, highlighting its relative weakness against the dollar. The currency slipped through the critical $1.1580 support area by a few hundredths of a cent before mounting a recovery on reports suggesting a potential agreement between the US and Iran had been negotiated. The euro rallied to approximately $1.1630 on these optimistic headlines but proved unable to sustain the gains as hopes for a diplomatic resolution faded once again.
The euro settled above $1.1600 yesterday but today trades with a notably heavier bias, confined between approximately $1.1595 and $1.1620. This narrow range reflects the uncertainty surrounding both geopolitical developments and the diverging economic trajectories between the United States and the eurozone. The technical breakdown through $1.1580 carries implications for further downside if the currency fails to stabilize in the current consolidation zone.
On the policy front, negotiated wage growth in the eurozone has decelerated meaningfully to 2.46% in the first quarter from 2.86% in the fourth quarter of 2025. Full-year 2025 negotiated wage growth averaged 2.82%, a substantial decline from the elevated 4.5% pace recorded in the two prior years. Despite these moderating wage pressures, market pricing suggests approximately 88% probability that the European Central Bank will implement a rate hike next month. This hawkish positioning indicates that ECB policymakers remain focused on managing underlying inflation risks despite the softer wage backdrop.
Germany’s May IFO survey provided the first improvement in business sentiment since the Middle East conflict began. The overall business climate index rose to 84.9 from 84.5, with the current assessment component climbing to 86.1 from 85.4 and the expectations component improving to 83.8 from 83.5. This modest improvement suggests European economic resilience, though the gains remain fragile given ongoing geopolitical uncertainties.
United Kingdom
Sterling continues to trade within the range established on Wednesday, offering little definitive guidance regarding the near-term directional bias for cable. The week began with a test of $1.33, representing the lowest level in over a month, followed by a rebound that carried the currency to nearly $1.3465 on Wednesday. Despite disappointing retail sales data and a budget deficit representing the largest shortfall in six years, sterling has remained relatively quiet, trading within approximately a quarter-cent range above $1.3415.
The April retail sales report disappointed expectations significantly. Including gasoline, retail sales tumbled by 1.3%, more than double the median forecast in Bloomberg’s survey which anticipated a decline of only 0.6%. The weakness was predominantly attributable to gasoline prices, as excluding this component, retail sales slipped by just 0.4%. It is important to note that UK retail sales are reported in volume terms rather than nominal values, providing a more accurate picture of consumer purchasing behavior independent of price inflation. Over the first four months of 2026, headline retail sales have risen by an average of 0.1% monthly, while the ex-gasoline measure has advanced by an average of 0.2% monthly. In comparison, the first four months of the prior year saw both measures rising by approximately 0.4% monthly, indicating a marked deceleration in consumer activity.
The UK fiscal position has deteriorated sharply. April’s budget deficit reached £24.3 billion, marking the largest monthly shortfall since the pandemic. This deterioration raises questions about the sustainability of current fiscal policy and may eventually constrain policy flexibility for the Bank of England as it navigates the inflation and growth dynamics ahead.
China
The dollar made a marginal new low for the week against the offshore Chinese yuan, slipping to CNH6.7955. Barring a meaningful recovery, this would represent the sixth weekly loss for the greenback over the past eight weeks, underscoring persistent weakness in the US currency against the Chinese renminbi. The pattern of dollar weakness reflects capital flow dynamics and shifting interest rate differentials between the two economies.
The People’s Bank of China fixed the dollar slightly higher today at CNY6.8373 compared with CNY6.8349 on the previous day. However, this modest daily appreciation masks a broader structural trend. On a weekly basis, the PBOC fix has declined in all but three weeks since the end of September 2025, indicating consistent downward pressure on the dollar’s valuation against the Chinese currency. This sustained depreciation pattern suggests the PBOC is managing the yuan with an eye toward gradual appreciation, potentially reflecting confidence in the stability of the Chinese economy and capital account management.
Japan
The Japanese yen has demonstrated considerable resilience since the Bank of Japan’s intervention on April 30, appreciating in only three of the fifteen sessions leading into today despite significant dollar strength elsewhere. The dollar surged to a new monthly high yesterday near JPY159.35 but faced resistance at JPY159.15 today and has not traded below JPY158.90, indicating the presence of technical support and potentially defensive positioning by Japanese authorities.
The interest rate differential between US and Japanese securities has compressed dramatically. The US ten-year yield premium over Japan is hovering near four-year lows at approximately 180 basis points, a sharp contraction from the 290 basis point differential recorded at the end of May 2025. This narrowing spread reduces the carry trade incentive for borrowing yen and investing in dollar-denominated assets, potentially supporting the Japanese currency.
Capital flow data from the first twenty weeks of 2026 reveals a significant shift in Japanese investor behavior compared with the year-ago period. Japanese investors have sold approximately JPY3 trillion (roughly $19 billion) of foreign bonds and purchased JPY1.77 trillion of foreign stocks. In the corresponding period last year, Japanese investors bought approximately JPY4.4 trillion of foreign bonds and JPY8 trillion of foreign stocks. This represents a dramatic reversal from foreign bond purchases to foreign bond sales and a substantial reduction in foreign equity purchases. Conversely, foreign investors have become net buyers of Japanese securities, purchasing JPY7.5 trillion of Japanese bonds and JPY10.7 trillion of Japanese stocks year-to-date, compared with JPY4.4 trillion of Japanese bonds and JPY334 billion of Japanese stocks in the year-ago period. This reorientation of capital flows suggests shifting risk appetite and portfolio rebalancing dynamics.
Japan’s inflation picture has softened considerably, complicating the Bank of Japan’s policy calculus. April’s CPI readings came in weaker than any economist surveyed by Bloomberg had anticipated. The headline CPI ticked down to 1.4% from 1.5%, while the core measure, which is the BOJ’s primary focus, declined to 1.4% from 1.8%. This marks the third consecutive month in which core inflation has fallen below the BOJ’s implicit target level. The measure excluding both fresh food and energy eased for the sixth consecutive month, declining to 1.9% from 2.4% and matching the lowest reading since September 2022. Process food prices eased and energy costs continued to decline, though at a slower pace than in March. Rice prices, which surged 98% year-over-year through April 2025, have moderated to just 0.6% gains over the past twelve months, indicating that earlier food inflation shocks are reversing.
Despite the softening inflation backdrop, pricing in the interest rate swaps market reflects approximately an 80% probability of a rate hike at next month’s BOJ meeting. The market has factored in almost two hikes for the full year, suggesting that despite near-term inflation weakness, expectations persist for gradual policy normalization. This creates a tension between current economic data and market pricing that will likely resolve as additional data emerges and BOJ communication clarifies the central bank’s reaction function to the disinflationary pressures.
Canada
The Canadian dollar fell to its lowest level since April 13 yesterday as the greenback reached CAD1.38, touching the lower end of a resistance band identified between approximately CAD1.3800 and CAD1.3815. The US dollar subsequently pulled back and settled slightly below Wednesday’s high at approximately CAD1.3780. Today, the greenback remains firm but has held below the CAD1.38 level, suggesting this represents a meaningful technical barrier for further loonie weakness.
Canada reports March retail sales today, with Statistics Canada indicating that preliminary data point to a 0.6% increase following a 0.7% rise in February. Excluding auto sales, the median forecast in Bloomberg’s survey anticipates a 0.9% rise after the 0.5% increase recorded in the previous month. The forward-looking economic calendar includes Q1 2026 GDP data next week. After contracting by 0.6% in Q4 2025 at an annualized rate, the Canadian economy appears to have returned to growth, though the pace and sustainability of this recovery remain uncertain given persistent headwinds from trade tensions and domestic policy uncertainties.
Australia
The Australian dollar rebounded from a test at $0.7100 in the local session to reach new session highs in the New York afternoon yesterday near $0.7165. However, the $0.7175–$0.7185 area has capped the currency in recent days, establishing a technical ceiling. The aussie is trading in a little more than a quarter-cent range above $0.7125 today as consolidation continues.
The Australian dollar ranks among only two G10 currencies that have appreciated against the dollar since the Middle East conflict began. The Australian dollar has gained approximately 0.65%, while the Norwegian krone has appreciated by roughly 3%. This relative strength reflects the commodity-linked nature of the Australian economy and the support provided by elevated energy and commodity prices stemming from geopolitical risk premiums.
Emerging Markets
The Mexican peso traded higher as risk appetites improved during the North American afternoon yesterday. The greenback peaked on Wednesday before Moody’s downgrade announcement near MXN17.43 but subsequently eased to a new low for the week near MXN17.26 by late yesterday. Today, the dollar has held above MXN17.2960 and is trading firmly, though remaining well within yesterday’s range, suggesting consolidation around current levels.
Mexico’s economic outlook remains challenged. The economy is not expected to revise its estimate of a 0.8% quarter-over-quarter contraction in Q1 2026. Although economic activity appears to be expanding in the current quarter, the pulse remains weak. The IGAE economic activity report, which functions as a monthly GDP proxy, may show the economy stagnating after a 0.11% rise in February. Additionally, Mexico and the European Union are holding a summit that will produce a new trade deal, introducing both opportunities and uncertainties regarding trade relationships and tariff structures.
The Indian rupee extended gains today as the central bank’s engineered short squeeze continued to provide support. The dollar slumped to INR95.6850, representing its lowest level in seven sessions. Estimates of yesterday’s intervention size range from approximately $2 billion to $5 billion, indicating substantial central bank activity in the foreign exchange market. This intervention strategy reflects the Reserve Bank of India’s commitment to managing currency volatility and supporting the rupee against speculative pressures.
Global Markets
Equity markets rallied broadly today, with the rally in US indices setting the tone for gains across Asia Pacific and European exchanges. The S&P 500 and Nasdaq reached new highs for the week yesterday, establishing positive momentum that carried into today’s trading. Nearly all major equity markets advanced, with the Nikkei leading the move in the Asia Pacific region with a nearly 2.7% surge. Taiwan’s Taiex followed closely with an almost 2.2% rally. Europe’s Stoxx 600 index rose for the fifth consecutive session, marking the first time since last November that the benchmark has achieved such a streak. US index futures are trading approximately 0.2% to 0.3% firmer, suggesting a modestly positive open for North American equities.
Benchmark ten-year yields are mostly lower, supported by pullback in oil prices and yesterday’s rally in the US ten-year Treasury. The US ten-year yield fell to 4.55%, establishing a new low for the week. European yields have declined 4–6 basis points broadly, with the UK ten-year Gilt yield experiencing the largest weekly drop at 19 basis points. The US ten-year yield is off approximately four basis points for the week. The ten-year Japanese Government Bond yield presents an anomaly, rising 2.5 basis points for the week despite the broader global trend toward lower yields, reflecting the unique dynamics in the Japanese bond market and potential capital flow shifts.
Gold exhibited volatility but ultimately found support near key technical levels. The precious metal dipped below the $4,500 support level for the fourth time this week yesterday but recovered on the back of the broader rally in risk assets, settling above the previous session’s high for the first time in a couple of weeks. A move above the week’s high, observed on Tuesday near $4,589, would lift the technical tone and potentially trigger additional buying. Silver also traded firmer, with the week’s high established on Tuesday slightly below $79. That level represents the immediate technical hurdle for further silver appreciation. Both metals are consolidating with a slightly softer bias so far today, suggesting traders are taking profits ahead of the extended holiday weekend.
Crude oil prices have rebounded today following yesterday’s decline on optimistic reports regarding US-Iran negotiations. July WTI was sold in the North American afternoon yesterday as market participants reacted to preliminary deal reports. The selling extended the contract into its third consecutive declining session, matching the longest losing streak since the Middle East conflict began. July WTI fell to almost $95.76, establishing a five-day low and briefly trading below the twenty-day moving average (approximately $97 today) for the first time in two weeks. However, as contradictory reports emerged regarding the status of negotiations, oil prices rebounded today. July WTI reached almost $99.45 before pulling back ahead of the North American open, currently probing the $98 area late in the European morning session. The volatility reflects the market’s acute sensitivity to any developments regarding geopolitical tensions and the potential for supply disruptions.
