### United States
The dollar booked an advantageous week against G10 currencies, closing firmly despite turbulent trading patterns. The anticipated upward swing in the dollar’s value is poised to persist. Despite underwhelming retail sales, manufacturing output, and softer than anticipated CPI and PPI data, market expectations have shifted, moving the forecasted Fed rate cut to Q4 from Q3. Other G10 central banks are likely to cut rates before the Federal Reserve does. Midway through Q2, the Atlanta Fed’s GDPNow Tracker rests at a 2.4% growth prediction, potentially rendering it the best among the G10. Yet, the temporary lifting of punitive tariffs between the US and China has spurred a surge in shipment orders and imports, leading to possible distortions in exclusive economic signals. Moody’s recent decision to strip the US of its AAA rating echoes moves by S&P nearly 14 years ago and Fitch almost two years ago. Though causing a minor disturbance post-market on Friday, it’s largely viewed as a delayed adjustment with negligible influence on the US creditworthiness. Interestingly, foreign investors have increased their holdings of US debt since S&P and Fitch made their decisions. Nevertheless, the US’s escalating debt servicing costs and the government’s unattainable budget underscore the widely acknowledged fact that the current trajectory of US deficit and debt is unsustainable.
### Eurozone
Investor sentiment exhibits a considerable likelihood (~90%) of the ECB enacting a rate cut in June, with another possible decrease before the next Fed reduction becomes fully realized. While the euro showed relative stability amid portfolio re-allocation strategies, it is precariously standing after a prior rally, which saw a 14% increase from early February to late April, reduce by around 4.3%. Wage data and the preliminary May PMI are of particular note, although they might fail to deter market convictions concerning an imminent rate cut by the ECB. As evidenced from last week, the euro appeared vulnerable to further depreciation, settling near $1.1130, just shy of reaching the anticipated lows from the preceding sessions, thus inducing concerns over impending selling pressures.
### United Kingdom
Sterling hit a three-year high in late April, near $1.3445. Although it has mostly hovered above $1.3200, the newly negotiated trade agreement with the US did not yield significant influences, largely tied to unresolved details. The Bank of England’s multiple rate cuts this year instantiate a high bar for an additional cut in June. The April CPI, retail sales, and PMI, while unlikely to alter prospects for next month’s meeting, are crucial in assessing current economic conditions. The CPI is anticipated to show a significant 1.1% month-over-month increase due to surging energy and water prices. Retail performance was strong throughout Q1 but signs of slowing became apparent when observing April’s perceived downturn in consumer confidence and PMI results. The April composite PMI fell to 48.5, matching October 2022 lows. In this environment, economists predict improvement in PMI during the upcoming survey period.
### China
Chinese authorities are subtly steering the yuan to maintain parity with the dollar while introducing slight exchange rate flexibility. Having risen approximately 1.3% against the US dollar this year, the yuan remains one of the weaker currencies in the region, aside from the Indian Rupee. There is speculation regarding further yuan gains against the dollar, currently stabilized by a lower reference rate introduced by the People’s Bank of China in recent sessions. The high-frequency data cycle is now focused on the real sector, including retail sales, industrial production, surveyed unemployment, and indicators related to the property market and housing prices. With intentions to achieve the 5% growth target, China might necessitate additional economic stimulus while the ever-bleeding property sector requires interventions.
### Japan
The Japanese yen experienced slightly elevated volatility, occasionally influenced by movements in the broader dollar as seen by fluctuating three-month implied volatility. Meanwhile, the correlation with US 10-year yields is relatively diminished. The April trade balance might receive notable attention as stakeholders assess tariff impacts, with expectations for a narrower surplus corresponding to JPY559 bln. A modest increase in nationwide April CPI is projected compared to Tokyo’s index due to the varied components weightings. With the existing macroeconomic landscape, the yen is exploring a footing beyond JPY146.35, although momentum indicators suggest potential forthcoming strains.
### Canada
Economic vulnerabilities persist in Canada, as reflected in the dwindling employment figures within the private sector during March-April. The anticipation surrounding the imminent CPI sharp drop (concurrent with a carbon tax repeal and oil price drops) intensifies the likelihood of a Bank of Canada rate cut. Retail sales, notably lifted by advanced purchasing activities ahead of tariffs, rebound potential following a preliminary flat performance in recent months. The Canadian dollar faces challenges amid this economic climate, given its strong correlation with both the Dollar Index and the US fiscal changes.
### Australia
The Australian dollar is influenced by factors including the CSI 300 and the broader equity markets. With the Reserve Bank of Australia’s meeting on the horizon, expectations for a quarter-point cut are well-founded, aligned with ongoing monetary easing endeavors. Despite early-month volatility induced by US-China negotiations, the Aussie’s momentum is softer, with gleaned insights from the flash May PMI potentially magnifying the ongoing downtrend.
### Mexico
Despite the overarching reshoring pressures from the US, the Mexican peso maintains commendable resilience, supported by central bank interventions through interest rate cuts totaling 150 basis points this year. Yet, the peso’s status remains intertwined with risk-sensitive currencies, evidenced by the strengthening correlation with the S&P 500. Economic endeavors by Mexico, such as contending with possible US-imposed remittance taxes, amplify fiscal constraints. Importantly, the mid-May CPI release merits close scrutiny, amid speculations of further rate cuts suggested by Banxico. Despite these dynamics, the dollar’s momentum against the peso remains agile, leaving room for continued scrutinized developments.
