## United States
The United States is currently causing a stir in capital markets, impacted by the ongoing trade conflict and an ambitious budget that is seen as both regressive and debt-inducing. Recently, tensions have escalated with the European Union, with claims of poor negotiation practices from the EU’s side. President Trump has threatened a steep 50% tariff, which is set to take effect on June 1, raising concerns as this could have a more significant impact than the current situation with China. The Stoxx 600 in Europe saw its most considerable loss since April due to these tensions. Additionally, Trump has proposed a 25% tariff on Apple and Samsung smartphones, further adding to the uncertainty.
The bond markets are under pressure, with continued rises in long-term yields. The US 10-year yield is up by almost 25 basis points to around 4.50%, while the 30-year yield has risen approximately 35 basis points to just above 5.0%. The reassessment of the overnight rate accounts for these increases in long-term rates. The implied overnight rate in Fed funds futures has climbed by about 40 basis points over the past month.
The market has delayed expectations for the next Federal Reserve rate cut to Q4, yet this hasn’t strengthened the dollar. The uncertainty surrounding US policy, often termed “strategic ambiguity”, has led market participants to demand higher US interest rate premiums to hold dollars. The economic calendar in the US remains busy for late May, with real sector data gaining significance. There is less impact from survey data as recent numbers suggest resilience in the real sector. Key data points include consumer confidence indices, durable goods orders, and personal income and consumption data, which will influence Q2 GDP forecasts.
The Dollar Index hit a new low for May, falling below 99.00 before stabilizing. Trump’s announcement of the proposed tariff helped it regain some ground but set a session low late in the North American session. The index lost nearly 2% last week, ending a four-week upward trend. Momentum indicators have turned downward with the five-day moving average falling below the 20-day moving average. The trend line off last month’s lows was breached, with a break below 98.85 suggesting a potential retest of the three-year low set in April.
## Eurozone
Europe is one of the primary beneficiaries of diversification away from dollar assets. Speculators in euro futures have net long positions equivalent to around 75,000 contracts, the most since last September. The euro gained momentum moving towards the 61.8% retracement near $1.1050. Despite President Trump’s EU tariff threats, the euro posted its first weekly gain since April 18.
The euro strengthened despite a widening US two-year yield premium over Germany, which usually correlates with the exchange rate. The momentum indicators are positive, with potential for the euro to move above $1.1380, targeting higher levels. Eurozone data in the coming week includes confidence surveys, the ECB’s inflation survey, and retail sales data from Germany and Spain. The highlight, however, will be the release of April CPI figures, crucial ahead of the ECB meeting on June 5, where another rate cut is anticipated.
## United Kingdom
UK officials are in a challenging position, with economic data overstating the potential for a rate cut by the Bank of England. Recent Q1 data showed growth at 0.7% and a jump in April’s CPI, though both metrics are expected to ease.
Prime Minister Starmer finds political challenges on the domestic front, and external pressures from the potential US tariffs on the EU could give the UK a competitive edge. However, a weaker EU would ultimately not benefit the UK. Market volatility saw sterling settle unchanged against the euro despite tariff threats. Upcoming UK data comprises CBI surveys and house price indices, but their market impact is expected to be minimal. Sterling has gained, reaching almost $1.35, driven by higher-than-expected retail sales and inflation, positioning it well within the G10 currencies.
## China
In China, the yuan has appreciated to new yearly highs against the dollar, yet its overall appreciation remains modest in comparison to other Asian currencies. The People’s Bank of China has eased monetary policy, but without additional fiscal support, meeting the 5% growth target could prove challenging.
China’s industrial profits will be reported on May 27, and despite being a manufacturing hub, profit figures are typically weak. Chinese firms focus on market share rather than immediate profitability. The May PMI will be released on May 30, providing insights into industrial activity.
## Japan
The Japanese yen shows notable sensitivity to changes in the US two-year yield, with correlations reaching the upper end of historical ranges. The exchange rate’s correlation with the Dollar Index is also near its highest levels since the mid-1990s.
Following a small contraction in Q1 GDP, focus shifts to Q2 data with April’s employment and retail sales expected to shape forecasts. Key attention remains on Tokyo’s May CPI figures after elevated April values. The recent changes in exchange rates show significant fluctuations, with the US dollar dropping around 4% in recent sessions.
## Canada
The Canadian dollar’s movements appear more influenced by the general direction of the US dollar rather than risk appetite or oil prices. Canada will report March and Q1 GDP figures at the end of the week. The expectation is for a 1.8% rise in Q1 GDP, although this is subject to the central bank’s response to recent inflation trends.
The Canadian dollar has seen strength against the greenback, fueled by US tariff threats on the EU. A further drop in the US dollar could lead to another leg down, with technical indicators suggesting potential towards CAD1.3600 or even back to the lows of September last year.
## Australia
In Australia, the Reserve Bank cut its cash target rate by 25 basis points, with another cut expected by August. The Australian dollar is responsive to the overall movement of the greenback, particularly against the Canadian dollar, and to the performance of the stock market. Recent weeks have seen recovery above $0.6500, aided by technical momentum and moving averages.
## Mexico
The Mexican peso has demonstrated strong ties to risk appetite and oil prices, indicated by its significant correlation with the S&P 500 and WTI. The central bank’s latest inflation report and recent rate-cut decisions—focusing more on growth than inflation—will be key. The peso has continued to strengthen against the US dollar, aligning with an increase in popularity for dollar-funded carry trades, particularly in Latin America.
