### United States
Despite widespread optimism that the recent trade talks between the US and China would ease tensions, skepticism remains warranted. Even a reduction in tariffs by half would maintain a formidable bilateral embargo. Instead of prompting significant reforms in Beijing, these strategies risk fanning nationalism and creating a staunchly defiant adversary. History offers lessons, such as Keynes’ advice against punitive measures post-WWI on Germany, advocating for a more pragmatic approach. Thermonuclear economic strategies may surpass even the strategic military presence represented by over 60 US military bases in the region. Consistent with our expectations, China seems to have truncated the talks, leaving without sufficient rationale. The US dollar rose to a 3–4-week high against most G10 currencies, although it remains within broader consolidation ranges. The Federal Reserve acknowledged growing risks across both of its mandates and reiterated that policy adjustments remain premature amidst profound uncertainties. In contrast, other central banks, including the ECB, the Bank of England, and others are expected to cut rates prior to any such move by the Federal Reserve.
Upcoming US highlights include stable US CPI readings, initial Q1 25 GDP estimates from Japan and the UK, the UK and Australia’s latest employment update, and a significant 50 bp rate cut from Mexico’s central bank. Meanwhile, India and Pakistan are de-escalating tensions despite continuing military preparedness. The robust US labor market ensures most G10 central banks will lower rates before the Fed resumes easing. The dollar is correcting upward after a mid-January to early May sell-off. Negative developments loom, including supply shocks from the effective embargo on Chinese goods, US brand boycotts in Canada and Europe, government layoffs, reduced consumer confidence, and stagnation caused by uncertainty. These ramifications might manifest more acutely in the economic data by July or August.
The coming week is expected to show stable year-over-year April CPI (2.4%) and robust retail sales, partially benefiting from tariff avoidance, and bolstered industrial output after March’s 0.3% decline. Housing start figures may see a rebound following an 11.4% drop in March. Between the FOMC meeting’s conclusion and Fed Chair Powell’s speech on May 15, nearly half of his colleagues will have spoken. The Dollar Index reached a four-week high before the weekend but fell short of maintaining upside momentum. A movement above 101.30-40 would indicate ongoing correction with a 102.00-20 area target. Momentum indicators are recovering, but breaking last week’s low (~99.15) could undermine this corrective trajectory.
### Eurozone
The Euro experienced a robust 14.25-cent rally from early February to April 21, which has concluded. The question now is whether it will consolidate, move sideways to alleviate the overbought technical condition, or require a genuine correction. Given the resilience of the US jobs market, the ECB seems poised to cut rates before the FOMC resumes easing. The widening US two-year premium over Germany often supports the dollar, having increased approximately 20 bp since the end of April.
While the US economy contracted by an annualized 0.3% in Q1, the eurozone saw growth at 1.6%. This week’s update will shed more light on European growth, although projections suggest Q2 growth might be half of the Q1 pace. The German ZEW survey may draw some attention, though the expectations component fell sharply in April, suggesting a cautious outlook. The euro found support before the weekend, approaching a four-week low. A move above the $1.1300 area would suggest continued consolidation rather than a downside correction.
### United Kingdom
Sterling, along with the euro, typically moves in the same direction against the dollar, with the 30- and 60-day correlations of changes in exchange rates respectively standing at around 0.75 and 0.80. Market sentiment has now discounted a more gradual easing path post-last week’s rate adjustment, with year-end rates projected to be slightly higher. The impact of the US-UK trade deal seems nominal on economic outcomes but has geopolitically significant ramifications—distancing the UK from the EU and complicating other trade negotiations due to contested tariffs.
Future Bank of England decisions seem less likely to hinge on imminent data releases, though upcoming data on job reports, Q1 GDP, and March real sector data remains in focus. January through March economic growth is projected at 0.3% after an essentially stagnant H2 24. While the Bank of England’s forecast is more optimistic, real sector indicators like consumption and manufacturing may present a more subdued picture. Sterling has remained in a consolidative phase, with prices consistent with short-term stability.
### China
China’s officials appear to accept a recent paring of the yuan’s gains against the dollar. The practical embargo on Chinese goods by the US presents a substantial economic headwind, though China is selectively reducing tariffs on some US goods. This move aims to mitigate self-inflicted damage rather than indicate policy retreat. Without amplifying domestic demand to offset US demand loss, China risks straining relations with other trade partners if exports are redirected.
China’s inflation metrics aligned with expectations, with slight contractions in consumer and food prices contributing to mounting deflationary pressures. It remains challenging for China to meet a 2% inflation target given recent patterns. Producer prices continue to decline, exacerbating deflation concerns. Foreign direct investment remains tepid, reflecting ongoing de-risking and challenging economic conditions. The dollar-yuan exchange suggests that a push beyond certain levels could trigger a more significant upward move, although support remains stable within a defined range.
### Japan
Recent correlations between exchange rate changes and US 10-year yields indicate a weakening relationship. Meanwhile, the yen is acting similarly to a risk currency, with increasing sensitivity to broader dollar movements. Japan experienced robust economic performance in Q4 24, but Q1 25 slowed significantly. Exports may have been a drag, while private investment and public consumption likely slowed. Japan’s upcoming current account report will provide insights into foreign bond purchases and sales, though immediate impacts from early April speculative activity remain opaque.
The dollar reached recent highs against the yen but was unable to maintain momentum, suggesting resistance at certain levels. We continue to monitor key trendlines for potential support or resistance in currency trading.
### Canada
The Canadian dollar’s movement continues to mirror broader US dollar fluctuations, with recent correlations to the Dollar Index reaching notable highs. Canada’s recent employment data showed weakening indicators, adversely affecting the Canadian dollar despite broader dollar movements. Near-term data focus remains on the housing sector alongside March’s portfolio flow figures. Anticipated support and resistance levels will provide trading insights as economic conditions unfold.
### Australia
The Australian dollar recently benefited from general US dollar weakness and optimism regarding US-China trade. However, technical signals suggest a resistance to upward momentum, prompting caution among trend-followers. Correlations to the offshore yuan and other dollar-bloc currencies are notable, with economic releases on inflation expectations and employment remaining pivotal ahead of the central meeting. Recent bonds and market yield shifts also characterize current monetary trends.
### Mexico
The Banco de México is set to implement a significant rate cut amid regional and global economic pressures. Despite geopolitical and economic headwinds, specific domestic factors underline the central bank’s policy direction, with broader implications for economic performance and trade.
