United States
The greenback remains acutely sensitive to geopolitical developments, particularly the ongoing Middle East conflict and its potential to disrupt energy flows. When market sentiment tilts toward hope for an extended ceasefire, the dollar typically faces selling pressure. From a technical standpoint, the 30-day correlation between changes in the Dollar Index and the two-year US yield stands at approximately 0.75, approaching the highest levels recorded since late 2016. Similarly, the correlation between Dollar Index movements and the 10-year US yield sits near 0.75, the highest since the end of 2024. Most striking, however, is the rolling 30-day correlation between the Dollar Index and the S&P 500, which reached nearly -0.75 during the fourth quarter of 2022—its most extreme level. This correlation has since moderated to approximately -0.65, which remains more extreme than readings observed throughout 2025.
On the data front, the most critical high-frequency release this week is May’s Consumer Price Index, scheduled for mid-week. Bloomberg’s consensus forecast calls for a 0.5% monthly rise in the headline rate and 0.4% in the core measure. Given base effects, year-over-year headline inflation is expected to climb to approximately 4.2% from 3.8%, while core inflation should rise to 3.1% from 2.8%. These projections may understate underlying price pressures. Should the median estimates prove accurate, they would translate into a 6% annualized pace of headline inflation for the first five months of the year and a 3.6% annualized pace for core inflation. This CPI release arrives one week before the conclusion of the first Federal Open Market Committee meeting chaired by the new Fed leadership, at which a revised Summary of Economic Projections is expected to be released.
The day following the CPI report, May’s Producer Price Index becomes due. While markets historically react less sharply to PPI than CPI, the reading remains significant. After surging 1.4% in April, a more measured but still robust increase of 0.5% is anticipated. Should this materialize, the year-over-year rate would advance to 6.2% from 6.0%. Additionally, April’s trade balance will be reported this week. The goods trade deficit has already been confirmed to have narrowed slightly, though the US continues to run a chronic goods deficit offset by its persistent service sector surplus. While China, representing approximately 17% of the world’s population, accounts for roughly 14.5% of global exports, the United States—with just over 4% of the world’s population—generates 13% of global service exports. Across industrialized nations and numerous emerging markets, the service sector provides more employment than manufacturing.
May’s federal budget deficit will also be reported this week. Through April, the cumulative deficit stands approximately 9% smaller than the year-ago period, though the shortfall for the first four months of the calendar year runs about 4% larger than the prior-year comparison. The strong May employment data, combined with a backup in market rates, propelled the Dollar Index to two-month highs ahead of the weekend, reaching approximately 100.10. The index posted what appeared to be a bullish outside up day, trading on both sides of the previous session’s range and closing above its high. The next technical target may be the year’s high, recorded at the end of March near 100.65.
Eurozone
With few exceptions, the euro has remained mostly confined to a $1.16–$1.18 trading range since approximately April 20. However, the single currency broke decisively lower ahead of the weekend following the stronger-than-expected US employment data. The euro’s inverse 30-day correlation with changes in the two-year US yield stands near -0.82, the most extreme reading in more than 20 years. Paradoxically, the correlation between euro changes and Germany’s two-year yield is also inverse, at approximately -0.65, representing near the most extreme level in six years. The correlation between euro changes and the two-year interest rate differential measures only about 0.10 over the past 30 sessions.
Germany reports April factory orders, industrial output, and trade figures ahead of the European Central Bank’s Thursday, June 11 meeting. German factory orders jumped 5% in March following a 1.4% increase in February. Industrial output, however, has disappointed, falling 0.7% in March after a 0.5% decline in February. Germany’s trade surplus continues to hold up better than might be expected given concerns about the China slowdown. Germany recorded an average monthly trade surplus in the first quarter of 2026 of €18 billion, matching the first quarter of 2025 level exactly.
The swaps market is confident the ECB will deliver a rate hike at this week’s meeting, with the deposit rate expected to stand at 2.25% by the end of next week. Markets have fully discounted another hike in the fourth quarter. The eurozone’s May CPI came in at 3.2%, with core inflation at 2.5%. Even though revisions at the end of last week showed the regional economy contracted in the first quarter, market participants remain highly confident the ECB will hike rates and signal that it will remain vigilant—indicating preparedness to raise rates again if necessary.
The euro was turned back from the 20-day moving average near $1.1645 even before the stronger-than-expected US jobs data drove the single currency below last month’s low near $1.1575. The currency slumped to just above $1.1520. Initially, the $1.1500 area may offer support, but a move back to the year’s low set in mid-March slightly above $1.1400 cannot be ruled out. Reestablishing a foothold above $1.1600 is needed to begin repairing the technical damage.
United Kingdom
Sterling’s correlation with the euro over the past 30 sessions is near 0.87, rarely exceeded in the past decade. The 60-session rolling correlation stands at 0.90, matching the late 2023 correlation and representing the highest level in at least two decades. Changes in sterling are inversely correlated with changes in US two-year yields, as one would intuitively expect, at approximately -0.75—the most extreme reading in nearly 20 years. Less intuitively, the correlation of changes in sterling and UK two-year yields is also inverse, at near -0.55, which rarely becomes more extreme.
The UK’s April GDP will be released at the end of the week. Growth in the first quarter was firm at 0.6%, matching the best quarterly performance since the first quarter of 2024. Still, the economy appears to be on the verge of slowing, and the median forecast in Bloomberg’s survey calls for near stagnation in the second and third quarters. The swaps market has tempered its previously hawkish outlook for the central bank. The first rate hike is not fully discounted until the middle of the fourth quarter, with approximately a 20% chance of a second hike. Recall that as recently as late April, three hikes were fully discounted.
Sterling posted a large outside down day ahead of the weekend, settling below $1.3400 for the first time in two and a half weeks. Cable was sold to $1.3330. The next target is around $1.3300, which held last month. The year’s low was recorded at the end of March near $1.3160.
China
Assuming rational actor behavior, one must conclude that Beijing is allowing the yuan to appreciate against the dollar and its trade-weighted basket because such appreciation is understood to serve China’s interests. Several motivations can be speculated: deflecting some animosity over China’s historically large trade surplus, making the acquisition of foreign financial and real assets cheaper, and encouraging domestic capital to remain at home as Beijing enforces stricter controls on outbound capital flows. At the same time, the rolling 30-day correlation of changes in the Dollar Index and the dollar against the offshore yuan reached at least a 10-year peak in late April near 0.85 and has since eased to approximately 0.68. This remains at the upper end of its long-term range. Recall that in late January this correlation fell below 0.05 and was even briefly inversely correlated last year.
China reports two data series for which markets and media are particularly sensitive. The first is trade. May trade figures are due this week. Through April, China’s trade surplus is approximately 4% smaller than in the first four months of 2025. While the yuan is recognized as undervalued, the 20% magnitude that some economists and banks suggest does not appear extreme given the greenback’s overvaluation against several major currencies. The OECD’s purchasing power parity measure estimates the yen is more than 60% undervalued, the euro 30%, and the Canadian dollar 20%. The claim that a rising yuan will allow other Asian currencies to appreciate is not borne out in recent price action. Moreover, some economists claimed China was exporting deflation. What has actually occurred is the opposite. China’s inflation gap with other countries has narrowed, not because others converged with China, but because China’s consumer and producer prices have risen.
The yuan is entering a consolidative and corrective phase after trending higher since the end of March, having spent most of March consolidating. The greenback posted an outside up day against the offshore yuan and settled above the 20-day moving average near CNH6.7875 for the first time since the end of April. The dollar’s high from the second half of May was around CNH6.82, which may represent a reasonable initial target.
Japan
At near 0.85, the 30-day rolling correlation of changes in the dollar-yen exchange rate and the Dollar Index is at its best level since early in the fourth quarter of 2025. The correlation between the exchange rate and changes in the US 10-year yield has drifted lower from the year’s high in late April near 0.65 to just above 0.50. The correlation between the exchange rate and Japan’s 10-year yield is less than 0.05 and has not exceeded 0.40 since mid-2024. The correlation of the exchange rate and the 10-year interest rate differential sits just below 0.50, having been briefly inversely correlated in December of last year. The threat of intervention following a record operation in late April through early May has injected a new element into the dynamics.
Ahead of the Bank of Japan’s meeting conclusion on June 16, Japan will release a revision of first-quarter GDP, April’s current account figures, and May producer prices. This data is unlikely to impact expectations that the central bank will deliver a rate hike. The initial estimate of first-quarter GDP at 2.1% annualized significantly exceeded expectations, compared to 0.8% annualized in the fourth quarter of 2025. While Japan runs a current account surplus and possesses an undervalued currency, it has been running a trade deficit—a situation that is changing. The swaps market prices in an almost 80% chance of a hike later this month, with approximately a 70% chance of another before year-end.
Paradoxically, the US Treasury Secretary has encouraged a BOJ hike, yet Japan’s core inflation has been below target for the three months through April, and its headline rate is less than half of the US rate. Simultaneously, the administration has argued for lower US policy rates. The dollar reached a new high since the late April BOJ intervention following the US employment data near JPY160.35. The high set on April 30 was JPY160.70, while the dollar reached a high in March around JPY160.45. Momentum indicators are higher now than when the BOJ intervened at the end of April. The US two- and 10-year yields are approximately 25 basis points higher than at the end of April. The chances of a BOJ rate hike this month were seen as a 65% probability in the swaps market at the end of April and are now approximately 95% discounted.
Canada
The Canadian dollar is sensitive to the greenback’s overall direction. The rolling 30-day correlation of changes in the USD-CAD exchange rate and the Dollar Index is around 0.67. It peaked shortly after the war began near 0.85, which was the highest level since mid-2024. The Canadian dollar is also sensitive to the general risk environment, using the S&P 500 as a proxy. The rolling 30-day correlation of changes in the USD-CAD exchange rate and S&P 500 is near -0.45. The exchange rate is more sensitive to changes in the US two-year yield (approximately 0.45 30-day rolling correlation) than to changes in Canada’s two-year yield (approximately 0.35) or changes in the two-year interest rate differential (approximately -0.04).
The OECD’s purchasing power parity model has the Canadian dollar trading approximately 20% below fair value. Yet Canada’s trade balance has deteriorated significantly. In the first quarter of 2025, the goods balance was in surplus by an average of approximately C$337 million per month. In the first quarter of 2026, the average shortfall was nearly C$2.2 billion. The Bank of Canada meets on June 10. Before the Middle East war began, the swaps market was discounting approximately a 40% chance of another rate cut. This swung dramatically, and by March 20, the market had slightly more than three rate hikes this year fully discounted. The pendulum has swung sharply again, and even before the recent data showing back-to-back quarterly contractions, the swaps market had less than two hikes priced into the curve. Now, there is one hike fully discounted late in the year with approximately a 37% chance of a second.
The Canadian economy unexpectedly contracted in the first quarter of 2026, marking the second consecutive quarterly contraction. Still, ahead of the weekend, Canada reported an increase of 154,000 full-time positions in May—the most since February 2022—and a drop in the unemployment rate to 6.6% from 6.9%. Canada’s April headline CPI was 2.8% with a core rate of 1.5%, while the underlying core measure averaged approximately 2.05%. The Canadian dollar initially reacted positively to the strong jobs data, with the US dollar initially falling to almost CAD1.3865 before rebounding to a new session high near CAD1.3950. The year’s high was recorded at the end of March slightly above CAD1.3965. A move above CAD1.40 would signal potential toward CAD1.4100–1.4140. The participation rate remained steady at 65%, while wage growth slowed markedly to 3.2% from 4.8%.
Australia
Judging from the 30-day rolling correlation of changes, the Australian dollar is most sensitive to changes in the US two-year yield at -0.85, the most extreme in more than two decades. The Aussie is also sensitive to the greenback’s broad direction, using the Dollar Index as a proxy at approximately -0.82, the most extreme in two years. The Aussie is less sensitive to changes in the domestic two-year yield at less than 0.35. The correlation with the two-year interest rate differential and the exchange rate is lower than with the US rate alone at approximately 0.71. The exchange rate’s correlation with gold has recovered from around 0.35 in late March to around 0.84, the highest level since late 2022.
Australia’s economic calendar is light this week, consisting primarily of private sector consumer and business surveys. The Melbourne Institute’s consumer inflation expectation survey may be the most important indicator. It reached 5.9% in April, its highest level since November 2022, before pulling back in May to 5.6%, which also represented last year’s high print. The central bank meets on June 16. With three hikes already delivered this year and recent data—including employment, the preliminary May PMI, and April household spending—coming in weaker than expected, there is little doubt the RBA will remain on hold. The futures market has downgraded the probability of another hike this year to approximately 70%. This probability had been fully discounted as recently as May 26.
The Australian dollar broke down following the US jobs data and fell slightly below $0.7040, its lowest level since April 13. It settled below the lower Bollinger Band at approximately $0.7065. The Aussie could be at the edge of a precipice. Since around mid-April, a head and shoulders topping pattern has been etched out and appears to have settled below the neckline with the losses suffered at the end of last week. The measuring objective of the pattern is around $0.6900. From another perspective, the $0.7055 area represents the halfway mark of the Aussie’s rally off the year’s low from March 31 near $0.6835, with the next retracement objective near $0.7000.
Emerging Markets
The Mexican peso faces four recent drivers that stand out prominently. First, the 30-day correlation between changes in the exchange rate and changes in the US two-year yield is above 0.80 and the highest in 20 years. These were inversely correlated until approximately mid-March. Second, there remains substantial sensitivity to risk sentiment. Using the S&P 500 as a proxy, the inverse correlation of the dollar-peso exchange rate is almost -0.79. In April, it approached -0.85, a level not seen in a decade. Third, the exchange rate is inversely correlated with gold at approximately -0.79, the most extreme since mid-2022. This indicates the peso tends to strengthen alongside gold. Fourth is the dollar’s overall direction. The correlation of the exchange rate and Dollar Index changes is about 0.63, off this year’s peak near 0.80 but still at the upper end of this year’s range.
Mexico reports May vehicle production and exports to start the new week. In April, Mexico exported almost 87% of the vehicles it produced. By contrast, estimates suggest China exports 15–20% of the vehicles it produces, with approximately a fifth of those exports being foreign brands. The highlight of the week is Tuesday’s May CPI and Thursday’s April industrial output. Both the headline and core CPI measures are likely to remain near the upper end of the 2%–4% target range, while the economy struggles to find traction. Industrial output contracted by 1.2% year-over-year in the first quarter, with the monthly series falling by a cumulative 1.36% in the first quarter. After delivering the second rate cut of the year last month, Banxico has signaled it is moving to the sidelines, and the swaps market favors a rate hike with 80% probability by year-end.
The Mexican peso fell by around 1.10% ahead of the weekend, matching its biggest decline in nearly three months. It turned what was a small gain for the week into a modest loss of approximately 0.70%. The dollar recorded an ostensibly bullish outside up day against the peso, having traded on both sides of Thursday’s range and settled above its high. In fact, the greenback settled at its best level in a month. The dollar had forged a base in recent sessions in the MXN17.26–MXN17.27 area and was lifted to approximately MXN17.5360 before the weekend, its best level since May 5, before closing near MXN17.48. The next technical target is the cap from the second half of April in the MXN17.58–MXN17.59 area.
Global Markets
The war in the Middle East continues to disrupt flows from the region and significantly shapes overall risk appetite across global markets. After falling by almost 14% in the last two weeks of May, July West Texas Intermediate crude rose approximately 4.5% last week as progress toward a resolution appeared limited. The odds on Polymarket regarding the Strait of Hormuz appear more cautionary and stable than the vagaries of the capital markets and oil futures themselves. On that event contract, there is approximately an 18% chance that the Strait is opened by the end of June and about a 36% probability it is opened by the end of next month.
Crude oil markets remain volatile as geopolitical tensions persist. Brent crude has tracked similarly to WTI, with energy markets remaining sensitive to any developments regarding regional stability and potential supply disruptions. The energy sector continues to warrant close monitoring as a key driver of broader risk sentiment and currency movements, particularly for commodity-linked currencies and emerging market assets.
Gold has demonstrated renewed strength, particularly benefiting from risk-off sentiment and safe-haven flows. The precious metal’s correlation with certain currencies, notably the Mexican peso and Australian dollar, has shifted meaningfully, with gold now moving inversely to risk currencies. Silver has tracked gold’s general direction, though with somewhat more volatility given its dual nature as both a precious metal and an industrial commodity.
Equity markets across Asia, Europe, and the United States have remained sensitive to monetary policy expectations and geopolitical developments. The backdrop of potential central bank action, particularly from the ECB and BOJ this week, continues to weigh on market sentiment. Asian equities have experienced volatility related to China’s economic data and currency movements, while European markets have traded cautiously ahead of Thursday’s ECB decision. US equity futures have reflected the strong employment data and rising rate expectations, with the correlation between equity moves and fixed income volatility remaining elevated.
Sovereign bond markets globally have experienced a backup in yields, with US Treasuries leading the move higher. The two-year and 10-year yield spreads have widened, reflecting market expectations for sustained monetary policy tightening from the Federal Reserve. German Bund yields have risen in anticipation of the ECB’s rate decision, while UK gilt yields have fallen as rate hike expectations have been scaled back. Japanese Government Bond yields remain relatively anchored despite BOJ rate hike expectations, as the central bank continues to manage yield curve control. The backup in US yields has been the dominant theme, driving currency movements globally and supporting the dollar broadly.
