Written by the Market Insights Team
BoC to hold
Kevin Ford – FX & Macro Strategist
Why won’t the Bank of Canada (BoC) cut rates today? Ironically, policymakers likely recognize that a rate cut is imminent, yet lingering concerns about inflation rebounding will keep the Bank of Canada on hold, for now.
Despite weak domestic data, particularly business and consumer surveys and employment figures, the BoC is holding off on rate cuts. Stubborn core inflation and a stronger-than-expected Q1 2025 GDP have left Governor Tiff Macklem in a difficult position, limiting the central bank’s flexibility. Adding to the uncertainty, U.S. tariffs remain a key risk, with the BoC acknowledging the challenge of fully assessing their impact. However, the bank notes they are already exerting pressure on the Canadian economy. As a result, the odds of a June rate cut have plunged from 58% in May to just 25% ahead of the meeting.
The focus today will be on the Bank of Canada’s policy announcement and press conference, with investors eager to hear from Governor Tiff Macklem for signals that the BoC may be nearing the end of its easing cycle. Meanwhile, with the Canadian dollar showing less sensitivity to the U.S. dollar compared to other G10 currencies, market watchers are laser-focused on tomorrow’s domestic monetary policy decision.
Dollar’s modest rebound before crucial data
George Vessey – Lead FX & Macro Strategist
The US dollar staged a modest rebound on Tuesday as investors processed a mixed set of US economic data, offering fresh insights into the Federal Reserve’s (Fed) rate path. While the rebound lifted the dollar off its 6-week low, lingering growth concerns and uncertainty over trade negotiations continued to limit further upside as President Trump doubles steel and aluminium tariffs from 25% to 50%.
On the labour front, JOLTs job openings unexpectedly rose to 7.39 million in April, above estimates and March’s revised 7.2 million, reinforcing labour market resilience. However, factory orders fell sharply by 3.7%, signalling manufacturing weakness and raising questions about broader economic momentum. Today, the ADP employment report and ISM services PMI will be crucial ahead of Friday’s non-farm payrolls report, all of which will help determine the Fed’s policy outlook and dollar’s direction.
Short-term dollar drivers remain tied to evolving Fed policy expectations, with officials signalling a preference for holding rates steady despite mounting pressure for cuts. Escalating trade tensions further complicate the outlook, with the OECD lowering its US growth forecast to 1.6% in 2025 and 1.5% in 2026, citing global uncertainty.
Beyond short-term fluctuations, a bigger concern for long-term dollar positioning is the growing unease around de-dollarization. Trump’s proposed “revenge tax”—Section 899 of his bill—introduces yet another disincentive for foreign investors, further eroding confidence in Treasury bonds and US assets.
Already, erratic trade policies and the nation’s deteriorating fiscal accounts have put pressure on dollar-denominated holdings, prompting global institutions to reassess exposure. If foreign investors perceive heightened risks, capital flow dynamics may shift further away from the dollar, reinforcing the long-term challenges facing the currency.
Eurozone inflation below target ahead of ECB meeting
George Vessey – Lead FX & Macro Strategist
The euro faced selling pressure on Tuesday, weighed down by softer-than-expected inflation data and stronger US economic releases, reinforcing short-term headwinds for the currency. A downgraded global growth outlook from the OECD and heightened political uncertainty in the Netherlands added to investor caution. Trade policy concerns also remained in focus, with the US pushing for final offers in negotiations by Wednesday, just days after renewed tariff threats.
Ahead of the European Central bank’s (ECB) meeting this Thursday we had some interesting inflation data out of Europe supporting the case for interest rates to be lowered further. Services inflation fell to 3.2% from 4%. A sharp decline in core inflation to 2.3% and headline inflation to 1.9% in May all signal that price pressures may undershoot the ECB’s target, cementing the view that the deposit rate will be cut by 25bps to 2% on Thursday. This was one factor weighing the euro but one that could be short-lived. Trade-related uncertainties have so far had a muted impact on Eurozone growth, with global commodity price declines and euro strength against the dollar helping to cushion inflationary pressures. As price concerns ease, the ECB’s focus is shifting toward economic growth, reinforcing a supportive backdrop for the euro in the medium term.
Moreover, if we do see more of a pick-up in FX volatility, the euro is expected to benefit, as it has over the past few months, as an attractive alternative to the dollar. In the very short term, holding above $1.1285 will be key if we want to see a retest of the $1.16 handle this summer. But traders are looking beyond short-term noise and positioning for long-term euro gains as the skew trades in favour of the euro across tenors, with $1.20 a potential target by year-end.
Sheinbaum to fight remittances bill
Kevin Ford – FX & Macro Strategist
Remittances sent to Mexico fell by 12% in April compared to the same month a year earlier, marking the steepest annual decline in over a decade. This drop reflects mounting challenges in the U.S. labor market, where job losses and economic uncertainty have reduced the ability of immigrants to send money back home. Additionally, growing fears of deportation among immigrant communities have likely contributed to the downturn in transfers.
Given that remittances accounted for approximately 3.5% of Mexico’s GDP in 2024, this sharp decline could have significant economic consequences. These financial inflows have long been a vital driver of domestic consumption and economic growth, particularly in households reliant on funds from relatives abroad.
Adding to the uncertainty, U.S. lawmakers are weighing a 5% levy on remittances sent by non-citizens, a proposal that Mexico’s government has strongly opposed, labeling it as double taxation. Mexican President Claudia Sheinbaum has emphasized that all Mexicans living in the U.S. pay taxes, regardless of their legal status. She also pointed out that some states already tax remittances, calling the proposal unjust and discriminatory.
The evolving U.S. labor market conditions and shifting immigration policies may further disrupt the flow of remittances to Mexico in the months ahead, creating additional economic pressures.
On trade-related matters, Mexico’s Minister of the Economy Marcelo Ebrard announced that the official negotiations for the early review of the USMCA will begin in late September, rather than the beginning of June, as previously expected. Ebrard clarified that the evaluation phase had already begun months ago, during which his negotiating team, alongside Mexican business leaders, has been meeting weekly with their U.S. counterparts. Both teams are conducting a deep assessment of what has worked and what needs to be changed since the USMCA was implemented, paving the way for formal negotiations.
US Dollar sustains modest rebound
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 2-6
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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