Deal or no deal? – United States
- A potential thawing in trade relations between the US and China boosted sentiment. Chinese and US negotiators will meet in Switzerland from May 9–12 for trade negotiations, chaired by Chinese Vice Premier He Lifeng.
- US President Donald Trump said he expected “substantive” reduction in Chinese tariffs and highlighted a UK-US trade deal as an example of the benefits of his tariff policies.
- On the macro front, any chance of a Federal Reserve rate cut in May was eliminated by a stronger than expected US nonfarm payrolls result.
- As such, the Federal Reserve kept interest rates on hold at its 7 May meeting and indicated that the current uncertain environment means the central bank cannot provide guidance around further cuts.
- Across the pond, the Bank of England did cut rates, but the BoE’s cautious commentary saw the move characterised as a “hawkish cut”.
- In FX markets, the initial focus was on Asia. The US dollar was hit in a historic sell-off in the USD/TWD pair, causing the Taiwanese dollar to surge higher. The move corresponded with US-Taiwan trade talks and some commentators suggested the Taiwan government might allow the TWD to rise – “appreciation by stealth”.
- The USD staged a recovery following the Fed decision with the USD index reaching a one-month high at the end of the week. The euro and British pound were the underperformers.
Global Macro
Global central banks diverge
Fed holds amid scrutiny. After holding rates steady for the third consecutive meeting, the Fed acknowledged growing uncertainty in the economic outlook, emphasizing the increasing risks of both higher unemployment and rising inflation. During the press conference, Powell faced pressure on questions about soft data and the rationale behind pre-emptive rate cuts by other central banks. He reiterated the Fed’s stance that soft data, while informative, has yet to be reflected in hard data, justifying a cautious approach. Powell also reminded markets that current conditions are not comparable to 2019, when three pre-emptive rate cuts were necessary. Market expectations for rate cuts have adjusted, with investors pricing in three reductions by the end of 2025. However, the likelihood of the first cut occurring in July has diminished, reflecting the Fed’s commitment to a no-rush, hard-data driven strategy.
BoE hawkish cut. The Bank of England (BoE) cut interest rates by a quarter point to 4.25% as expected. The BoE’s nine-person Monetary Policy Committee was split between the five members who supported the quarter-point cut, two who favored a bigger, half-point reduction and two who wanted rates to stay at 4.50%. Most market participants reckoned a near-unanimous vote for at least a 25-basis point cut. However, it turns out the picture was more complex, with two voting for rates to be held – meaning the decision leaned more hawkish than expected.
Inflationary pressures in ISM. ISM Services PMI surprised to the upside, rising to 51.6 in April from a nine-month low of 50.8 in March, exceeding forecasts of 50.6. New orders and inventories accelerated, reaching 52.3 and 53.4, respectively, while business activity held in expansion territory at 53.7. Price pressures remain a concern, prices charged, as measured by the ISM Manufacturing PMI Price Index, climbed for the fifth straight month.
Regional outlook: US & UK
Handshake trade deal
Symbolic. It is the first trade deal agreed after President Trump began his second presidential term in January, and after he imposed strict tariffs on countries around the world in April. It is symbolic for this reason, but the details reinforce our view that tariffs are unlikely to go away anytime soon.
Details subject to revisions. The final details of the pact will still be negotiated over the coming weeks, but here’s what we know. The UK steel and aluminium industries will no longer face any tariffs after they had 25% duties placed on them. The deal appears to centre predominantly around cars, the US’ sixth-top export to the UK and the UK’s top export to the US. The first 100,000 vehicles imported into the US by UK car manufacturers each year are subject to the reciprocal rate of 10% and any additional vehicles each year are subject to 25% rates. That’s a change from the 25% tariff in place for foreign cars shipped to the US but still leaves UK carmakers worse off than before.
Markets are upbeat. Markets are riding a wave of optimism though, with US stocks rallying on hopes of lower tariffs. The White House is framing this as a trade war victory, buoyed by the UK trade deal announcement and upcoming talks with China. The S&P 500 and Nasdaq 100 both gained over 1%, erasing earlier losses and hitting their highest levels since March.
Premature celebration? However, could it be that investors are too optimistic about trade talks? The baseline 10% tariff remains unchanged on the UK, signaling that double-digit tariffs are likely here to stay. With the US running a $12bn goods trade surplus with Britain in 2024, the UK’s inability to negotiate a lower rate suggests nations with US trade deficits may face even tougher terms.
Week ahead
Inflation and growth metrics dominate the agenda
Inflation data in focus. Key inflation readings across major economies will be closely monitored this week. In the US, the Consumer Price Index (CPI) for April is due on Tuesday, with the year-on-year rate expected to remain steady at 2.4%, while the month-on-month rate is forecasted to tick up slightly to 0.3% from -0.1%. Germany will release its final April CPI figures on Wednesday. France will follow suit on Thursday. These figures will provide critical insights into the inflation trajectory across the Eurozone as the ECB continues to monitor price pressures.
Growth readings to highlight economic momentum. A suite of GDP data releases will give markets important signals about global growth trends. Japan reveals its preliminary Q1 GDP figures on Friday, where the annualized growth rate is expected to decelerate to -0.4% from 2.2%. The UK’s Q1 preliminary GDP data on Thursday is expected to show marginal growth, with both quarterly and annualized rates were at 0.1% and 1.5%, respectively. The Eurozone will also release its Q1 second estimate GDP data on the same day as well.
Labor markets and consumer sentiment. The UK will also report key labor market data on Tuesday. Average weekly earnings for March was last reported at 5.6% year-on-year, while the unemployment rate was at 4.4%. In the US, initial jobless claims will be released on Thursday, offering further signals on the state of the labor market. Additionally, US consumer sentiment will be gauged through the preliminary release of the University of Michigan’s Sentiment Index on Friday, expected to show a slight improvement to 53 from 52.2.
Central bank watch. While no major central bank decisions are scheduled, the upcoming economic data will be closely watched for its implications on monetary policy. Australia’s employment data on Thursday could influence RBA expectations, with consensus forecasting a 25k increase in employment and an unemployment rate holding steady at 4.1%.
FX Views
Positive trade news boosts dollar
USD Bear market correction? The US dollar index rose to a 4-week high, boosted by trade optimism following the US-UK trade deal. But another key talking point this week was the massive rally in the Taiwanese dollar – raising concerns of USD-rich Asian countries being the catalyst for the next broader USD decline. The USD’s slide this year has pressured heavily exposed economies like Taiwan, prompting investors to ramp up hedging and diversify beyond US assets, which fits into the structurally bearish USD case. Meanwhile, the Fed’s decision to hold rates unchanged and markets paring easing bets had minimal positive impact on the buck. Indeed, the dollar’s lackluster rebound relative to US equities is noteworthy too, suggesting a weak USD bear market correction is in play. The risk of a structural USD bear market remains elevated for three main reasons. 1) US policymakers seem inclined toward a weaker dollar. 2) Policy credibility is under strain due to fiscal uncertainty, erratic tariff policy, and Fed independence concerns. 3) The fading narrative of US exceptionalism. US inflation data will be a key focus in the upcoming week.
EUR Fading volatility is a drag. The euro continues to oscillate between $1.12 and $1.14 versus the US dollar, lacking a fresh positive catalyst to drive it higher for now. EUR/USD closed below the 21-DMA for the first time in three weeks, but this could be a sign of a healthy correction. Indeed, the premium to own bullish euro exposure versus the dollar remains elevated. Broadly speaking, the euro’s 9% surge this year has fuelled concerns over stretched positioning, but the real threat is fading volatility. Gains for the common currency have been supported by Germany’s fiscal pivot and diversification away from US assets, but a sizable chunk of the upside move has come from the volatility regime itself. The Bloomberg EURO index shows its strongest correlation to a one-month FX volatility gauge in nearly five years. With volatility drifting lower, the euro’s upside momentum is losing steam, even as options markets still reflect dollar bearishness. A dip below $1.13 appears corrective rather than a trend reversal, provided the $1.1200–$1.1220 support zone holds. Ultimately, the bullish momentum is under pressure, but we think the direction remains intact.
GBP Trade optimism & hawkish BoE. The pound marginally outperformed most of its peers when the news of a UK-US trade deal broke. However, the initial move higher in sterling faded given the limited nature of the agreement. The bottom line is that post-deal tariffs on the UK will remain substantially higher than before Liberation Day. The dollar was the main beneficiary of the trade optimism as well, dragging GBP/USD towards $1.32 after the pair tested its 100-DMA at $1.3337 following the hawkish BoE rate cut. The pair has closed below its 21-DMA in a sign of near-term bullish moment waning. However, in the options space, GBP long-term sentiment hit the least bearish since 2014. Elsewhere, with tariff-induced volatility subsiding, rate differentials could return to the driving seat for GBP/EUR. Monetary policy divergence means GBP/EUR could close the gap on UK-DE rate spreads. The swap differential suggests the pair should be trading above €1.19. Coming up, a big week of UK data beckons with labour market figures and Q1 GDP results under the microscope.
CHF Negative rates not ruled out. It’s been a quiet week for the safe haven Swiss franc amidst the rebound in global risk appetite. But the main story to watch over the next few weeks is how the Swiss National Bank (SNB) will respond to the sharp 9% rise of the franc versus the US dollar year-to-date, which hit a decade high last month. According to the SNB President Martin Schlegel recently – policymakers remain ready to intervene in FX markets if needed for price stability. The most recently available data, for the final quarter of 2024, showed the central bank largely keeping out of FX markets for a year. An alternative to dissuade flows into the franc would be to cut borrowing costs again but the challenge is clear – policy rates are already at 0.25%, leaving little room to manoeuvre without dipping into negative territory. A move below zero could strain the banking sector, eroding profitability and complicating financial conditions.
CAD Loonie rebounds on USD strength. USD/CAD posted a strong performance in April, but it remains the weakest among its G10 peers, making it the worst-performing major currency in 2025. After the Fed meeting on Wednesday, the Loonie extended its losses, reinforcing downward pressure. The UK-US trade deal discussions triggered a stronger rebound, pushing the DXY back above the 100 level and sending USD/CAD to 1.393—its highest point of the week. As previously noted, short-term rate differentials between the U.S. and Canada continue to widen, solidifying 1.38 as a key support level. The Loonie may pause around 1.394 before making a potential move toward 1.40 in the coming days. With DXY reclaiming the 100 level and VIX easing, upward momentum now appears more likely.
Meanwhile, Canada’s macro outlook remains fragile. Recent data confirmed a fifth straight month of private-sector contraction, with the S&P Global Composite PMI dipping to 41.7 in April from 42 in March—its sharpest decline since June 2020. Both manufacturing and services posted similar slowdowns, while new orders saw a steep drop, adding further weight to concerns about growth.
AUD Labor party victory spurs fiscal optimism. The Australian Labor Party’s significant election victory reinforces the likelihood of continued fiscal stimulus, which is supportive of the Australian economy. Markets will watch for the passing of key legislation, including higher taxes on superannuation balances above AUD 3 million. On the economic front, robust fiscal spending may provide additional tailwinds to growth. AUD/USD still hovering above 0.6400 handle, converging toward the upper Bollinger Band with increased upward momentum. Price action remains above the Ichimoku Cloud, affirming a positive bias. Key support levels lie at the 200-day EMA (0.6409) and 21-day EMA (0.6384), while resistance targets include 0.6545 and 0.6688. Upcoming data on Australian employment and trade balance will be key.
CNY PBoC rate cuts spur negative momentum. The PBoC’s recent rate cuts, including a 50bp cut in the reserve requirement ratio and a 10bp cut to the seven-day reverse repo rate, aim to inject liquidity and support economic recovery. Measures to mitigate the impact of US tariffs and stimulate domestic growth are likely to weigh on the yuan in the medium term. USD/CNH has rebounded and is now on track to test next daily key resistance levels of 200-day EMA of 7.2518, followed by 21-day EMA of 7.2635. Downside targets extend to 7.1475. USD/CNH is still more than 2% away from its mid April 2025 daily highs of 7.4290. Focus will shift to trade balance, CPI, and PPI data for further cues on the yuan’s trajectory.
JPY USD/JPY struggles as BoJ balances risks. Bank of Japan (BOJ) Governor Kazuo Ueda reiterated concerns about price deflation risks and uncertainties surrounding high inflation, signaling caution in monetary policy adjustments. Ueda highlighted Japan’s inflation trajectory, projecting it to near the 2% target in the latter half of the three-year outlook period ending March 2028. While the BOJ remains committed to gradual policy normalization, the central bank is balancing this with external risks, including weaker global growth and geopolitical uncertainties, which could threaten Japan’s fragile recovery. USD/JPY however, has struggled to sustain its upward momentum. It is now hovering at its 21-day EMA (144.09) with the next key resistance levels of 50-day EMA (146.17) and 200-day EMA (150.03) next. A potential head-and-shoulders pattern on the weekly chart suggests deeper declines if support at 140.85 (near eight-month of the weekly lows) fails. Market participants will monitor Japan’s current account, GDP, and industrial production data closely.
MXN. Peso steady at 5-year average.
Mexico’s inflation has settled below 4%, though it still sits above the central bank’s target of 3%. In April, core annual inflation ticked up to 3.93%, slightly above forecasts—with monthly inflation rising by 0.49%. Prices for food, beverages, tobacco, and services have edged higher, even though energy and agricultural goods have dipped slightly. This marks the sharpest annual price increase so far this year, reinforcing many policymakers’ careful approach amid easing trade tensions.
Weak domestic demand and growing economic slack are keeping upward price pressures in check, while lower oil prices and favorable base effects provide some relief. Although last year’s peso depreciation pushed inflation higher, recent peso gains since December suggest these effects may be short-lived. Overall, the latest CPI data point to a cautious outlook when it comes to Banxico’s easing cycle.
The Mexican peso reacted to the CPI data by drifting toward 19.50, its five-year average, and approaching a six-month high. Earlier in the week, the peso tested 19.78 before retreating, showing a steady move toward 19.50 as the week wrapped up. With expectations of a more dovish Banxico, markets are now anticipating a shift in the central bank’s stance as it looks to balance inflation and growth over the medium term.
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