- Trade deal progress and lower tariff rates have eased concerns over economic disruption. However, market sentiment turned sharply negative after Moody’s downgraded the US credit rating, citing mounting debt concerns and cutting the country’s score from Aaa to Aa1.
- Two other big developments also grabbed the market’s attention: a disappointing bond auction and the House Republicans’ approval of the “Big, Beautiful Tax Bill” with rising deficits in a higher-rate environment raising questions about long-term sustainability.
- US equities tumbled almost 2% in a few days, whilst long-dated Treasury yields spiked to multi-year highs, the 30-year yield is back above 5%, reflecting growing Wall Street worries about the US fiscal outlook.
- While fiscal policy dominates, recent macro indicators show resilience. US composite PMI rose to 52.1, beating forecasts and calming recession fears. However, weak PMI data from Europe reinforce sluggish growth concerns, yet the euro remains relatively strong against the dollar.
- From the UK, inflation surged with services inflation at 5.4%, exceeding expectations. The sharp rise, coupled with strong retail sales data has shifted BoE policy expectations, pushing gilt yields higher and supporting sterling.
- Finally, a reset in UK-EU relations offered the pound further support but UK government has ruled out single market access or a customs union, reinforcing long-term trade barriers.
Global Macro
Attention shifts to fiscal policy
Moody’s rating downgrade. Moody’s downgraded the U.S. sovereign rating to Aa1 citing deterioration of credit outlook. Moody’s is the final of the three major rating agencies to lower U.S. debt. The downgrade comes at a moment where the US administration will aim to pass Trump’s ‘Big, beautiful tax bill’. House of Republicans have passed the bill and now will move to the Senate, where it’s expected to find resistance from Democrats.
Global yields react. US 20-year bond auction this week saw weaker-than-expected demand, pushing rates up. 30-year yield hit 5.09%. Japan & Europe have seen similar trends. Markets are pushing back on fiscal deficits. US market faces nearly $3 trillion in US debt mature in 2025, much of it short-term and with rates this high, net interest payments will continue straining the US credit outlook. For the US, not the greatest timing to refinance 25% of debt.
Dollar weakness resumes. Between Friday afternoon and yesterday’s close, the dollar has slipped -1% in response to Moody’s downgrade of the U.S. sovereign rating to Aa1. In contrast to previous rating cuts, where the greenback surged as investors sought safety, this time, the market reaction has been noticeably different.
Macro in the backseat. While markets have been fixated on fiscal policy, some key macro data has quietly made an impact this week. Worth highlighting: May’s S&P Global PMI shows U.S. Manufacturing climbing to 52.3 (beating the 49.9 estimate and 50.2 prior), Services PMI rising to 52.3 (vs. 51.0 est. & 50.8 prior), and Composite PMI improving to 52.1 (surpassing the 50.3 estimate and 50.6 prior). A solid uptick across the board.
Regional outlook: US, EZ, & UK
US Fiscal woes, Eurozone slump, and UK resilience
US fiscal concerns in focus. The combination of Moody’s US credit rating downgrade and the lackluster reception of a proposed tax cut bill in Congress reinforced long-term worries about US fiscal stability, which could accelerate diversification away from dollar-denominated assets. Indeed, the ongoing inverse correlation between US yields and the dollar highlights this stark regime shift.
Soft EZ activity data, so what? A raft of weaker-than-expected PMI data for key Eurozone economies—namely France, Germany, and the broader region reinforces the narrative of a sluggish Eurozone economy. The Eurozone Composite PMI fell from 50.4 to 49.5 in May, with the services sector being the main driver of the decline. While manufacturing has remained sluggish for some time, the previously-resilient services sector has now also slipped into contraction territory. Nonetheless, euro declines were pared, underscoring the prevailing sentiment that the euro still holds a relative advantage over the dollar at this juncture.
A resilient UK consumer. The repricing of BoE rate expectations has boosted sterling, with a hawkish May policy meeting and hot inflation data eliminating chances of a June cut. Markets now see just 40bps of cuts in 2025, down from 96bps earlier. The Citi Economic Surprise Index for the UK – which measures data surprises relative to market expectations – continues to climb, hitting its highest level since July 2024 and further boosted by strong retail sales which rose for a fourth month running.
UK-EU agree partial reset. The UK’s Labour government secured a veterinary agreement, aligning food standards with the EU, removing border checks, and easing trade friction. In return, EU fishing boats gain 12 years of UK access, and talks on youth migration are underway. Both sides also agreed on closer defense cooperation, strengthening diplomatic ties.
Week ahead
Focus on inflation and growth data
Inflation readings take center stage. The economic calendar features several key inflation releases across major economies. Notable reports include French CPI on Tuesday, Australian CPI on Wednesday, and preliminary German CPI figures on Friday. These readings will be closely watched for signs of persistent price pressures that could influence central bank policy outlooks.
Growth indicators also in focus. The week brings a mix of growth-related data, including US GDP on Thursday, which is expected to confirm a 0.3% annualized contraction in Q1. Canadian monthly GDP for March and the quarterly annualized figure for Q1 will be released on Friday, offering insights into the health of the Canadian economy.
Consumer sentiment and spending eyed. Tuesday sees the release of US consumer confidence data for May, which is expected to tick up slightly to 87. On Friday, US personal income and spending figures for April will shed light on the state of the American consumer. Any significant deviations from expectations could impact market sentiment.
RBNZ rate decision in the spotlight. The Reserve Bank of New Zealand’s rate decision on Wednesday stands out as a key event risk for the New Zealand dollar. Markets expect a 25bps cut to 3.25%, so any deviation from this expectation could trigger significant volatility in NZD crosses.
Liquidity conditions in focus. With the US and UK markets closed on Monday for holidays, trading volumes may be lighter than usual to start the week. This could lead to some choppy price action, especially for USD and GBP currency crosses. Liquidity should improve as the week progresses and participation increases.
FX Views
Diversifying away from dollars
USD Fiscal woe is fresh foe. Market attention has largely shifted to developments surrounding US fiscal stability, which has weighed heavily on the US dollar this week following the loss of upside traction the week prior. The dollar index is on track for its worst week in six, down over 1.2% at time of writing. The combination of Moody’s US credit rating downgrade and concerns over the deficit impact of the tax cut bill have pushed the 30-year Treasury yields above 5.1%, the highest level since 2023. A soft 20-year bond auction raised more alarms, reinforcing long-term worries about US fiscal stability, which could accelerate diversification away from dollar-denominated assets. Indeed, the inverse correlation between US yields and the dollar highlights this stark regime shift, whilst the steepening at the long end of the US curve is also typically dollar negative. The latter in this instance, reflects risk premia on US policies. Offering some welcome relief for the dollar though was US data, with flash PMIs surprising stronger than expected – cooling fears about a US economic slowdown.
EUR Euro on borrowed strength. Investor sentiment toward the dollar continued deteriorating this week, benefiting the EUR as the most liquid alternative. EUR broke above its 21-day moving average, only to retreat below it following disappointing Eurozone PMI prints. This reinforces our view that further—and more sustainable—euro upside would require stronger, domestically anchored momentum. Reducing reliance on USD weakness, which has historically been the primary driver of EUR moves, is key to maintaining gains beyond short-term technical levels. While the recent UK-EU summit and signs of fiscal easing in Germany offer some optimism for the euro area’s growth outlook, de-escalation in U.S.-EU trade tensions is needed for the euro to break meaningfully higher. Additionally, the eurozone’s macro backdrop remains soft, with underwhelming PMI data and an ECB that has yet to convincingly shift away from its dovish stance.
GBP In a sweet spot. GBP/USD hit its highest level in three years this week closing in on the $1.35 mark. The pair is back above its key daily moving averages and is now circa 11% higher than it was back in January this year. And in fact, for the first time since the global financial crisis, options traders are no longer bearish on the pound over the long term. Meanwhile, due to the uplift in EUR/USD, sterling’s gains against the euro have been muted, or rather non-existent this week, but it has still gained over 3% since the knee-jerk selloff last month. With pound bulls encouraged by stronger-than-expected economic performance and the absence of a recession, sterling remains supported by a hawkish Bank of England, resisting dovish shifts and providing yield appeal. The G10 FX de-dollarization narrative continues to fuel sterling’s bullish momentum too, given its renewed role in diversification strategies. Moreover, investors welcomed a partial reset in UK-EU economic relations though the deal won’t significantly boost the UK economy or prevent tax hikes in the autumn. The pound looks poised to build on recent gains, but sudden shift in risk sentiment poses the biggest threat to sterling bulls, given the pound’s high-beta status and sensitivity to global market swings.
CHF Appealing but vulnerable. The Swiss franc has strengthened over 1% against the USD this week, extending its 9% YTD gains, as investors flock to safe-haven assets amid US fiscal concerns and rising Treasury yields. The franc has long been a go-to destination during market stress, but more so as the dollar’s haven appeal has weakened. However, its rapid appreciation is raising concerns at the Swiss National Bank (SNB). With the trade-weighted franc near record highs, markets are increasingly uneasy about potential intervention. The SNB has already signaled discomfort, and traders are pricing in a 50bps rate cut in June, with negative interest rates potentially returning by September. Thus, if trade tensions and recession fears continue to ease, a mean reversion in USD/CHF could unfold amidst a return to traditional market dynamics. This could be true for EUR/CHF too given the decoupling with rate differentials is so extreme.
CAD Back below 1.39. After Trump’s 2016 win, the CAD gained ~4% vs USD. Post-2024 election it has been nearly flat. But macro backdrop is different: higher tariffs, deeper uncertainty, and a weakening Canadian economy. In 2016, expansion was just beginning. Now, uncertainty remains. Is CAD poised for another leg down? Although the CAD has benefited from US dollar weakness, its beta is the lowest amongst G10 peers. Also, CAD net non-commercial positioning in the futures market, even though has improved, remains short, limiting advances beyond the 1.38 level. On the macro side, Canada’s annual inflation eased to 1.7% in April (down from 2.3% in March), but underlying pressures remain sticky. CPI median hit 3.2%, its highest since March 2024, while CPI trim rose to a 13-month high of 3.1%. With Q1 GDP data due May 30, rate cut odds by the BoC for the June meeting have dropped to 35%. The Loonie kicked off the week near 1.40 and has gained 0.65% over the past five days, yet remains unable to break below 1.38, hovering just above key technical support. With renewed US dollar weakness, it has dipped below 1.39, touching a low of 1.381 and nearing the 90-week SMA at 1.3795. Looking ahead, with a light macro calendar next week, range-bound trading is likely to persist through month-end.
AUD Exporters eye China opportunity amid trade tensions. Australian exporters remain optimistic about their China business prospects as potential US tariffs could enhance their competitive positioning in Chinese markets. This fundamental backdrop supports AUD strength as trade diversion benefits become more apparent. From a technical perspective, AUD/USD still hovers above the 21-day EMA at 0.6410 with diminishing downward momentum. The pair maintains its position above the Cloud, reinforcing the positive outlook. However, recent price action suggests resistance at 0.6500 remains a key challenge. A breakout above this level would target 0.6545, with further upside potential to 0.6688. On the downside, any corrections should find support at Cloud levels of 0.6290 and 0.6177. A break below 0.6177 would shift the bias negative, targeting 0.5950. Key upcoming data including monthly CPI, building capital expenditure, housing credit, and retail sales will provide direction for the pair’s next move.
CNY Tariff effects emerge as China data softens. China’s April economic data revealed moderating growth momentum following robust Q1 readings. Retail sales growth slowed to 5.1% year-on-year, while infrastructure and manufacturing fixed asset investment decelerated. Export growth patterns showed clear tariff impact, with US shipments declining 21% while ASEAN exports surged 21%, highlighting trade diversion effects. Industrial production growth moderated to 6.1%, while both CPI and PPI remained in deflationary territory. USD/CNH is more than 3% higher than its previous lows of 6.9713 back in September 2024. Technically, USD/CNH is converging toward the lower Bollinger Band with upward momentum dissipating, suggesting renewed downside pressure. Trading below the Cloud maintains the negative outlook. A break below 7.1900 opens further downside to 7.1475, with 7.0869 as the ultimate target. Any rebounds should be viewed as corrective, with resistance at 7.2242 and 7.2566 expected to cap advances. Only a close above 7.2566 would tilt bias upward. Chinese industrial profit data will be closely watched for further economic insights.
JPY BoJ’s Noguchi sticks to plan, USD/JPY at 2-week troughs. BoJ board member Asahi Noguchi stated on Thursday that there’s no need for significant adjustments to the central bank’s JGB plan for cutting JGB buying. This stance draws attention as long-end bonds face a selloff and with the 40-year JGB auction looming on May 28. USD/JPY is now at 2-week troughs. USD/JPY has shown negative price action, breaking below the 21-day EMA at 144.77 with emerging downward momentum. Technical analysis points to further downside risk toward 140.00, with 137.77 as the next target below that level. A weekly close below 140.25 would complete a head-and-shoulders top pattern, confirming the negative structure. Any advances should be treated as corrective moves likely to face rejection at higher levels. However, a close above the Cloud resistance at 149.00 would signal a potential positive reversal, exposing upside to 154.67. Tokyo core CPI and industrial production data will be key catalysts for the pair’s direction.
MXN Peso pushes ahead. The 20-day SMA has become a strong short-term resistance line for the Peso, at 19.50, which has gained close to 1% versus the US dollar this week. The Peso has benefited this year from a shift from global investors to emerging and Latin American markets. The Mexican stock exchange has surged up 17% YTD, as measured by the S&P/BMV IPC Index, while the peso has gained 7% against the USD YTD. The Peso kicked off the week at 19.5 before dipping to a low of 19.2, testing key support at its 60-week SMA. A retracement near its 20-day SMA could trigger sell pressure, fueling upward momentum to retest this year’s low at 19.2—also a seven-month high. Should the currency gain further traction, a push toward the 19 level could be in play. Much of this will hinge on whether risk aversion eases and credit risk concerns fade, potentially driving renewed demand for high-yield emerging market assets. On the macro side, revised GDP data confirms a Q1 rebound, avoiding recession, but growth concerns persist. Weak US growth, tariffs, and trade uncertainty weigh on the economy. Slower activity and rising slack in Q2 are expected to drive disinflation, reinforcing rate-cut expectations. However, it’s key to note that March retail sales delivered a stunning surprise for the Mexican economy, soaring from -1.1% to 4.3%, the sharpest growth rate since November 2023, fully reversing the previous month’s decline.
Have a question? [email protected]
*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.
Leave a Reply