Written by the Market Insights Team
Fed overlooking stagflation fears
Kevin Ford – FX & Macro Strategist
The Federal Reserve (Fed) remains in wait-and-see mode, letting economic conditions play out before making any policy moves. Unlike 2019, when it acted pre-emptively, the Fed claims that there’s no urgency for intervention, and stagflation concerns aren’t front and center, at least not yet. Still, Powell’s worst fears could already be unfolding, with ISM manufacturing price trends potentially informing inflation in the coming weeks, even as front-running distorts short-term data.
Markets are riding a wave of optimism, with US stocks rallying Thursday 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. However, the baseline 10% tariff remains unchanged, signaling that double-digit tariffs are likely here to stay. The deal grants preferential tariff access for UK-imported vehicles and partial relief for steel and aluminum products. In exchange, the UK opened its market to $5 billion in US exports, primarily in agriculture, chemicals, and machinery. The big question remains, are markets getting ahead of themselves? While sentiment is strong, the true economic impact of tariffs has yet to unfold. Time will tell if this optimism can sustain markets through the summer.
The dollar, which didn’t have the same level of participation in the recent rally, has rebounded this week on trade optimism, climbing past 100 for a second straight session, fueled by hopes that the US-UK trade deal could be the first of several. Yesterday, the greenback gained most against the yen and Canadian dollar but gains against the British pound were limited after the Bank of England (BoE) delivered a widely expected rate cut while striking a surprisingly hawkish tone.
CAD hinges on dollar strength
Kevin Ford – FX & Macro Strategist
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.
On the macro side, the Bank of Canada’s annual Financial System Survey offers a snapshot of key financial risks, resilience, and emerging trends, drawing insights from senior risk management experts. This year’s results highlighted concerns over rising household debt and the growing influence of leveraged hedge funds in government-bond auctions, factors that have cooled expectations for an imminent rate cut and reinforced a more cautious stance on monetary policy.
The Canadian bond market didn’t take the news well, with 10-year government bond yields jumping above 3.22%, hitting a two-week high. A mix of domestic and regional pressures continues to push longer-term borrowing costs higher. Meanwhile, the government’s ramped-up bond issuance to finance fiscal initiatives is adding to supply, keeping yields elevated.
UK-US trade deal is symbolic at best
George Vessey – Lead FX & Macro Strategist
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 we think it reinforces our view that tariffs are unlikely to go away anytime soon. Still, markets are cheering the news. The main beneficiary in the FX space has been the US dollar, with GBP/USD erasing its earlier gains to trade closer to $1.32. Elsewhere, sterling appreciated across the board, finally hurdling the €1.18 handle versus the euro and jumping over 1% against the Japanese yen, though these gains have been partially eroded overnight.
The final details of the UK-US trade 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.
Moreover, in our view, given 10% tariffs will remain on most other UK goods into the US, this trade deal is not a positive indicator for broader tariff de-escalation. 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.
CPI points to slowing easing cycle
Kevin Ford – FX & Macro Strategist
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.
A widening negative output gap and slower global growth, fueled by U.S. tariffs, support the idea of lower interest rates, though persistent inflation risks may limit how far rates can drop. Banxico may need to moderate its pace of rate cuts as conditions evolve, while recent Q1 GDP growth and a new fiscal support package are expected to boost domestic demand over the coming months.
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.
DXY recovers above the 100 level
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 5 – 9
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 quothave 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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