Dollar Dusts Itself Off
US
USD is holding on to most of yesterday’s gains, global equity markets are firm, and bond yields have ticked-up. Peak trade hostility and the Fed signaling it’s in no hurry to resume easing are underpinning the recovery in USD.
The data supports the Fed’s wait-and-see approach to policy adjustments. The Atlanta Fed GDPNow model estimate for Q2 real GDP growth is 2.3% SAAR, up from 2.2% on May 6. Meanwhile, progress on inflation is stalling above 2%. The New York Fed one-year ahead inflation expectations rose to a 19-month high at 3.63% in April vs. 3.58% in March. Encouragingly, longer-term expectations remain consistent with the Fed’s inflation goal. Five-year ahead inflation expectations eased to 2.74% vs. 2.86% in March.
Nonetheless, the fundamental backdrop remains difficult for USD: the Trump administration implicitly supports a weaker dollar, the US economy faces stagflation risk, and US policy credibility has been undermined by the trade war.
There are no US economic data release today but plenty of Fed officials are scheduled to speak: Barr, Kugler, Williams, Barkin, and Goolsbee.
UK
GBP/USD is trading on the defensive near a multi-week low around 1.3240. As was widely expected, the BOE trimmed the policy rate 25bps to 4.25%. The MPC voted by a majority of 5-4 to reduce Bank Rate to 4.25%. Two members preferred to reduce the Bank Rate by 50bps (Taylor and Dhingra) and two members preferred to keep rates unchanged (Mann and Pill).
The three-way vote split suggests back-to-back rate cuts are unlikely. Indeed, the BOE reiterated its guidance for “a gradual and careful approach” to further rate cuts. Moreover, the BOE made minor tweaks to its economic outlook. The 2025 GDP growth outlook was raised while inflation forecasts were revised lower, and the unemployment rate projections were lifted across the forecast horizon.
Bottom line: the BOE remains on a cautious easing path which is GBP supportive, especially on the crosses. Odds of a 25bps cut in June fell to roughly 20% from 55% following yesterday’s BOE meeting. Over the next 12 months, the swaps market implies about 100bps of total easing. BOE speakers today: Governor Andrew Bailey (9:40am London) and Chief Economist Huw Pill (12:15pm London).
The new UK-US trade framework announced yesterday reduces downside risk to UK economic activity. Under the agreement, the US will get increased market access and a faster customs process for exports to the UK, while the UK will get limited tariff relief on autos, steel and aluminum. However, the US will keep the baseline tariff of 10% on UK goods.
CANADA
CAD will take its cue today from Canada’s April labor force report (1:30pm London). Consensus sees a 5k rise in jobs vs. -32.6k in March, while the unemployment rate is expected at 6.8% vs. 6.7% in March. Tariffs and uncertainty about trade policy are disrupting the recovery in the labor market that began in late 2024. The number of job postings on Indeed has decreased since mid-January and the Bank of Canada’s (BOC) business survey indicate firms are scaling back hiring. A soft April jobs report will reinforce the case for additional BOC rate cuts and undermine CAD.
Markets price-in 50bps of BOC rate cuts over the next twelve months and the policy rate to bottom at 2.25%. This seems about right. The BOC’s scenario analysis shows Canada’s real GDP growth either stalling in Q2 or contracting over the remainder of 2025.
NORWAY
USD/NOK is consolidating this week’s gains. Norway April CPI was mixed. Headline inflation matched consensus at 2.5% y/y vs. 2.6% in March while underlying inflation was 0.2pts lower than expected at 3.0% y/y vs. 3.4% in March. Yesterday, the Norges Bank kept the policy rate steady at 4.50%. The Norges Bank reiterated that “a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon.”
The Norges Bank pointed out that “the Committee’s current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.” The Norges Bank March Monetary Policy Report implies 50bps of easing by year-end to 4.00%, which is roughly in line with swaps market pricing.
JAPAN
USD/JPY rallied to a one month high near 146.19 on improving financial market risk sentiment and limited room for additional Bank of Japan (BOJ) rate hikes. The swaps market implies just one 25bps hike to 0.75% over the next two years. Nevertheless, ongoing uncertainty around trade policy remains a major drag to global growth and limits JPY downside.
Japan wage growth is not a source of significant inflation pressures. Nominal cash earnings growth slowed more than expected in March to 2.1% y/y (consensus: 2.5%) vs. 2.7% in February. The less volatile scheduled pay growth for full-time workers was 0.2pts lower than expected in March at 2% y/y vs. 2% in February. Softer wage growth in March is partly due to lingering leap-year effects.
Japan Finance Minister Kato reiterated that the government is not considering using the sale of US Treasuries as part of its trade negotiation with the US. Japan is the largest foreign holder of long-term Treasuries at just over $1 trillion or 13.4% of total foreign holdings of long-term Treasuries. Relative to the total stock of outstanding long-term Treasuries (over $26 trillion), Japan’s Treasury holding is small at around 4%.
CHINA
China trade surplus narrowed less than expected in April as exports to Southeast Asian nations offset the slump in US exports. China’s trade surplus fell to $96.18bn (consensus: $93.90bn) vs. $102.64bn in March. Exports soared 8.1% y/y (consensus: 2%) vs. 12.4% in March and imports fell -0.2% y/y (consensus: -6%) vs. -4.3% in March. Going forward, the trade war is bound to be a drag on China’s external sector.
The US and China will hold their first high-level trade talks Saturday and Sunday in Geneva. US Treasury Secretary Scott Bessent cautioned “My sense is that this will be about de-escalation, not about the big trade deal.” President Donald Trump added the tariffs on China “can’t get any higher — it’s at 145%, so we know it’s coming down.”
