US

The technical relief rally in USD is not gaining much traction. In our view, the fundamental backdrop remains difficult for USD for three reasons: (i) the Trump administration implicitly supports a weaker dollar, (ii) the US economy faces stagflation risk, and (iii) confidence in US trade, fiscal, and security policies has taken a big hit.

The April JOLTS data suggests the US labor market is in balance. Job openings unexpectedly increased to 7391k (consensus: 7100k) vs. 7200k in March, the job opening rate rose 0.1pts to 4.4% and the unemployment-to-job opening ratio remained at 1 for a second consecutive month. Moreover, there’s no layoff spiral underway. The layoffs rate rose 0.1pts to 1.1% but remains within the same narrow range in place since 2021. And the hiring rate increased 0.1pts to 3.5%.

Friday’s May non-farm payrolls print will offer a timelier update of the US labor market. Consensus see job gains of 130k vs. 177k in April, consistent with a healthy labor market. Today, the ADP reports its private sector jobs estimate and is expected at 114k vs. 62k in April (8:15am New York, 1:15pm London).

The 50% steel & aluminum kicked-in today, bringing the overall US average effective tariff rate to 15.1% (up 12.7% year-to-date), the highest since 1938. US protectionist trade policy and uncertainty about the ultimate level of tariffs are downside risks to growth and upside risk to inflation.

Indeed, Fed Governor Lisa Cook warned yesterday that while “The U.S. economy is still on a firm footing…there is evidence that changes to trade policy are starting to affect the economy…Manufacturing output declined in April. Orders for heavy trucks plunged. Firms reported a drop in capital expenditure plans for 2025. Measures of uncertainty have increased, on net, this year, and household and business sentiment has declined, despite some recent improvements in both.”

The May ISM services index is today’s highlight (10:00am New York, 3:00pm London). Headline is projected at 52.0 vs. 51.6 in April. The regional Fed ISM services prints suggest risk are skewed to the upside. Of note, the S&P Global services PMI increased 1.5 points to a two-month high at 52.3.

Later today, the Fed June Beige Book will likely offer more insights on how trade policy uncertainty is affecting economic activity (2:00pm New York, 7:00pm London). According to the April Fed Beige Book, which was based on information collected on or before April 14, “the outlook in several Districts worsened considerably as economic uncertainty, particularly surrounding tariffs, rose.”

CANADA

USD/CAD is range-bound near multi-month lows around 1.3700. The Bank of Canada (BOC) is expected to leave the policy rate at 2.75% (9:45am New York, 2:45pm London). The probability of a cut is low. 12 of 36 analysts polled by Bloomberg look for a cut, while the swaps market only sees around 20% odds of a cut. Looking ahead, the swaps market is pricing in around 50bps of total easing over the next 12 months.

We expect the BOC to deliver a neutral hold which should have a muted implication for CAD. Canada risk entering a period of stagflation which complicates the BOC’s easing path. Canada core CPI inflation (average of trim and median CPI) ran hot in April at 3.15% y/y (consensus: 2.85%) vs. 2.85% in March. Meanwhile, the BOC’s scenario analysis shows Canada’s real GDP growth either stalling in Q2 or contracting over the remainder of 2025. The next quarterly BOC Monetary Policy Report is due at the July 30 meeting.

AUSTRALIA

AUD/USD is trading in a narrow range just above its 200-day moving average at 0.6437. Australia real GDP growth was soft in Q1. Real GDP undershot expectations at 0.2% q/q (consensus: 0.4%) vs. 0.6% in Q4, largely reflecting extreme weather which had a drag on mining, tourism and shipping. Household consumption added 0.2pts to growth while private investment and inventories each made a positive contribution of 0.1pts. In contrast, government spending and net trade reduced growth by -0.1pts each.

Bottom line: the bar for more RBA cuts is low and a headwind for AUD. RBA cash rate futures imply 85% odds of a 25bps cut to 3.60% at the July 8 meeting and a total of almost 100bps of easing over the next 12 months.

EUROZONE

EUR/USD firmed slightly to 1.1400 after testing intra-day lows near 1.1360 early during the European trading session. EU and US trade negotiators meet today to address ongoing disputes. Remember, US “reciprocal” tariffs of 50% on EU goods are set to come into force July 9, and the EU paused its countermeasures on April 14 to create space for continued negotiations.

Meanwhile, the German government will seek to pass a €46bn package (roughly 0.3% of EU GDP) of corporate tax breaks over the summer. Greater fiscal stimulus from Germany reduces the burden on the ECB to support growth and bodes well for EUR. In our view, EUR/USD has room to edge higher as the euro can play a greater role in foreign central bank reserves.

POLAND

National Bank of Poland is expected to keep rates at 5.25% today. At the last meeting May 7, the bank cut rates 50bps to 5.25% and pushed back on expectations of an aggressive easing cycle. Governor Glapinski expressed doubts about a cut next month, adding that some MPC members see autumn data as key for more easing. Looking ahead, the swaps market is pricing in nearly 175bps of total easing over the next 24 months that would see the policy rate bottom between 3.50% and 3.75%.

SOUTH KOREA

Left-leaning Lee Jae-myung decisively won South Korea’s presidential election. With his Democratic Party in control of parliament, Lee has a strong mandate to advance legislation. KRW is outperforming, the Kospi Index surged 2.7%, and Korean 10-year government bonds yields surged about 10bps to more than a three-month high at 2.88%.

South Korea headline inflation unexpectedly cools below the central bank’s 2.0% target. Headline CPI fell to 1.9% y/y (consensus: 2.1%) vs. 2.1% in April and core CPI matched consensus at 2.0% vs. 2.1% in April. Bank of Korea just cut rates 25bps last week to 2.50%. Governor Rhee said the bank would consider more rate cuts if the 2025 growth outlook falls more, adding that four of the six members of the board were open to a cut over the next three months. Rhee also said there is a chance of larger cuts in the future. The swaps market is pricing in 25-50bps of total easing over the next 12 months that would see the policy rate bottom between 2.00-2.25%.