The dollar was weaker across the board against the majors last week. NOK, SEK, and JPY outperformed while AUD, EUR, and NZD underperformed. The dollar continues to experience a perfect storm of negative drivers: growing fiscal concerns, unpredictable tariff policies, and weaker U.S. data. Those drivers are likely to carry over into this week.

AMERICAS

The trade wars are back in focus. President Trump on Friday threatened 50% tariffs on the EU starting June 1. We knew this was coming after Trump recently admitted that the US couldn't complete trade talks during the 90-day pause and would instead just start setting tariffs. How he arrived at 50% is anybody's guess but this is just the start of what we expect to be much higher tariffs announcements. The EU is one of the largest trading partners of the US and so the average effective US tariff will jump sharply from around 19% currently.

We can't stress enough how important this 50% EU tariff threat really is. First of all, it's well above the 20% original reciprocal tariff on the EU. As we know from those initial announcements on April 9, there has been no serious analysis put into these tariffs and instead are simply meant to be a punitive measure on any country running a trade surplus with the US. We expect the EU will quickly retaliate. The US, EU, and China account for 60% of global GDP and so this escalation bodes ill for the entire world. Bottom line: the dollar bear trade remains intact.

FOMC minutes Wednesday will be key. At that meeting, the FOMC voted unanimously to leave the target range for the funds rate unchanged at 4.25-4.50%. The statement stressed that “Uncertainty about the economic outlook has increased further” and “the risks of higher unemployment and higher inflation have risen.” Meanwhile, Fed Chair Jay Powell reiterated that “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” There were no updated macro forecasts or Dot Plots, as the next Summary of Economic Projections are due at the June 17-18 meeting.

There will be many Fed speakers this week. Kashkari, Barkin, and Williams speak Tuesday. Kashkari speaks Wednesday. Barkin, Goolsbee, Kugler, Daly, and Logan speak Thursday. Goolsbee speaks Friday. All are expected to remain in wait and see mode. Indeed, Goolsbee said last week that "Everything's always on the table. But I feel like the bar for me is a little higher for action in any direction while we're waiting to get some clarity.” We concur. The odds of a June cut have fallen to 5%, around 25% in July, and less than 75% in September. Looking ahead, the swaps market is still pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in earlier this month.

April PCE readings Friday will be the data highlight. Headline is expected to fall a tick to 2.2% y/y, while core is expected to fall a tick to 2.5% y/y. The 3-month annualized rise in core PCE is concerning. The Cleveland Fed’s inflation Nowcast model estimates headline and core PCE at 2.2% and 2.6%, respectively. The rising ISM prices index point to a reacceleration in inflation pressures. Looking ahead, the Nowcast model sees headline and core PCE picking up in May to 2.4% and 2.7%, respectively.

Personal income and spending will be reported at the same time. Income is expected at 0.3% m/m vs. 0.5% in March, while nominal spending is expected at 0.2% m/m vs. 0.7% in March. Real spending is expected flat m/m vs. 0.7% in March. The Atlanta Fed GDPNow model, which currently tracks at 2.4% SAAR in Q2, forecasts personal consumption spending to grow 3.7% SAAR.

Consumer confidence measures will be closely watched. Conference Board reports May consumer confidence Tuesday. Headline is expected to rise one point to 87.0 from April, which was the lowest level since May 2020. The sentiment data no longer appears to be a reliable indicator of future spending behavior. Watch out for the labor index (jobs plentiful minus jobs hard to get). In April, this measure fell 2.4 points to a seven-month low of 15.1, indicative of weakening labor market conditions. University of Michigan reports its final May consumer sentiment Friday.

We get our first revisions to Q1 GDP data Thursday. Growth is expected to remain unchanged from the initial estimate of -0.3% SAAR. However, this is old news as markets look ahead to Q2 and Q3.

Indeed, the Q2 outlook remains solid. The Atlanta Fed GDPNow model now has Q2 growth at 2.4% SAAR and is right back at its initial estimate. It will be updated Tuesday after the data. Elsewhere, the New York Fed Nowcast model now has Q2 at 2.4% SAAR and will be updated Friday. Its initial Q3 estimate should also come Friday. Bottom line: the economy remains on solid footing but the impact of the tariffs hasn't fully hit yet.

Canada highlight will be GDP data Friday. Statistics Canada advance information indicates that real GDP increased 0.1% m/m in March after falling -0.2% in February. For Q1, the Bank of Canada estimates real GDP growth of 1.8% SAAR vs. 2.6% in Q4, reflecting a slowdown in consumer spending, residential investment, and business investment. Further out, the BOC’s scenario analysis shows real GDP either stalling in Q2 or contracting over the remainder of 2025.

EUROPE/MIDDLE EAST/AFRICA

Eurozone highlight will be May CPI data. France reports Tuesday. Its EU Harmonised inflation is expected to remain steady at 0.9% y/y. Spain, Italy, and Germany all report Friday. Spain’s EU Harmonised inflation is expected to fall two ticks to 2.0% y/y, Italy’s is expected to fall a tick to 1.9% y/y, and Germany’s is expected to fall two ticks to 2.0% y/y. Spain is one of the only eurozone countries to report core CPI and it is expected to fall two ticks to 2.2% y/y. Eurozone-wide CPI data won’t be reported until next Tuesday.

ECB reports April inflation expectations Wednesday. 1-yaer expectations are expected to fall a tick to 2.8%, while 3-year expectations are expected to remain steady at 2.5%. Expectations for inflation five years ahead, which were reported for the first time last month, came in unchanged for the fourth consecutive month at 2.1%. With longer-term inflation expectations still well anchored around 2%, the ECB has room to deliver the 50 bp of cuts priced in by the swaps market. Nagel and Lagarde speak Monday. Villeroy and Nagel speak Tuesday. Panetta and Vujcic speak Friday.

Riksbank publishes it Financial Stability report Wednesday. The November 2024 report concluded that stability risks have declined in the short term but there is considerable uncertainty abroad. The updated report will likely be expanded to assess how trade uncertainty is affecting Sweden’s financial system.

ASIA

Japan highlight will be May Tokyo CPI data Friday. Headline is expected to remain steady at 3.4% y/y, core (ex-fresh food) is expected to rise a tick to 3.5% y/y, and core ex-energy is expected to rise a tick to 3.2% y/y. If so, Tokyo core would be the highest since April 2023 and would move further above the 2% target. Recall that the Bank of Japan cut its core inflation forecast for FY25 to 2.2% in May vs. 2.4% in January and cut its FY26 forecast to 1.7% in May vs. 2.0% in January. These forecasts seem too low in light of the recent acceleration, but perhaps the expected slowdown in growth will temper inflation in the coming months. The BOJ is still seen on hold through 2025. Looking ahead, the swaps market is pricing in 25 bp of tightening over the next 12 months.

Key April labor market and real sector data will also be reported Friday. Unemployment is expected to remain steady at 2.5% while the job-to-applicant ratio is expected to remain steady at 1.26. Despite a relatively tight labor market, wage pressures really haven’t materialized. Elsewhere, IP is expected at 0.1% y/y vs. 1.0% in March, retail sales are expected at 3.0% y/y vs. 3.1% in March, and housing starts are expected at -18.1% y/y vs. 39.1% in March.

Australia highlight will be April CPI data Wednesday. Headline is expected to fall a tick to 2.3% y/y. If so, it would be the lowest since November and would move closer to the 2% target. At its last May 20 meeting, the RBA cut rates 25 bp to 3.85% and stressed that “Inflation is in the target band [2-3%] and upside risks appear to have diminished.” Indeed, the RBA projects the policy relevant trimmed mean inflation at 2.6% (down from 2.7% previously) across the forecast horizon. Next meeting is July 8 and the market sees nearly 75% odds of another cut then.

Australia Q1 capex survey will be reported Wednesday. Private capex is expected to rise 0.5% q/q vs. -0.2% in Q4. However, the decline in the business survey capex index (lowest reading since June 2024) points to downside risk to private investment.

April retail sales data Friday will also be important. Headline is expected at 0.3% m/m vs. 0.3% in March. The RBA liaison contacts indicate that retailers continue to report slow to moderate growth in demand over recent months, consistent with a gradual recovery in private demand.

Reserve Bank of New Zealand meets Wednesday and is expected to cut rates 25 bp to 3.25%. At its last April 8 meeting, the RBNZ cut rates 25 bp and noted it “has scope to lower the OCR further as appropriate.” The RBNZ also warned that “the recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand.” We don’t expect material tweaks to the updated OCR path as Q1 CPI data ran a little hot. In February, the RBNZ projected the OCR to bottom at 3.10% from Q1 2026. The swaps market is slightly more bearish and is pricing in nearly 75 bp of easing over the next six months that would see the OCR bottom around 2.75%. The drag to global growth from greater protectionist policies suggests the risk is the RBNZ slashes the OCR towards the lower end of its 2-4% neutral range estimate.