US
Markets largely shrugged off renewed US-Iran strikes. Crude oil prices are consolidating near recent lows, and bond yields are only marginally higher. USD is mixed, underperforming mostly versus NOK and outperforming largely against AUD, ZAR, SEK, and NZD. Equity markets are down reflecting the ongoing pullback of the AI trade and Fed rate hike expectations.
The comments from US Central Command (CENTCOM) suggest the renewed hostilities do not mark a re-escalation of the conflict, rather they are part of contained tit-for-tat exchanges seen since the April 8 ceasefire. CENTCOM said it “completed self-defense strikes against Iran” hitting “air defense, ground control stations, and surveillance radar sites near the Strait of Hormuz.” CENTCOM added “the operation was a proportional response to recent attacks on US forces and international commercial ships transiting regional waters.”
USD can continue to edge higher as the US macro backdrop of improving labor demand and sticky inflation back a more restrictive Fed policy stance. Fed funds futures fully price in a 25bps rate hike to a target range of 3.75-4.00% by year-end and nearly 50bps of tightening in the next twelve months.
US May CPI takes the data spotlight today (1:30pm London, 8:30am New York). Headline CPI is expected to rise 0.5% m/m vs. 0.6% in April to be up 4.2% y/y (the most since April 2023) vs. 3.8% in April on higher gasoline prices. Core CPI is seen at 0.3% m/m vs. 0.4% in April or 2.9% y/y vs. 2.8% in April.
Overall, the US disinflation trend has clearly stalled even when looking at CPI measures which filter out extreme price swings, like trimmed mean, median, sticky, and super core.
CANADA
USD/CAD retreated lower after testing a six-month high of 1.3969 yesterday. In the short-term, the risk is USD/CAD grinds up to 1.4140 (November 2025 high) because there is room for Bank of Canada (BOC) rate hikes bets to adjust lower.
The BOC is widely expected to keep the policy rate on hold at 2.25% for a fifth straight meeting (2:45pm London; 9:45am New York) BOC is also poised to stick to its two-way policy optionality introduced in April that new US trade restrictions on Canada would argue for cuts, but persistently high energy prices could warrant “consecutive increases in the policy rate.”
The swaps curve more than fully price-in 50bps of rate hikes over the next twelve months. In our view, Canada’s contained inflation backdrop gives the BOC scope to keep rates on hold for an extended period and assess whether the rebound in May employment and April real GDP is sustained.
NORWAY
NOK is up against most major currencies. Norway underlying inflation ran hot in May. The swaps curve brought forward bets of a follow-up 25bps Norges Bank rate hike from November to September.
Underlying CPI unexpectedly increased to a four-month high of 3.4% y/y (consensus: 3.2%, Norges Bank forecast: 3.3%) vs. 3.2% in April, while headline CPI matched consensus at 3.1% y/y (Norges Bank forecast: 3.3%) vs. 3.4% in April.
At its last May 6 meeting, the Norges Bank delivered a surprised 25bps rate hike to 4.25% and left the door open for another hike by year-end because “inflation is too high and has run above target for several years.” Bottom line: a hawkish Norges Bank and elevated energy prices continue to underpin a firmer NOK. NOK is the top performing major currency year-to-date.
CHINA
USD/CNH is directionless just above its June multi-year low of 6.7581. China May CPI was soft, but PPI ran hot. Headline CPI printed at 1.2% y/y for a second straight month (consensus: 1.3%) and core CPI unexpectedly dipped -0.1ppt to 1.1% y/y (consensus: 1.2%), underscoring still weak consumer spending activity.
Indeed, subdued CPI and rising PPI indicate firms have limited pricing power to pass higher costs onto consumers, squeezing profit margins. PPI matched consensus at 3.9% y/y (highest since July 2022) vs. 2.8% in April.
In our view, a continued appreciation in China’s currency can help the country shift its growth model towards consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
