US

Crude oil prices have retraced some of this week’s losses. Progress over reopening the Strait of Hormuz remains deadlocked between Iran’s push to monetize access via a permanent toll system and the US insistence on freedom of navigation. Regardless, markets continue to lean risk-on as both sides remain at the negotiating table. Most stock indexes continue to grind higher and bond yields are drifting lower.

USD is firmer against most major currencies. KRW is underperforming across the board prompting South Korean FX authorities to warn that the currency’s drop is “excessive relative to economic fundamentals, and will take decisive action if necessary.” KRW is the fourth worst performing currency since the start of the Iran war on February 28, largely reflecting South Korea’s negative net energy balance.

In our view, the dollar index (DXY) risk overshooting the upper end of its nearly one year 96.00-100.00 range in the near term. First, the US macro backdrop of a stabilizing labor market, sticky underlying inflation, and resilient economic activity back a more restrictive Fed. As of May 21, the Atlanta Fed GDPNow model estimates annualized real GDP growth of 4.3% in Q2 vs. 2.0% in Q1.

Second, the May PMI data points to a widening US growth edge over peers. The composite PMI for the US was unchanged at 51.7, the Eurozone dropped -1.3ppt to a 31-month low at 47.5, the UK plunged -4.1ppt to a 13-month low at 48.5, Japan slipped -1.1ppt to a five-month low at 51.1, and Australia declined -2.6ppt to 47.8.

Light data calendar today, with the final May University of Michigan consumer sentiment survey on tap. Fed Governor Christopher Waller speaks on the economic outlook (3:00pm London, 10:00am New York).

CANADA

USD/CAD is up and nearing important resistance at its 200-day moving average (1.3812). Canada March retail sales print is unlikely to be market moving. Statistics Canada advance estimate suggests that sales increased 0.6% m/m vs. 0.7% in February.

Alberta will hold a nonbinding referendum to separate from Canada on October 19. Alberta’s premier Danielle Smith stressed that “the referendum question does not directly trigger separation, but if successful would ask Alberta’s government to commence the legal process necessary to hold a binding referendum on the matter.”

Despite the political noise, polls suggest limited appetite for Alberta separatism which should help contain CAD-related risks. More than a third of voters say they'd vote against separation. In the meantime, the Montreal Canadiens (Habs) – the only Canadian team left in the NHL Stanley Cup playoffs – is giving the Great White North a reason to rally together.

UK

GBP/USD is directionless near its 200-day moving average at 1.3423. Scope for a downward adjustment to the UK swaps curve alongside the rising likelihood the Labour government pivots further leftwards can further undermine GBP.

UK retail sales fell more than expected in April. Total retail sales volumes declined -1.3% m/m (consensus: -0.6%) vs. 0.6% in March (revised down from 0.7%) driven by fuel sales. Total retail sales, excluding automotive fuel, dropped -0.4% m/m (consensus: -0.3%) vs. 0.1% in March (revised down from 0.2%) dragged down by both clothing and non-store retailers.

The swaps curve continues to imply a full 50bps of Bank of England (BOE) rate hikes to 4.25% in the next twelve months. That’s too aggressive given the BOE estimates a negative output gap between -1.5% and -1.7% GDP in 2026, and leading indicators point to a contraction in private sector activity over Q2.

JAPAN

USD/JPY is consolidating around 159.00 and should hold under 160.00 due to threat of currency intervention. Japan April CPI undershot expectations. The swaps curve hardly budged and still price in roughly 80% odds of a 25bps BOJ rate hike to 1.00% at the next June 16 meeting.

Headline CPI dipped -0.1ppt to 1.4% y/y (consensus: 1.6%). Underlying inflation also slowed sharply and tracked well below the BOJ’s 2026 forecast. Core CPI less fresh food fell -0.4ppt to near a four-year low at 1.4% y/y (consensus: 1.7%, BOJ: 2.8%) while core CPI less fresh food and energy dropped -0.5ppt to 1.9% y/y (consensus: 2.2%, BOJ: 3.0%), the lowest since September 2022.

We expect the BOJ to resume tightening in June. First, April’s CPI undershoot largely reflects temporary disinflationary factors linked to government subsidies for high school tuition and energy prices. Second, Japan has a positive output gap (0.6% in Q4 2025) suggesting upside risks to inflation. Third, the Japanese government is expected to unveil on Monday an extra budget to fund emergency relief measures worth around ¥3 trillion ($18.9 billion).