Whispers of a Weaker Dollar Emerge

US

USD is lower within its April 21 cyclical low at 98.00 and May 12 one month high at 102.00. Unnamed US officials denied yesterday that the Trump administration is seeking to weaken the dollar as part of trade deals. Speculation that trade deals will involve allowing for greater local currency strength versus USD has gained traction in the past few days, notably with KRW and TWD. As Otto von Bismarck once said “Never believe anything in politics until it has been officially denied.”

Currency appreciation in exchange for trade accord is one of our central global macro themes. Specifically, a grand bargain between the US and China – one that devalues the dollar against the Chinese renminbi (CNY) – is very much on the table. This could help President Donald Trump achieve his core goal to revitalize American manufacturing activity and help China rebalance its economy away from investment towards consumption. See here for details.

Overall, USD has entered a short-term period of consolidation as the Fed is in no hurry to resume easing. Nonetheless, 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) US policy credibility has been undermined by the trade war.

The focus today are the US April retail sales and PPI prints (both at 1:30pm London). Consensus sees headline retail sales at 0% m/m following the tariff-front running boost of 1.5% m/m in March. The retail sales control group used for GDP calculations, is projected at 0.3% m/m vs. 0.4% in March. The resilient jobs market supports retail sales activity.

Meanwhile, headline PPI is expected at 2.5% y/y vs. 2.7% in March while core PPI is projected at 3.1% y/y vs. 3.3% in March. Watch out for PPI services less trade, transportation, and warehousing as it feeds into the PCE. In March, this measure fell three ticks to a 16-month low at 4.0% y/y.

Fed officials stick to the wait-and-see policy script. San Francisco Fed President Mary Daly (non-voter) stressed yesterday “The word of the day is patience…Patience to see, not guess,” adding that the uncertainty shock is not yet causing a demand shock. Fed Vice Chair Philip Jefferson said he will “watching very carefully for signs of weakening economic activity in hard data” while emphasizing that “the current stance of monetary policy is well positioned to respond in a timely way to potential economic developments.”

Fed Chair Jay Powell speaks today about the Fed’s five-year review of its monetary policy framework (1:40pm London). There is no Q&A, so don’t expect new policy insights from Powell.

UK

EUR/GBP is consolidating above 0.8400. The UK Q1 GDP report supports the Bank of England’s (BOE) “gradual and careful approach” to further rate cuts. Real GDP rose 0.7% q/q (consensus & BOE projection: 0.6%) vs. 0.1% in Q4 driven by gross fixed capital formation, net trade, and household consumption. Inventory destocking and government consumption were the main drags to growth in Q1. Going forward, the BOE projects underlying GDP to remain broadly flat in Q2, while headline GDP is expected to grow by just 0.1%.

The swaps market has virtually ruled-out odds of a follow-up 25bps BOE cut in June while a total of 50bps easing to a low of 3.75% is priced-in over the next 12 months. Bottom line: the BOE’s cautions easing cycle, the US-UK trade deal, and warmer UK-EU relations suggest EUR/GBP can sustain a break below its 200-day moving average at 0.8391. BOE staunch dove Swati Dhingra speaks today (3:00pm London).

NORWAY

Norway’s economy increased more than expected in Q1. Mainland real GDP rose 1.0% q/q (consensus: 0.6%) vs. -0.4% in Q4, the fastest pace in almost three years. The increase was broadly based, but growth was particularly strong in power production and retail trade. Norges Bank rate cut bets by year-end were reduced by half to 25bps after the GDP data. The upward adjustment to Norway rate expectations supports a firmer NOK versus USD and EUR.

At its May 8 policy meeting, the Norges Bank kept the policy rate steady at 4.50% and 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 implied 50bps of easing by year-end to 4.00%.

AUSTRALIA

AUD/USD is struggling to sustain a break above its 200-day moving average at 0.6455. Australia’s labor market remains strong and bodes well for AUD. Employment overshot consensus rising 89k in April (consensus: 22.5k) vs. 36.4k in March. Full-time jobs increased 59.5k vs. 12.2k in March, and part-time jobs rose 29.5k vs. 24.2k in March. The unemployment rate was unchanged at 4.1% and the labor force participation rate increased to 67.1% vs. 66.8% in March, just shy of the 67.2% record high.

RBA cash rate futures continue to fully price-in a 25bps cut to 3.85% at next week’s policy meeting as inflation pressures have eased. However, the solid jobs market means the RBA will keep rates restrictive or above neutral for longer. Based on the average of the RBA’s seven models, the nominal neutral rate is between 2.75% and 3.00%. Cash rate futures imply 75bps of total easing over the next 12 months (down from 100bps before the jobs data) and the policy rate to bottom at 3.25%.