23/05/2025 Market Watch

Dollar Weakens Across the Board as Risk Sentiment Holds

Key Takeaways:

  • The US dollar is broadly weaker, breaking a four-week rally.
  • Sterling outperforms, reaching a new three-year high.
  • Asia Pacific stocks rise, but China and Taiwan lag.
  • Bonds are supported even with firm inflation data.
  • Gold holds steady; oil retreats from mid-week highs.

The US dollar is ending the week on the back foot, posting losses against nearly all major global currencies. Its broad decline reflects shifting sentiment, as markets digest mixed signals from the Federal Reserve and global economic data. Notably, sterling outperformed, surging to a new three-year high following stronger-than-expected retail sales figures. The Dollar Index is on track to break its four-week rebound, even as traders now expect the next Fed rate cut to be delayed until the fourth quarter.

In equities, Asia Pacific markets mostly advanced, with the exception of China and Taiwan. In Europe, the Stoxx 600 remained relatively flat, showing little change both on the day and the week. US equity futures are leaning slightly lower, following the S&P 500’s recent three-day decline after a six-day rally. Despite firm inflation data from Japan, bonds found support across the curve, including at the long end in Japan. European bond yields dipped slightly, while US 10-year yields fell modestly to 4.51%.

Commodities showed a mixed performance. Gold remained firm and is currently trading near $3330, up from last week’s close above $3200. Crude oil, however, came under pressure midweek. July WTI futures reversed sharply from a peak of $64.20 and are now consolidating near $61.00, highlighting a cautious tone across energy markets.

United States of America

Overview

The US dollar saw a temporary rebound midweek, supported by stronger-than-expected preliminary PMI data. However, this recovery has proven short-lived, as both Asian and European markets resumed selling pressure. The Dollar Index (DXY) climbed above the 100.00 mark for the first time this week but now hovers near critical support just below 99.35—close to the 61.8% retracement of the April rally. With momentum weakening, the dollar appears set to end a four-week winning streak.

On the data front, today’s focus turns to April’s new home sales report. While March saw a robust 7.4% increase—the strongest in five months—forecasts point to a modest 4% decline. This would bring the seasonally adjusted annual rate to 695,000 units, around 5.5% lower than the same month last year.

However, the release is not expected to influence markets significantly. Similarly, the Kansas City Fed’s services survey is unlikely to shift sentiment.

Looking ahead, next week brings more consequential releases. Durable goods orders may show headline weakness due to reduced Boeing orders, even though underlying shipments were strong. Meanwhile, the release of the April PCE deflator will be closely watched. While CPI and PPI data suggest the possibility of a marginal deceleration in inflation, it is likely to be negligible, depending on rounding.

Economic Drivers

  • Dollar recovery fuelled by strong preliminary PMI data, though gains remain fragile.
  • Renewed selling pressure from Asia and Europe limits upward momentum in DXY.
  • Expectations of a pullback in new home sales after strong growth in March.
  • Boeing’s weak order activity likely to weigh on durable goods data next week.
  • Inflation outlook remains steady with minimal change expected in the PCE deflator.

Data and Events

  1. 23 May 2025: New Home Sales.

Price Action

  • Dollar Index temporarily rose above 100.00 but is now near key support at 99.35.
  • Current level near the 61.8% retracement of the rally from April lows.
  • Broader trend signals potential end to the four-week dollar advance.

Key Points:

  • Dollar rebound lacked follow-through despite stronger PMI.
  • Renewed weakness from international flows places DXY near key technical support.
  • New home sales and KC Fed data unlikely to influence markets.
  • Next week’s focus shifts to durable goods and the PCE deflator.

Australia

Overview

The Australian dollar ended yesterday on a weaker note, slipping below Wednesday’s low. Despite this, it remains comfortably within the broader consolidation range that has defined price action since mid-last week, trading between approximately $0.6385 and $0.6470. During European trading today, it moved close to the upper boundary, reaching around $0.6465. However, it remains just shy of last week’s high near $0.6500, indicating ongoing range-bound conditions in the absence of new domestic catalysts.

Australia’s economic calendar is quiet in the immediate term, with no major releases until the release of the monthly inflation report in the middle of next week. Markets remain focused on the Reserve Bank of Australia’s recent decision to cut interest rates by 25 basis points. Notably, the central bank disclosed that a 50 basis point cut was also considered, reflecting growing concern over the economic outlook. Following the move, expectations for further easing have surged, with the probability of another rate cut in July rising from under 25% to approximately 60%. The overnight cash target rate now stands at 3.85%, and market pricing implies it could fall to around 3.15% by year-end—a notable shift from just a week ago.

Economic Drivers

  • RBA cut the cash rate by 25 basis points and revealed a 50 bp option was on the table.
  • Growing expectations for additional monetary easing in July.
  • Market-implied year-end rate forecasts have shifted meaningfully lower.
  • Limited domestic economic data this week keeps focus on central bank policy.
  • Inflation data due next week may further shape policy expectations.

Data and Events

No major economic releases are scheduled today.

Price Action

  • Australian dollar remains within a range of $0.6385 to $0.6470.
  • Brief dip below mid-week lows but bounced near $0.6465 in European trade.
  • Last week’s high near $0.6500 remains a key level for potential breakout.

Key Points:

  • AUD still trades within a defined range despite a soft close yesterday.
  • RBA rate cut and forward guidance fuel speculation of further easing.
  • No major domestic data this week; focus shifts to next week’s inflation report.
  • Market pricing now sees deeper rate cuts by year-end.

Canada

Overview

The Canadian dollar saw modest movement as the US dollar attempted to recover, ending a three-day losing streak. Trading remained confined within a narrow range between CAD 1.3850 and CAD 1.3890 before easing toward a fresh weekly low closer to CAD 1.3800. However, for market participants, a break below the CAD 1.38 handle remains crucial to signal any meaningful shift, with the yearly low near CAD 1.3750 still intact.

On the economic front, Canada posted stronger-than-expected retail sales, with headline growth estimated at 0.7% in March, driven by the highest auto sales for that month since 2018. However, when excluding autos, retail sales likely slipped by 0.1%, following a 0.5% increase in February. These figures are seen as partially pre-emptive of potential fallout from new US tariffs. The most impactful development, however, came from inflation data, where firmer core CPI readings prompted a shift in interest rate expectations. Markets now view a June rate cut by the Bank of Canada as less likely, with September seen as the more probable window.

Looking ahead, focus will turn to next week’s Q1 GDP release. The economy is projected to have grown at an annualized rate of 1.8%, a slowdown from the 2.6% expansion seen in Q4 2024. Expectations for Q2 are more pessimistic, with risks tilted toward contraction, and forecasts for Q3 remain flat.

Economic Drivers

  • Strongest March auto sales since 2018 pushed retail sales to 0.7%.
  • Retail sales excluding autos likely fell by 0.1%, indicating uneven consumer demand.
  • Firmer core CPI data caused markets to push back expectations for rate cuts.
  • A rate cut in June is no longer seen as likely; September is now the key date.
  • Weakening growth momentum evident in Q1 GDP forecasts and outlook for Q2.

Data and Events

  1. 23 May 2025: Retail Sales.

Price Action

  • USD/CAD moved in a tight range between 1.3850 and 1.3890 before edging lower.
  • Attempted recovery snapped a three-day decline but failed to gain traction.
  • A drop below 1.3800 is needed for further downside momentum.
  • Year-to-date low remains near 1.3750, serving as key support.

Key Points:

  • USD/CAD remains range-bound with sellers capping gains.
  • Strong auto sales supported headline retail growth in March.
  • Core inflation pressures have reduced the likelihood of a June rate cut.
  • Attention shifts to next week’s GDP data, with growth concerns rising.

China

Overview

The Chinese yuan saw renewed strength as the US dollar reversed course from earlier gains. After reaching a four-day high near CNH 7.2050, the dollar was sold off to a fresh six-month low around CNH 7.1745 in today’s session. If downward pressure continues, the next significant support zone lies between CNH 7.1460 and CNH 7.1500. Despite recent fluctuations, the People's Bank of China (PBOC) has maintained relatively stable reference rates, setting today's midpoint at CNY 7.1919—just slightly adjusted from previous sessions.

Beyond currency dynamics, a broader structural context is shaping China’s economic behavior. Unlike the Anglo-American model, which emphasizes profit-driven competition through capital markets, China’s system aligns more closely with the bank-financed, market-share-oriented approach seen in Japan and parts of Europe. This structure reflects the country's reliance on state-owned enterprises and patient capital, favouring long-term strategic goals over short-term profitability.

Upcoming data will provide a clearer picture of China’s economic momentum. April’s industrial profits are due early next week, following a 2.6% year-over-year rise in March. However, this was a recovery from a 3.5% contraction in March 2024. Later, on May 31, China will release its official Purchasing Managers’ Index (PMI), with downside risks prevailing given current sentiment and structural challenges.

Economic Drivers

  • Yuan strength reflects fresh selling pressure on the US dollar amid broader risk sentiment.
  • The PBOC maintains tight control over currency fixings, ensuring relative stability.
  • China’s state-led economic structure focuses on market share rather than profit maximization.
  • Capital access primarily via bank lending offers companies more strategic flexibility.
  • The economy remains heavily influenced by large state-owned enterprises and policy-driven growth.

Data and Events

No major economic releases are scheduled today.

Price Action

  • USD/CNH reversed from CNH 7.2050 and dropped to six-month lows near CNH 7.1745.
  • Next significant technical support lies in the CNH 7.1460–7.1500 range.
  • PBOC reference rate set at CNY 7.1919, reflecting continued stability around key levels.

Key Points:

  • Yuan regains strength as dollar weakens to six-month lows.
  • PBOC keeps daily fixings stable to anchor currency expectations.
  • China’s economic model prioritises market share over profits.
  • Focus shifts to industrial profit and PMI data for insight into growth momentum.

Europe

Overview

The euro experienced sharp movements this week, initially peaking near $1.1380 before pulling back to around $1.1255 in North American trading. It has since recovered, nearing $1.1355, indicating continued two-way volatility. This level near $1.1380 corresponds to the 61.8% retracement of the previous month’s decline, marking a key area of resistance. The euro had closed last week slightly below $1.1165, marking the fourth consecutive weekly loss after a four-week rally, largely mirroring broader dollar trends. The recent rebound coincides with the five-day moving average crossing above the 20-day, suggesting a potential shift in near-term sentiment.

Germany’s Q1 GDP revision from 0.2% to 0.4%, driven by stronger consumption and investment, provided a mild boost to euro sentiment. Although the euro’s performance is mostly a function of broader dollar dynamics, the data reinforced the resilience of the Eurozone’s largest economy. Meanwhile, the euro area's negotiated wage growth slowed to 2.4% year-over-year in Q1 2025 from 4.1% in Q4 2024, drawing limited attention from markets due to its marginal implications.

Attention now turns to the European Central Bank’s (ECB) upcoming meeting on June 5, where a rate cut is widely expected. ECB President Christine Lagarde has indicated that the neutral rate (r*) is around 1.75%, aligning with market forecasts for where the deposit rate could end 2025, down from the current 2.25%. Markets are also watching Moody’s review of Italy’s sovereign credit rating later today, given its precarious position on the lowest investment-grade tier. While S&P and Fitch maintain a more stable or positive view, any shift from Moody’s could trigger volatility.

Economic Drivers

  • Germany’s Q1 GDP was revised upward to 0.4% due to stronger household spending and investment.
  • Slower wage growth suggests limited inflationary pressure from labour costs.
  • ECB is expected to cut rates at its June 5 meeting amid weaker inflation and growth projections.
  • ECB’s terminal rate expected to settle near 1.75% by year-end.
  • Moody’s pending review of Italy’s credit rating may affect risk sentiment across the region.

Data and Events

No major economic releases are scheduled today.

Price Action

  • Euro reversed from a midweek high of $1.1380, dipped to $1.1255, and rebounded to $1.1355.
  • Five-day moving average is crossing above the 20-day, signalling a shift in momentum.
  • Price activity remains within retracement levels of the previous downtrend.
  • Previous week’s close below $1.1165 capped four weeks of decline.

Key Points:

  • Euro saw sharp fluctuations but remains range-bound.
  • Upward revision in German GDP helped offset broader euro weakness.
  • ECB rate cut expected at June meeting; market eyes neutral rate at 1.75%.
  • Moody’s review of Italy’s rating could inject risk into euro markets next week.

Japan

Overview

The Japanese yen has been under renewed pressure following a brief recovery by the US dollar, which rose for the first time this week despite falling US 10-year yields. After peaking near JPY 146.85 on May 12, the dollar has generally been in retreat, but a rebound yesterday was short-lived. Fresh selling today pushed the pair down to JPY 143.15, bringing the recent low near JPY 142.80 back into focus.

Inflation remains central to Japan’s economic narrative. Tokyo’s April CPI surprised to the upside, with headline inflation jumping to 3.5% from 2.9%, and core CPI rising to 3.1% from 2.2%. This was later confirmed by the national April CPI, which matched Tokyo’s upward momentum: headline inflation held steady at 3.6%, while core inflation accelerated to 3.5%. These figures continue to outpace the Bank of Japan's 2% target, but the swaps market has priced in only around 15 basis points of tightening for the rest of 2025, reflecting limited expectations for aggressive policy action.

More significantly, Japanese bond markets are undergoing a major shift. Long-dated yields have climbed sharply in recent weeks, driven by expectations of monetary policy normalization and inflation persistence. The 30-year yield has risen for four straight weeks, gaining around 35 basis points and now trading close to German levels. Meanwhile, the 40-year yield has increased for seven consecutive weeks, jumping nearly 93 basis points to approach 3.55%. This rise has not yet shown material strain on the banking sector, as evidenced by a strong rally in Japanese bank stocks. However, insurers, with greater exposure to ultra-long-term bonds, have seen a recent pullback following a strong five-week run.

Economic Drivers

  • Tokyo and national CPI readings both showed strong inflation momentum in April.
  • Core inflation continues to move well above the BoJ's 2% target.
  • Swaps pricing shows minimal market expectation for rate hikes in 2025.
  • Surge in long-term Japanese government bond yields reflects market adjustment.
  • Bank shares have rallied strongly amid rising yields, while insurers are more vulnerable.

Data and Events

  1. 23 May 2025: National Core CPI.

Price Action

  • USD/JPY rebounded briefly but remains under pressure, currently near JPY 143.15.
  • Support at JPY 142.80 is back in focus after today’s drop.
  • The pair remains below the recent high of JPY 146.85, set on May 12.

Key Points:

  • Yen strengthened again after dollar rebound failed to hold.
  • April CPI data confirmed strong inflation in Tokyo and nationwide.
  • Japanese bond yields surged, with long-end yields nearing European levels.
  • Market still sees limited BoJ tightening this year.
  • Bank shares gained on yield rise, but insurers saw a modest correction.

United Kingdom

Overview

Sterling remains the top performer among the G10 currencies this week, driven by strong domestic data and a weaker US dollar. After setting a fresh three-year high near $1.3470 on Wednesday, the pound consolidated its gains and traded mostly above $1.34 through Thursday. The momentum extended into today’s session, pushing sterling to the $1.35 level, which may carry psychological significance. Further resistance is noted in the $1.3650 region.

The key catalyst has been the surprising strength in UK retail sales for April. Volume-based sales surged by 1.2% month-on-month, far exceeding expectations. Moreover, March’s initial 0.4% rise was revised down to 0.1%, making April’s rebound even more notable. As a result, retail sales for the first four months of 2025 are running at an annualised pace of over 9.5%, compared to just over 5% during the same period last year.

This retail performance, alongside rising core CPI and services inflation, has altered expectations for Bank of England policy. Markets are now pricing a less aggressive rate-cutting path. The swaps market projects the year-end base rate to be around 3.82%—the upper end of its range since early April and roughly 32 basis points higher than forecast a month ago. Next week’s UK economic calendar is relatively light, suggesting that recent data may continue to influence sentiment.

Economic Drivers

  • April retail sales rose 1.2%, significantly above expectations.
  • March retail sales were revised lower, enhancing the relative strength of April data.
  • Retail sales are running at a 9.5% annualised pace in 2025, nearly double last year’s rate.
  • Rising core CPI and services inflation signal persistent underlying price pressures.
  • Swaps market now expects fewer BoE rate cuts, with year-end rate forecast near 3.82%.

Data and Events

  1. 23 May 2025: Retail Sales.

Price Action

  • Sterling broke above $1.34 and extended gains to reach $1.35 today.
  • Next key resistance is near $1.3650.
  • Recent strength driven by a combination of strong domestic data and broad dollar weakness.

Key Points:

  • Sterling is the strongest G10 currency this week, setting a new three-year high.
  • April retail sales outperformed and lifted growth expectations.
  • Market now sees a higher terminal BoE rate due to strong inflation and demand signals.
  • The pound may continue to benefit from a supportive macro backdrop in the near term.

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