04/06/2025 Market Watch
The US dollar showed some strength following a stronger-than-expected JOLTS report but has since weakened against most G10 and emerging market currencies. This signals a broader tone of consolidation in the currency markets. At the same time, revised final May PMIs across various regions reflect a more positive tone than earlier flash estimates, as the impact of April's US tariffs begins to ease.
Today’s focus shifts to the Bank of Canada, which is widely expected to leave rates unchanged due to firm core inflation and solid Q1 GDP growth. However, the broader easing trend remains intact, and future rate cuts are still likely. Tomorrow, the European Central Bank is expected to deliver a 25-basis point rate cut. With the policy rate nearing neutral levels, attention may shift to a possible pause to assess the impact of previous easing moves.
Equity markets are responding positively to US gains, with most Asia Pacific indices in the green, led by a strong rally in Taiwan. European stocks are also higher, while US futures suggest continued strength. Bond yields are ticking upward across major regions, with notable increases in Japanese long-term yields and a slight rise in the US 10-year Treasury, now hovering around 4.46%. Commodities are relatively stable, with gold holding within its previous range and oil trading in a narrow band after reaching recent highs.
The US dollar regained strength after slipping to a six-week low early Tuesday in Asia, recovering to a session high following a better-than-expected rise in job openings. However, the April JOLTS report offered a mixed picture—while job openings increased, layoffs were higher than anticipated, and the number of quits declined. The Dollar Index remains below Monday's high and is testing support near the 99.00 level during European hours.
Despite the attention on labor data, the Federal Reserve appears less reactive to survey-based indicators like the ISM services and final PMI reports. These will likely have minimal impact on policy direction. The Beige Book is due today and, although anecdotal, often holds weight in the Fed’s broader assessment. More emphasis is placed on hard labor market data this week, particularly the upcoming ADP employment estimate. Historically, ADP figures have shown varied alignment with BLS data, underestimating on average through April, but overestimating over the past year.
The Australian dollar continues to face strong resistance near the $0.6500 level, a zone it has struggled to break above since early last month. Despite a few short-lived moves, the currency has mostly traded within the $0.6400 range throughout May. Today’s session low was recorded after the release of weaker-than-expected GDP data for Q1 2025, with price action briefly hovering above $0.6450, where a significant batch of options is set to expire.
Australia’s final services and composite PMI figures were also released but had a limited impact, as attention remained fixed on the GDP report. The economy grew just 0.2% in the first quarter, half the pace expected by market consensus and notably slower than the 0.6% expansion in the previous quarter. The PMI readings reflect this softening trend, with the composite index averaging 50.8 in April and May, slightly below the 51.1 average for Q1. Markets are now looking ahead to tomorrow’s trade and household spending figures, which could provide further insight into domestic demand.
Canada faces increasing economic pressure from external and domestic forces. The recently announced doubling of US tariffs on Canadian steel and aluminum is expected to deepen the country's economic challenges. Even prior to this announcement, forecasts had already pointed to a likely economic contraction for the current and next quarters. With monetary policy operating on a lag, the Bank of Canada has limited immediate tools to offset these headwinds. However, it moved early during the easing cycle, reducing the overnight rate by 225 basis points to 2.75% since June of last year.
Although the full impact of past rate cuts has yet to materialise, recent data suggest resilience in some areas. Core inflation readings for April remained elevated, and Q1 GDP growth came in stronger than expected at 2.2% versus the 1.7% consensus. These figures provide the central bank with justification to pause its rate-cutting cycle at today’s meeting. Market expectations, as reflected in swaps pricing and recent economist surveys, now align around a likely hold.
The offshore yuan has strengthened modestly against the US dollar in recent sessions, despite broader dollar strength and weaker-than-expected Chinese manufacturing data. On Monday, the dollar approached its 200-day moving average against the yuan, but then pulled back following a drop in the Caixin manufacturing PMI. The dollar slipped as low as CNH7.1830 before rebounding to around CNH7.1955. The latest reference rate from the PBOC was set at CNY7.1886, slightly higher than the previous day’s fix.
Markets are now awaiting the release of Caixin services and composite PMIs, which are expected to show modest improvement. However, optimism remains fragile as trade tensions re-emerge and container shipments to the US continue to decline. Without additional policy support, concerns remain over China’s ability to meet its 5% growth target for the year. Structural issues within the economy and the absence of significant new stimulus measures add to the uncertainty surrounding the country’s outlook.
No major economic releases are scheduled today.
The euro came under pressure after failing to hold gains above the $1.14 level, retreating from a high near $1.1455 to around $1.1365. This pullback aligns with a retracement of recent gains from the late May low near $1.1210. Market sentiment remains cautious as large option expiries near $1.1450 add to resistance.
On the data front, final readings of the services and composite PMIs for May were revised slightly higher. The services PMI was upgraded to 49.7 from a preliminary 48.9, still below the 50 threshold and marking the first contractionary reading of the year. Meanwhile, the composite PMI came in at 50.2, slightly lower than April but remaining in expansion territory. These revisions may not significantly influence the European Central Bank's stance ahead of tomorrow’s policy meeting, where a 25 basis point rate cut is widely expected. The ECB is also expected to revise down its growth and inflation projections. Germany will release factory orders shortly before the ECB meeting, with expectations for a decline after a strong surge in March. This will be followed by industrial production and trade data later in the week, which may reflect the impact of slowing demand and tariff-related distortions.
The Japanese yen weakened as the dollar rebounded from a five-day low near JPY142.40, climbing past the previous session’s high to reach almost JPY144.40 before losing momentum. Despite this short-term strength, the dollar struggled to hold gains and has since found support near JPY143.80. A drop back below the JPY143.25–50 zone could signal more consolidation in the current trend, rather than a shift toward a broader correction.
On the data front, markets showed little reaction to Japan’s PMI readings, which were revised modestly higher. The final services PMI for May came in at 51.0, slightly up from the initial estimate of 50.8 but still down from April’s 52.4. The composite PMI was revised from 49.8 to 50.2, just above the neutral threshold, reflecting a small recovery but still softer than earlier in the year. Looking ahead, April labor earnings data will be released tomorrow, with nominal wages expected to rise 2.6% year-over-year. However, real wages remain under pressure and are likely to post another annual decline.
No major economic releases are scheduled today.
Sterling remains within a tight range this week, showing signs of consolidation after holding above the $1.3500 level. Tuesday's session low was recorded just below this level during early US hours, but the pound has since stabilised and is trading slightly below $1.3550 in late European trading. Market behaviour suggests a constructive consolidation phase, with no immediate catalysts driving a breakout in either direction.
Final PMI data for May offered minor upside surprises but failed to materially shift the outlook. The services PMI was revised to 50.9 from the initial 50.2 estimate, rebounding from April’s 49.0 reading, which marked the lowest since early 2023. The composite PMI also saw an upward revision to 50.3 from 49.4, reflecting a return to modest expansion. Despite the improvement, both readings remain well below levels seen last year. The interest rate outlook remains stable, with markets assigning virtually no probability of a rate cut at the June 19 Bank of England meeting. A full rate cut is not priced in until November.
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