There were several developments to note last week, but arguably the most important was that investors are optimistic that the Middle East war is winding down despite some violations of the ceasefire. June WTI fell by 7% to around $95 a barrel, after rising by more than 22% in the previous two weeks. July Brent tumbled by about 6.6% to $101 a barrel. It has risen by almost 24% in the prior two weeks. Benchmark 10-year yields fell in through the G10 accept Australia and New Zealand, where they edged higher. There seemed to be little fallout from Labour's poor showing in the local elections on Thursday as sterling was among the top performing G10 currency ahead of the weekend and the nearly four basis point decline in the UK's 10-year Gilt was led the rally on Friday. Prime Minister Starmer cast aside calls for his resignation. Norway surprised many by becoming the first in Europe to hike rates. The krone appreciated by 1% the following day, Friday, to lead the G10 currencies. The Bank of Japan appears to have intervened in the middle the week to drive home the message of its intervention on April 30 to arrest the yen's weakness. A federal trade court issued a narrow ruling on a 2-1 vote that prevents the US from collecting Section 122 tariffs that the Trump administration adopted to replace the tariffs that were imposed under the International Emergency Economic Powers Act were ruled illegal by the Supreme Court. Meanwhile, Beijing has been facilitating yuan appreciation by its adjustment of the dollar's daily reference rate. It was set at new three-year lows last week.
While the US and China's CPI data are the economic data highlights of the week ahead, politics may dominate, and this includes the war in the Middle East. However, there are two other events of note. First, US Treasury Secretary Bessent will meet with senior Japanese officials in Tokyo. He says the yen's weakness will be discussed. The fact that the BOJ has not raised rates this year may help explain why Japan's recent intervention saw a different US response than the verbal intervention drew in January. Recall that, then the Federal Reserve checked prices (not unusual) but revealed that they were doing it on behalf of Treasury (highly unusual). This time crickets. The G-2 meeting between Trump and Xi at the end of the week is unlikely to impact markets in the short-term. Trump says he has a good personal relationship with Xi. And why not? According to reports at least some officials in Beijing think that Trump's threats on Greenland is more telling of the new world order than the US war on Iran, though the latter clearly is more disruptive. Expectations should be kept minimal and that includes the (re-) establishment of a permanent facility to communicate on either economic issues broadly, or perhaps, as some have suggested, AI.
US
Drivers: Two considerations seemed to drive the dollar lower. The first is geopolitical developments and the hope that peace and an open Strait of Hormuz may be near. The second was speculation that the BOJ intervened on April 30, and possibly again on May 6 to support the yen. At the same time, the inverse correlation between changes in the Dollar Index and the S&P 500 over the past 30 sessions reached nearly -0.75 last week, the most since October 2022. Changes in DXY and the two-year US yield (~0.45) in the upper end of where it has been in six months.
Data: With the next FOMC meeting in June, this week's data poses headline risk but may have little impact on policy. The highlight is the April CPI, and it is likely to rise by around 0.7% (0.9% in March), and that would lift the year-over-year pace to 3.8%-3.9%. The core pace is more moderate. It may rise by 0.2% for a 2.7% year-over-year rate. The week finishes off with the May Empire State manufacturing survey, and April retail sales (bolster by higher gasoline prices) and industrial output (which fell by 0.5% in March).
Prices: Despite the strong jobs data, which saw the US economy add jobs in back-to-back months for the first time since last April and May, the greenback found little traction. The Dollar Index traded inside Thursday's range (~97.80-98.30), which was inside Wednesday's range (~97.60-98.35). The momentum indicators are not generating significant signals. DXY appears to be stuck in a range. A break of 97.50, which is the (61.8%) retracement of the rally from the late January low (~95.55) to the end of March high (~100.65), could signal a move toward 96.75-97.00. On the upside, last week's high was near 98.60 and that offers initial resistance.
EMU
Drivers: The euro is positively correlated with changes in the Stoxx 600, and near 0.50, the rolling 30-day correlation is near its most robust level since Q3 24. On the other hand, changes in the euro and German two-year yields are inversely correlated (30-days) by almost -0.35. That suggests higher German yields has not been supportive of the euro. It has been inversed since the war began and was positively correlated from last January through the end of February. The same is broadly true of the 60-day correlation, as well.
Data: Data from the first quarter seems largely irrelevant now to investors. The leaves Germany's ZEW survey as the most relevant in the coming days. There have been many stories in the media about China's exports to Europe, but it seems that most immediately the shocks from the US tariff war and war on Iran are paramount. It has depressed investor sentiment and outlook. We learned last week that Germany trade surplus in Q1 was actually slightly larger than in Q1 25 and the rolling 12-month surplus reached a five-month high in March. This is not to say that Chinese imports are not significant, but the immediate pressure is from the US, which last week raised the tariff on EU vehicle exports to 25% from 15%.
Prices: The euro reached a three-week high in the middle of last week, a few hundredths of a cent below $1.18. Neither the disappointing March contraction in German industrial output nor the first US jobs data managed to drag the euro lower ahead of the weekend. It settled firmly, and made new session highs slightly below $1.1790 in the waning minutes of last week's activity. Last month's highs were in the $1.1825-50 area. The lower end of that range corresponds to the (61.8%) retracement of the euro's decline from the late January high (~$1.2080) to the mid-March low (~$1.1410).
Japan
Drivers: If, in fact, the BOJ intervened to cap the dollar, some would say its timing was impeccable. It sold dollars near a multi-year high and the drop in US yields and oil prices sent the dollar back to levels not seen since a few days before the war began. Yet, one cannot help but wonder if decline in US rate and oil prices alone would have achieved similar results, albeit more orderly. The US 10-year premium over Japan is at four-year lows near 185 bp. However, since the premium recorded its recent peak in early 2025 near 350 bp, the TIC data shows Japanese investors holdings of Treasuries increased from ~$1.06 trillion at the end of 2024 to $1.24 trillion as of February. The dollar value of the holdings increased every month last year but December but increased in January and February. US Treasury Secretary Bessent is in Tokyo in the coming days, and he has indicated he will discuss the weak yen.
Data: Bank of Japan Governor Ueda was careful not to pre-commit to raising rates at his press conference after the board decided on a 6-3 vote to keep rates steady. The data due in the coming day does not seem likely to have much impact on the BOJ's decision at the next meeting in mid-June. Due this week are March household spending, current account and April PPI.
Prices: The dollar fell from JPY160.70 on April 30 to a low last week near JPY155 on the back of the suspected intervention. The JPY155.40 area corresponds to the (61.8%) retracement of the greenback's rally from the late January low (~JPY152.10) to that multiyear high the end of April. Since the low was recorded, the greenback has held below JPY157.
PRC
Drivers: Beijing is accepting a pace of yuan appreciation that is among the strongest in the region. There can be only one reason in essence and the ruling clique with the CCP apparatus sees it in China's interest. There are numerous possibilities, including cost of not doing so. Still, the dollar's broad general direction is also important. The 30-day rolling correlation of changes in the Dollar Index and the dollar against the offshore yuan reached almost 0.87 in early May, the most robust in a decade (now near 0.77). The 100-day correlation, around 0.65, is the highest in a little more than a year.
Data: China is expected to report April lending figures over the course of the week. However, what can be counted on is the April CPI and PPI on May 11. China's deflation appears to have ended and both CPI and PPI were higher year-over-year in March.
Prices: The dollar settled below CNH6.80 ahead of the weekend for the first time in three years. The next important chart area is around CNH6.70, the low from Q1 23. The PBOC's campaign to guide the yuan higher continues. On a weekly basis, the dollars' reference rate has fallen three times since the end of last November.
UK
Drivers: Changes in sterling are correlated over the past 30 sessions with changes in the Dollar Index (~-0.90) and nearly the same with the euro, the largest component of DXY. It makes sense that sterling is inversely correlated with changes in US two-year rates (~0.36) but is less intuitive is that sterling is also inversely correlated with UK two-year yields. It reached almost -0.60 last week, the most inverse since last October, and is now near -0.50. It was positively correlated from mid-last December to early March. Labour's losses in the local elections failed to have much impact sterling or UK rates ahead of the weekend. Prime Minister Starmer does not look as if he will resign over the poor results.
Data: The highlight of the week is Q1 GDP and the March details. The median forecast in Bloomberg's for 0.3% growth, which if accurate, would be the strongest quarter since Q1 25 and better than the previous two quarters combined. Consumption appears stronger, the government spending appears to have nearly doubled from the Q4 25 pace, and net exports improved.
Prices: The $1.36 area capped sterling last month and corresponds to the (61.8%) retracement of sterling's losses from the late January high (~$1.3870) to the end of March low (~$1.3160). It reached almost $1.3660 on May 1 and settled above $1.36 before the weekend for the first time since Valentine's Day. It recorded session highs, near $1.3535 in late turnover. Support last week was found near the 20-day moving average (~$1.3540 to start the new week) and it has not settled below it for a little over a month. The momentum indicators have stalled but they may not prevent sterling from extending its gains in the coming days to retest last month's high. The next resistance area is seen around $1.3700.
Canada
Drivers: The Canadian dollar remains sensitive to the US dollar's overall direction. The rolling 30-day correlation of changes in the greenback against the Loonie and the Dollar Index is near 0.65, which is around the best it has been since last November. The nearly 0.5 correlation between the exchange rate and the S&P 500 shows risk-sensitivity too. On the other hand, counter-intuitively, the US dollar tends to rise against the Canadian dollar when oil prices rise (30-day correlation is almost 0.25) and when Canada's two-year yield rises (~0.22)
Data: Portfolio capital inflows dried up last year. They fell to a net C$118.25 bln from C$193.20 bln in 2024. However, in the first two months of 2026, net inflows were C$53 bln or nearly 45% of last year's total. The March figures are due at the end of the week.
Prices: The greenback began last week below CAD1.36. On May 1, it reached CAD1.3550, the lowest level since March 10. After the diverging employment data before the weekend, the greenback recovered to the upper end of its three-week range, a little above CAD1.3700. A convincing more through CAD1.3715 targets CAD1.3760 and then possibly the CAD1.3800-15 area. The momentum indicators are curling up from over-sold territory, and the five-day moving average looks poised to cross above the 20-day moving average in the coming days.
Australia
Drivers: The Australian dollar offers a higher yielding, risk-on alternative to the US dollar. Indeed, the Aussie's 30-day inverse correlation with the Dollar Index reached -0.85, the most extreme since in nearly two years. The fundamental narrative would note the hawkish central bank that has lifted rates three times this year, and the market is convinced it is not done. However, we note that the 30-day correlation between changes in Australia's two-year yield and the Australian dollar's exchange rate is also inverse, albeit slightly. However, it has been inversely correlated since early March. The correlation was modestly positive for the previous three months.
Data: With the third consecutive rate hike behind us and only a small chance of a rate hike in May, this week's data are unlikely to change many minds. The Q1 wage price index is too old as we approach the middle of Q2. May's consumer inflation survey by Melbourne Institute may be more interesting. In April the diffusion index stood at 5.9%, the highest since late 2022.
Prices: After reaching its best level since June 2022 in the middle of last week (~$0.7280), the Aussie pulled back to $0.7200 before finding new bids. The momentum indicators have flatlined since becoming over-extended. Still, the firm close ahead of the weekend suggests demand has not been satiated. There is little on the charts until closer to $0.7500 but that seems a bit far without a correction.
Mexico
Drivers: While the dollar-peso exchange rate is sensitive to the greenback's broad direction (~0.70 30-day correlation with changes in the Dollar Index), it is a little more sensitive to the risk environment. The inverse correlation with changes in the S&P 500 is near -0.75. The 30-day correlation of changes in the exchange rate and changes in WTI was inverse in the month before the Middle East war began but reached 0.60 last week, the most in four years.
Data: Mexico reports March industrial production figures and April vehicle production and exports. Through February, industrial output contracted by about 0.6% at the start the year. In the first two months of 2025, it grew by around 2%. Vehicle output increased in Q1 by about 3.8% over Q4 25, though compared with Q1 25, it was off marginally. Vehicle exports slowed slightly on the quarter, but March exports rose by 25% for the third consecutive monthly increase. The Mexican economy contract by 0.8% in the first quarter and it may take the more than next two quarters to recoup it.
Prices: The dovish cut delivered by the Banxico last week--with the door left open to one more cut in the cycle, did not deter peso buying. Ahead of the weekend, the dollar posted its lowest close since before the Middle East war started (~MXN17.18). The price action looked particularly poor for the dollar. The five-day moving average crossed back below the 20-day moving average after getting whipsawed in late April. Last month's low was near MXN17.1275. The low since the run-up to the 2024 Mexican election was recorded on February 18 near MXN17.0865.
Reviewed by Marc Chandler
on
May 09, 2026
Rating:
