The resilience of the US economy is remarkable. The economy bounced back from near stagnation in Q4 25 (0.5% annualized pace) to 2% in Q1 26 and, and perhaps to 4.3% this quarter, if the Atlanta Fed's GDP tracker is accurate. Wall Street economists are less sanguine and the median forecast in Bloomberg's survey from last week is for slightly is at more modest 2.1%. The Bloomberg US economic data surprise model reached its highest level last week since mid-2022 . Since April 17, the implied yield of the December 2026 Fed funds futures has risen from about 3.47% to 3.86%. The flash composite May PMI remained below the 50 boom/bust level in the eurozone for the second consecutive month. It fell below 50 in the UK for the first time since last April. Japan's composite PMI fell for the third consecutive month, at 51.1, matches the weakest reading since last May. Of the major countries, only the US composite PMI did not fall.
The dollar traded with a firmer bias last week, and as we discuss below, while there is scope for additional near-term gains, we suspect this dollar advance may be nearly over. Interest rate expectations have adjusted and a hike by the Fed now seems base case rather than a tail risk. The momentum indicators are getting extended and retracement levels and technical targets have been approached. Still, the dollar's price action remains strong, and participants may be best served by waiting for a technical reversal pattern before picking a top to the greenback. That said, the dollar may be most vulnerable to signs that the war on Ukraine and/or in the Middle East is moving toward a resolution. There have been many false positives, which have seen the greenback recover from an initial negative reaction.
US
Drivers: Leaving aside theory, empirically, the dollar is positively correlated to US interest rates unlike several of the other major currencies. The re-acceleration of the US economy, with the Atlanta Fed's tracker at 4%. The Fed funds futures are discounting about an 85% chance of a hike this year, according to the Bloomberg model and a little more than 60% by the CME's calculation. At the start of the month, a small chance of a cut was still being discounted. The 10-year yield has risen by about 65 bp since the Middle East war began, with the 30-year yield up almost 50 bp. This can be explained by the roughly 80 bp increase in the anticipated year-end effective Fed funds rate. Market-based measures of inflation expectations have risen. The 10-year breakeven is a little less than 20 bp (~2.43%) and the five-year, five-year inflation swap rate has risen by about five basis points (~2.43%)
Data: The April personal consumption print, and durable goods orders are likely to confirm what we already know. The US economy is re-accelerating this quarter and headline price pressures. The PCE deflator is seen rising to 3.9% from 3.5%, with a more restrained core (3.3% vs. 3.2%). The plethora of Fed surveys (Chicago, Philadelphia, Richmond, and Dallas) and the Conference Board' s consumer confidence pose headline risk. April new home sales may have struggled to maintain the 7.4% jump seen in March and the April goods deficit is due at the end of the week. In Q1 26, the goods deficit was about $252 bln compared with a nearly $464 bln shortfall in Q1 25 and almost $275 bln in Q1 24.
Prices: The Dollar Index eked out a small gain last week. According to Bloomberg, last week's high was 99.515, a thousandth of an index point from closing the gap created on the sharply lower opening on April 8. The top of the gap, the April 7 low, was 99.516. The 99.50 area also corresponds to the (61.8%) retracement of the Dollar Index's retreat from the year's high on March 31 (~100.64). The momentum indicators are stretched but have yet to turn lower.
EMU
Drivers: While rising rates is supportive of the greenback, rising German rates is correlated with a weaker euro. That holds for the two-year as well as the 10-year yield. Meanwhile, the odds of an ECB hike next month now stand a little above 85%, little changed from the end of April. Two hikes and about 50% of a third is discounted in the swaps market. At the end of the previous week, the hike was fully priced.
Data: The EU confidence surveys typically do not move the market and aggregate data for the eurozone is otherwise light this week. At the end of the week, the four largest members of the euro area port May inflation. The only question is how much and how fast inflation is rising.
Prices: The euro met the (61.8%) retracement target of the rally from the year's low set in mid-March near $1.1410, which was found near $1.1580. The momentum indicators are getting stretched but may not prevent additional losses, especially if hostilities in the Middle East flare up. The next area of chart support may be $1.1500-25. It takes a move above $1.1660 to signal a low may be in place.
PRC
Drivers: While the PBOC manages the exchange rate, they do not do so randomly. The 60-day correlation between the dollar's changes against the offshore yuan is above 0.80 and appears to be near a record. Since the end of last September, the PBOC's daily reference rate has fallen on a weekly basis in all but three weeks. Over this stretch, it has fallen by 4%.
Data: China reports April industrial profits. In March, they rose 15.8% year-over-year. The risk is on the downside in April as rising commodity and input prices are passed on fully to the consumers.
Prices: The dollar consolidated against the yuan in recent days but finished last week with its lowest settlement since May 14, when the three-year low was recorded (~CNH6.7815). The PBOC campaign to manage the gradual appreciation of the yuan does not appear over. The median forecast in Bloomberg's survey seems too conservative at CNH6.75 at the year end. We suspect potential toward CNH6.60.
Japan
Drivers: The yen is sensitive to the overall dollar direction. The rolling 60-day correlation of changes in the Dollar Index and the dollar against the yen is above 0.75, it has rarely been higher over the past decade. The correlation between changes in 10-year US yields and the exchange rate is near 0.60, the most since last October, but it is recovering from a three-year low near 0.15 early February. Ironically, higher 10-year JGB yields are also positively correlated (albeit minor at less than 0.07) with the dollar against the yen. The correlation of 10-year interest rate differential was inverse briefly last December but is now near 0.54, which is also the highest since last October.
Data: Japan's key data is backloaded to the end of the week ahead. Tokyo's CPI is a reasonably good guide to the national figures, which are lagged by a few weeks. There are three real sector reports due the same day. April employment, retail sales, and industrial output. We learned last week that the Japanese economy grew by 1.7% annualized rate in Q1 26. It grew by 1.3% in Q4 25. The impact of the supply shock stemming from the Middle East war is expected to weigh on growth in Q2. Still, the market is confident (~80%) that the Bank of Japan will hike when it meets in the middle of next month.
Prices: Despite the ongoing threat of BOJ intervention and the decline in the US 10-year premium over Japan to four-year lows, the market has sold the yen in nine of the past 10 sessions. It reached its highest level since the April 30 reported intervention near JPY159.35 on May 21. The momentum indicators and price action suggest the market will likely continue to market to probe for official pain threshold.
UK
Drivers: Sterling's rolling 30-day inverse correlation with changes in the US two-year yield is near -0.75. It has not been that extreme for two decades. Sterling is also inversely corelated with the UK's two-year yield (~-0.48). Sterling remains highly correlated with changes in the euro (0.88), the most since November 2023. It has rarely been higher in the past 20 years.
Data: The UK macro data is of little market significance in the coming days. There is no government data but private data, such as the BRC shop price index, CBI retail report, and Lloyd’s business barometer and price survey. The Bank of England meets next on June 18, and the swaps market is discounting slightly more than a 1-in-3 chance of a hike. At the end of April, a 60% probability was discounted.
Prices: Sterling posted an ostensibly bullish outside up days on Monday and Wednesday last week by trading on both sides of the previous day's range and settling above its high. However, progress was limited to about 15-ticks above Monday's high. It traded above Monday's high ($1.3450) in the last three sessions but was unable to settle over it. Initial support is seen in the $1.3375-85 area, and a break could spur a test on last week's low near $1.33.
Canada
Drivers: The broad direction of the US dollar is arguable the most important driver of CAD. The rolling 30-day correlation of changes in the Dollar Index and USD-CAD is around 0.70. It peaked near 0.85 in March but remained in the upper end of last year’s range. The exchange rate’s 30-day correlation with changes in the US two-year yield is a little above 0.50, having reached the highest level earlier last week in 6-7 months. Last September’s peak (~0.65) was the highest in three years. Yet counter-intuitively, the exchange rate is also positively correlated with higher Canadian yields too. The rolling 30-day correlation, above 0.30, the highest since last October, which was also a three-year high. The exchange rate is not so sensitive to the changes in the price of WTI. The 30-day correlation is around 0.20. It has been positive since mid-March but was inversely correlated from last November. The Canadian dollar is also sensitive to the risk environment. When the US S&P 500 sells off, the Canadian dollar tends to weaken. The inverse correlation between changes in the USD-CAD exchange rate and the S&P 500 is a little more than -45, which is among most extreme the inverse the 30-day correlation has been since the end of last September.
Data: The highlight of the week is saved until Friday, Q1 GDP. After contracting by 0.6% at an annual rate in Q4 25, the economy appears to have snapped back. The median forecast in Bloomberg's survey is for a 1.5% pace in Q1 26. The sum of the Q4 25 monthly GDP prints for flat but is up a cumulative 0.3% in Jan-Feb. The Bank of Canada meets next on June 10, and the swaps market is confident it will stand pat with its target rate at 2.25%. The odds rise to a little more than 30% for the following meeting in July.
Prices: The US dollar poked above CAD1.3815 ahead of the weekend for the first time in a little more than a month. It met the (61.8%) retracement objective of the decline from the year's high at the end of March (~CAD1.3965). The greenback finished the week above the 200-day moving average. The month's low, set May 1, is around CAD1.3550, and the subsequent rally has stretched the momentum indicators but there appears to be scope for additional, even if limited, near-term gains. The next technical target is in near CAD1.3870.
Australia
Drivers: The Australian dollar is the most sensitive to the broad movement of the US dollar as it has been for the past couple of years. The inverse 30-day correlation between changes in the Aussie and changes in the Dollar Index is more than -0.80. Recall that last the November, the correlation was briefly positive too for the first time since the pandemic. Changes in the Aussie and the S&P 500 are correlated by 0.75 over the past 30 sessions. In the past decade, the correlation has rarely moved above 0.80. The exchange rate's inverse correlation with changes in the US two-year yield is the most since at least 2000 at around -0.83. The 30-day correlation with Australia's two-year yield is less stable. It was, as one would suspect, positively correlated in the first two months of the year, peaking near 0.35, before signs switched and it became inversely correlated, reaching almost -0.30 in the middle of last month, the most inverse in three years. It swung back to a positive correlation in recent data and is approaching the year's high.
Data: After hiking rates three times in a row, the bar to another hike at the next RBA meeting in mid-June is high. Still, the futures market knows that it is not done. Another hike is fully discounted and about a 50% chance of a fifth hike before the end of the year. This week's data may boost the market's confidence. April CPI is due in the middle of the week. It is unlikely to repeat March's 1.1% surge (to 4.6% year-over-year), but it has not peaked. The median forecast in Bloomberg's survey is for a 0.6% rise, which would allow the year-over-year pace to soften slightly to 4.4% from 4.6%. Household spending in April may have pulled back for the first time this year, while private sector credit growth may show demand is still running at what the central bank sees as too strong (~8% year-over-year). The Reserve Bank of New Zealand meets on May 27. It is seen among the most aggressive in raising rates in the remainder of the year, with more than three hikes fully discounted in the swaps market. Still, it is not seen pulling the trigger this week (~22%) and instead waiting until its next meeting in July (~83%).
Prices: The Australian dollar has strung together three inside trading days, forging a symmetrical triangle, which is often understood as a continuation pattern. The Aussie was sold to $0.7080 last week, the lowest level in a little over a month. The momentum indicators are falling but are not over-extended. The next near-term technical target is around $0.7055, and a convincing break could send it toward $0.7000.
Mexico
Drivers: There are three main forces that appear to drive the peso's exchange rate. First is the broad direction of the dollar. The correlation of changes of the dollar against the peso and the Dollar Index over the past 30 sessions is around 0.60. It peaked last month above 0.80 but are still above where it was for most of last year. The dollar-peso exchange rate is inversely correlated to the JP Morgan emerging market currency index (~-0.80). The second driver is US rate expectations. The 30-day correlation of changes in the exchange rate and the US two-year yield is near 0.75, the highest since 2013. The third driver is the risk environment, for which we use the S&P 500 as a proxy. Over the past 30 sessions, the inverse correlation between changes in the exchange rate and the S&P 600 is around -0.65. It reached a 10-year extreme last month, a little more than -0.80.
Data: The week begins with the April trade figures. Mexico's trade balance tends to deteriorate in April (15 of 20 years). Moreover, the March surplus (~$5.93 bln) was the largest since the end of 2020. Still, it posted a trade deficit of slightly more than $1 bln in Q1. The deficit in Q1 25 was almost $270 bln and nearly $5 bln in Q1 24. The broader measure of trade, the current account is in a small deficit in Mexico. It was about 0.5% of GDP last year. The IMF expects it to be around the same proportion this year. In the middle of the week, the central bank will publish its inflation report when new economic projections are made available.
Prices: The dollar reached MXN17.43 in the middle of last week, a two-and-a-half week high. However, the consolidative tone continued, and the greenback remained mostly in the range set May 15 (~MXN17.21-MXN17.4030. Given the positioning of the momentum indicators, our working hypothesis is that the consolidation is a continuation pattern. If this view is correct, the US dollar can still rise to test the month's high near MXN17.55.
Reviewed by Marc Chandler
on
May 23, 2026
Rating:
