Three developments stand out from last week. First, all five G10 central banks that met delivered in some form of hawkish holds. The Bank of Japan was the least convincing and the swap market barely changed the extent of the anticipated tightening this year. The year-end projection rose by about 22 bp in Canada, 19 bp for the ECB, and 15 bp for the Bank of England. The projected year-end Fed funds rate rose by about 10 bp, but the Fed is the only major central bank where the market is still pricing in a chance of a cut (albeit small). Second, many pixels have been used to explain the implications of the three dissents, wanting the FOMC to adopt a more neutral stance. Yet rather than a substantive disagreement seems more procedural. While other members seemed sympathetic the question was over timing and given the significance of the uncertainties about the scale and duration of the war on Iran, a majority favored waiting. A change in the statement, arguably, would fit better with the updated Summary of Economic Projections in June. Third, the BOJ appears to have sold dollars to support the yen last week, even though it did not signal a policy shift, it seemed effective in halting the market's efforts to push the yen lower. The action will reinforce the significance of the JPY160 area, though unlike earlier this year, when the US participated in verbal intervention, the US Treasury did not appear to comment or support Japan's effort.
Aside from unpredictable Middle East developments, there are three highlights in the week ahead. First, the Reserve Bank of Australia meets Tuesday and is likely to hike rates for the third time this year. The Australian dollar reached new four-year highs before the weekend, in part, anticipating the hike. Second, the UK holds local elections on May 7. A poor showing for Labour will keep Prime Minister Starmer on the defensive, following the appointment and departure of Lord Mandelson. Third, at the end of the week, the US jobs report for April will be released. Job growth is seen at around a third of the 178k seen in March, which is subject to revisions.
US
Drivers: The dollar stood on two legs. First, is geopolitics. The US appears to be among the most able to deal with the supply shock spurred by the war in Iran. Second, economic data has borne this out. The US also appears to be experiencing a surge in capex and inventory rebuilding. S&P 500 earnings remain strong. The economy turned in a solid Q1 performance when it grew by 2% at an annualized rate. By comparison, the eurozone grew by less than 0.5% annualized, and the Japanese economy is expected to have grown by 1.2%. US government spending in Q1 rose 4.4%, the most since Q3 24. Government spending in the eurozone grew may less than half as much. The Federal Reserve delivered the hawkish hold as three regional presidents dissented, favoring a more neutral stance than one associated with an easing bias. Yet, the Federal Reserve is the only G10 central bank for which a hike is not discounted this year.
Data: It is a chock-filled data week for the US. The most market sensitive high-frequency report is April's jobs data. The median forecast in Bloomberg's survey calls for an increase of 100k jobs after 178k in March (which is subject to revision). The unemployment rate is seen ticking back up to 4.4% from 4.3%. Average weekly hours slipped to 34.2 from 34.3, which led to a 0.2% decline in aggregate hours worked. The March reports are a little more than passing interest after the 2.0% initial estimate of Q1 GDP was reported. Real final sales to private domestic parties, which excludes, trade, inventories, and the government, rose 2.5% after a 1.8% advance in Q4 25. In the middle of the week, the US Treasury will make its quarterly refunding announcement. Previously, Treasury anticipated borrowing $109 bln. The refunding of the tariff revenue may boost its borrowing need.
Prices: The Dollar Index was turned back at the start of the week after having entered the gap created by the sharply lower opening on April. The gap was entered but not closed and a bearish outside down day was recorded. There was no immediate follow-through selling, but DXY posted another downside reversal on April 30, and it recorded a two-week low before the weekend near 97.70. It stabilized and recovered to a little almost 98.25. The 98.35-98.55 area is the next important technical area.
EMU
Drivers: Over the past 30 sessions, the euro appears to be as sensitive to a change in US two-yields as it is to the change in oil prices. The inverse correlation is about -0.40-0.45, which is the most extreme for the oil correlation since last September. The correlation was near zero between the euro and the US two-year yield at the end of February and reached a three-month extreme in March near -0.47. The euro also seems particularly sensitive to the risk environment currently. The rolling 30-day correlation of changes in the euro and the VIX (S&P volatility) is the most inverse in a year (~-0.51). From mid-January through early March the correlation was positive. The euro strengthened after the ECB meeting as the swaps market shifted to pricing in 76 bp of tightening up from about 57 bp at the end of the previous week.
Data: The final PMI readings tend not to elicit much market reaction. Nor will March aggregate retail sales be of more than passing interest. Instead, Germany's March factory orders and industrial production figures will be looked upon for confirmation of the recover signaled by the PMI. Germany's March manufacturing PMI rose to 52.2 from 50.9 in February, the first above 50-reading since Russia's invasion of Ukraine.
Prices: The euro reached an eight-session high before the weekend, near $1.1785. It was pushed back to nearly $1.1715 after the US announced it would raise the tariff on light vehicles from the EU to 25% from 15%. The five-day moving average had looked poised to fall below the 20-day moving average, but the better price action prevented it. The other momentum indicators are not generating a strong signal. Although the US two-year premium over Germany edged higher for the past three sessions, on the week, it was essentially flat. A break below $1.1700 would weaken the technical tone.
PRC
Drivers: The PBOC strongly guides the exchange rate. As the dollar firmed broadly, Chinese officials appeared to be consolidating the efforts that had driven the yuan to a three-year high. The dollar was turned back last week near CNH6.85. The dollar fix was set at a marginal new low this past Monday (CNY6.8579) but net-net is little changed over the past two weeks. China's mainland markets were closed before the weekend and will re-open Wednesday.
Data: China's RatingDog (previously Caixin) service and composite April PMI will be reported on May 6. The RatingDog iteration tends to run hotter (stronger) than the "official" one generated by the China Federation of Logistics and Purchasing. During the week, April reserves, lending, and trade figures may be reported.
Prices: The dollar tested chart resistance near CNH6.85 in the middle of last week. While the broadly heavier dollar tone would suggest losses against the yuan, the mainland holiday will deny the market access to PBOC guidance, which may deter significant moves. Last week's dollar low was slightly below CNH6.82, while the month's low was closer to CNH6.8060. The dollar settled lower for the fourth week in the past five.
Japan
Drivers: In the face of the milquetoast press conference after the BOJ left rates on hold with 6-3 vote, the Fed's hawkish hold and firm US interest rates, the market pushed the dollar to around JPY160.70. It was met with a sharp escalation of Japanese official rhetoric. There were also reports of material intervention by the BOJ, citing an unidentified government official. Although we were initially skeptical and based on preliminary estimates, it looks as if the BOJ may have sold around $34.5 bln, which would be slightly more than its average operation in 2024. With Japanese markets closed in the first three sessions of the week ahead, consolidation is the most likely scenario. The pricing in the swap market for the next BOJ meeting in June was little changed last week around 65%.
Data: Japan reports March labor at the end of next week. Many, including BOJ officials, think that labor earnings are the key to consumption. It sounds reasonable but it is really much more complicated. Often, it seems American observers think that everyone would consume like Americans if they had funds. Yet, look at what happened in February. Inflation-adjusted (real) labor cash earnings rose 1.9% year-over-year. It was the first back-to-back positive reading since the end of 2024. Real household spending fell 1.8% year-over-year after a 1.0% decline in January. Consumption, we argue, is a complex cultural phenomenon that includes values, size of living space, and is more than simply resources, which are necessary but insufficient.
Prices: The dollar reached JPY160.70 on April 30 before what now appears to have been material intervention. It succeeded in spurring a powerful short squeeze of the yen and sent the dollar to about JPY155.50. This nearly met the (61.8%) retracement objective of the dollar's rally from the year's low, recorded in late January around JPY152.10. With Japanese markets on holiday until next Thursday, the market may content to consolidate. If the JPY155.50 area represents the lower end of range, the JPY157.50 area, which was the lower end of the previous range, may now offer resistance.
UK
Drivers: Sterling rarely is this correlated with the Dollar Index. The rolling 30-day correlation is more than -0.90 and the rolling 60-day correlation is only slightly lower. This seems to primarily reflect the euro and sterling's strong correlation (slightly below 0.90 for both time frames). After everything was said and done and more said than done, the odds of a rate hike at the next BOE meeting dropped last week in the swaps market to about 56% from almost 69% at the end of the previous week. The base rate is at 3.75% now and the swaps market says it will be near 4.40% at the end of the year. At the end of the previous week, it was about 4.27%.
Data: The UK's economic diary include the final April service and composite PMIs and the April construction PMI. While the services, manufacturing and composite PMIs are over the 50 boom/bust level, the UK's construction PMI was last above that threshold at the end of 2024. Given Prime Minister Starmer's seeming political vulnerability, the local elections next Thursday, may help shape the political discourse more than impactful for the markets.
Prices: Sterling powered through the $1.36 cap last week that had stymied it earlier in April. It corresponded to the (61.8%) retracement of sterling's losses since the peak in late January near $1.3870, a five-year high. The $1.3670-$1.3700 is the next hurdle. It reached almost $1.3660 before the weekend and then reversed lower, leaving a potentially bearish shooting star candlestick in its wake. A break of the $1.3530-55 area could signal a return to last week's low near $1.3455.
Canada
Drivers: The Canadian dollar climbed on the back of the US dollar's weakness and the risk-on environment that lifted the S&P 500 and Nasdaq to record levels. The 30-day correlation between the USD-CAD exchange rate and the Dollar Index dipped below 0.50 in late April for the first time since early January. However, it quickly rebounded to around 0.70 before the weekend, the highest in around six weeks. The USD-CAD's inverse correlation with the S&P 500 has reached -0.52, the most extreme since last September but finished last week near -0.47. The correlation with the VIX is around 0.30. Interestingly, the 30-day correlation with changes in WTI and the USD-CAD exchange rate was inverse from early last November through the middle of March. However, since then the correlation has flipped and is now near 0.30. Higher oil prices are associated with a weaker Canadian dollar.
Data: Canada sees the April services and composite PMI. They stood at 47.2 and 47.6 respectively in March, warning of economic weakness. The IVEY PMI was also below 50 (49.7) in March and the April reading is due. Canada reports its March merchandise trade figures too. In the first two months of the year, Canada recorded a goods deficit of C$9.9 bln. In Jan-Feb 20025, Canada experienced a C$2.1 bn surplus. In February, Canada's imports surged to a record, fueled by an increase in gold purchases. Canada's trade surplus with the US narrowed to C$1.7 bln, the smallest since May 2020. Canada is making progress diversifying its trade away from the US. Trade with other countries reached a record in February. Exports to rest of the world ex-US rose by 10.5% while imports increased by 1.6%. Lastly, the week ends with the April jobs report. In the Q1 26, Canada lost 67.5k full-time positions. In Q1 25, it lost about 41.3k full-time posts. In March 2025, the unemployment rate was 6.8% in March 2026 it was 6.7%. The improvement appears to be a function of a decline in the participation rate (64.9% vs. 65.3%).
Prices: In the middle of last week, the US dollar tested the upper end of its recent range, near CAD1.3710-15. It held and the greenback was sold to CAD1.3550 before the weekend. It has not been lower since March 10. The swaps market is fully discounting two hikes by the Bank of Canada this year, up from one hike and almost a 30% chance of a second a week ago. The US dollar has been sold through the trendline connecting the January and March lows but the greenback finished the week above it. The trendline begins the new week near CAD1.3590. It posted potentially a bullish hammer candlestick. Near-term potential may extend back toward CAD1.3630-50.
Australia
Drivers: The Australian dollar is sensitive to the overall direction of the dollar. The rolling 30-day correlation of changes in the Aussie and changes in the Dollar Index is inverse by about 0.75. That is around the most extreme for two years. The exchange rate is more sensitive to changes in the US two-year yield (~-0.60) than changes in Australia's two-year yield, which is, counter-intuitively, also inversely correlated with changes in the exchange rate (~-0.10). There is also a risk component. The changes in the Aussie and the S&P 500 are about 0.60 correlated over the past 30 sessions, the upper end of a five-month range. The 30-day rolling correlation with gold is around 0.55 after peaking in early February near 0.80.
Data: A few hours before the Reserve Bank of Australia's meeting concludes on May 6, March household spending will be reported. It rose at 4.6% year-over-year pace in February, and the central bank has cited it as a consideration in their two rate hikes here in 2026. The base effect in March and April will likely cushion the impact of the disruption spurred by the war on Iran. Previously, we had leaned against the third consecutive rate hike. However, given hawkish rhetoric, the rise in inflation expectations, the jump in March and Q1 CPI reported last week, a rate hike looks likely. The futures market is pricing in almost an 80% chance of a hike. On Thursday, the March trade figures are due. The Jan-Feb merchandise trade surplus is around A$7.95 bln compared with A$7.62 bln in the first two months of last year. Exports are up about 3.3% through Feb (-1.9% in Jan-Feb 2025), while imports are off 2.1% (vs. -0.5% in the year ago period).
Prices: The Australian dollar held above the lower end of its recent range near $0.7100 in the middle of last week and launched a challenge on the upper end of the range near $0.7200. It was recorded a new four-year high ahead of the weekend near $0.7230. The momentum indicators are stretched, perhaps leaving the Aussie vulnerable to a "buy the rumor, sell the fact" activity the RBA meeting.
Mexico
Drivers: The changes in the dollar against the Mexican peso enjoys around the same 30-day rolling correlation with the S&P 500 and the JP Morgan Emerging Market Currency Index. With both, the inverse correlation with the exchange rate is inverse by about -0.70-0.75. The correlation with the exchange rate and the Dollar Index is around 0.70. It reached the highest since last September, earlier this month when it briefly was above 0.80.
Data: It is an important week for Mexico. Thursday is the most important day. April CPI is due in the morning, and the central bank meeting concludes in the afternoon. Headline and core CPI is running above the top of the 2-4% target but they were in March when the central bank cut its overnight rate target by 25 bp to 6.75%. The central bank held out the possibility of another rate cut and the swaps market and all ten economists surveyed by Bloomberg expected a the cut to be delivered now.
Prices: The dollar reached a three-week high against the Mexican peso at the end of April near MXN17.5840. It pulled back ahead of the weekend. A base appears to have been forged in the MXN17.32-MXN17.37 area. The dollar bottomed on April 17, near MXN17.1275. A convincing push below MXN17.30 could re-target the low.
Reviewed by Marc Chandler
on
May 02, 2026
Rating:
