May 06, 2025

“Central bank decisions will be key this week, with the Fed and the Riksbank both expected to pause while the Bank of England is fully priced for a cut. Trade also remains in sharp focus.”

Tim Hallinan – Trading Director

USD

The dollar has been choppy but rangebound in recent sessions as markets wait for the next catalyst to steer US sentiment. Friday’s payrolls report came in stronger than expected at 177K, but 58K in downward revisions to previous months meant that it had a net neutral signal overall for FX. This is a data point that markets will be watching intently over the next few months as the impact of the tariffs really start to sink in. The dollar is a bit weaker this morning and markets have been trying to digest some positive news on US-China trade talks as well as some more perplexing stories, including a 100% tariff on movies and Trump posting an AI image dressed as the pope. The currency pair getting a lot of attention right now is USD/TWD, which dropped 9% in a couple of days thanks to a flood of USD selling and hedging activity and has strengthened some of TWD’s peers in Asia. The concern is that this sharp move might be a sign of things to come if we don’t see trade de-escalation, or rather if dollar devaluation is a subject of the talks. Tomorrow’s Fed decision is the big event this week. Despite Trump’s repeated calls for Powell to start cutting easing policy, the market is only pricing a 2% chance for a rate cut. There will be plenty of questions on a) Fed independence and b) its likely response to the tariffs.

GBP

Thursday’s Bank of England decision is widely expected to involve a fourth rate cut, as policymakers look ahead to a slowing global economy. The market is pricing a total of four more cuts before the end of the year – the key question for sterling is how the forward guidance, the vote split, and the new projections shift these expectations.

EUR

The eurozone’s domestic calendar is relatively quiet this week, so we can expect it to follow trade and policy developments in the US once again. The big story today is that Friedrich Merz becomes Germany’s Chancellor today, after winning the election in February with the CDU/CSU. He has a challenging situation to manage, particularly regarding transatlantic relations and Germany’s export-heavy economy that has contracted for the past two years.

Markets

Wall St stocks took a breather and closed broadly lower yesterday as the S&P 500 and the Dow both snapped nine-day winning streaks. The S&P is now nearly 17% higher than its post-‘liberation day’ low in early April.

Main Economic Events (All Times CET)

11:00am: Eurozone PPI

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