May 22, 2025

“The dollar remains weak as investors have become increasingly nervous about US plans to expand the deficit even further. Today is all about the PMIs, and we will be looking for clues on the impact of tariffs on the US economy.”

Tim Hallinan – Trading Director

USD

The ‘sell America’ trade has taken off again this week. The dominant theme right now is investors’ nervousness about the ballooning US debt pile and a series of governments with little desire to materially reduce the deficit, with the result being a selloff in long-term Treasuries and the dollar. The Moody’s downgrade had already put the greenback on a weak footing on Monday morning, and since then Trump has been pushing for the House to accept a budget reconciliation bill that the consensus expects would expand the US deficit by $2.5-3.0tn over the next ten years. A weak 20-year Treasury auction yesterday pushed its yield to 5.10%, which is the highest since 2023 and 110bps higher than when the Fed started cutting last September. Not much news is coming out of the G7 meetings so far, but a headline from Korea briefly put some pressure on the dollar as an unnamed official said that the US had blamed its large trade deficits on FX.

Today, the PMIs are expected to show a stagnating US economy. The composite figure is expected to sink slightly from 50.6 to 50.3, and the key for markets will be whether the details are yet showing any material impacts on growth and inflation from the recent tariffs.

GBP

Sterling is trading a touch below the three-year high that it hit against the dollar yesterday. This morning’s PMIs are a risk event, however, with markets expecting the UK economy to have sunk further into contraction this month with a 48.5 print. That said, the PMIs have not been a particularly reliable predictor of GDP growth in recent months – they did not line up with the 0.7% growth posted in Q1, although it is difficult to tell which of the two are not telling the right story here. Retail sales first thing tomorrow are expected are 0.3%.

EUR

The euro is struggling this morning, after a drop in the German services PMI dragged the overall index into contraction for the first time this year, at 48.6. Bund yields are falling, and markets are adding slightly to their certainty that the ECB will deliver two further rate cuts this year. The French figure printed broadly as expected at 48.0, and the eurozone-wide report comes this morning.

Markets

Equities are broadly under pressure in Europe this morning, following a drop-off in the major US indexes last night. The S&P 500 closed 1.6% lower on the back of rising Treasury yields.

Main Economic Events (All Times CET)

10:00am: Eurozone PMIs
10:30am: UK PMIs
2:30pm: US Jobless Claims
3:45pm: US PMIs

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