France reported a low May CPI of 0.7% and EU Harmonized CPI of 0.6%, signaling subdued inflation. Germany, Spain, and Italy, representing over 70% of the eurozone’s economy, are expected to report inflation at or below the ECB’s 2% target this Friday, a rare occurrence since 2021. Falling energy costs, a strong euro, and easing wage pressures are driving this disinflation, supporting expectations for an ECB rate cut on June 5 to stimulate growth, despite external risks like potential U.S. tariffs. Eurozone 1-year CPI expectations rose to 3.1%, the highest since February 2024, but stable 3-year expectations at 2.5% suggest confidence in the ECB’s long-term price stability, keeping the rate cut on track.

Japan’s 40-year JGB yields rose after weak demand at a recent auction, prompting the finance ministry to survey banks and investors on super-long bond demand, hinting at a potential shift toward issuing more short-term bonds. This could stabilize the bond market, support the yen, and reduce upward pressure on yields, though higher short-term bond issuance might elevate shorter-end yields, narrowing the U.S.-Japan yield gap and sustaining USDJPY’s downward trend. Japan’s May Consumer Confidence Index, expected at 31.8 (up from 31.2), may show slight improvement but remains below the long-term average of 40.7, reflecting ongoing economic caution. Persistent inflation, driven by food, labor, and energy costs, and upcoming Tokyo CPI data suggesting an uptick, strengthen the case for another rate hike.

A notable bank has been out predicting the Australian dollar will strengthen against the U.S. dollar due to Australia’s stronger economic growth outlook, which recent AUD appreciation hasn’t fully reflected. Australia’s May CPI was slightly higher than expected at 2.4% YoY, with trimmed mean CPI at 2.8%, but inflation remains within the RBA’s 2-3% target, reducing pressure for immediate rate cuts. Despite a 67% market-implied chance of a rate cut at the RBA’s July 7-8 meeting, Governor Bullock’s dovish stance prioritizes trade tariff risks over inflation, with year-end cash rate forecasts at 3.10%-3.35%. Weak Q1 private capital expenditure (-0.1% vs. expected 0.5%) supports the RBA’s cautious approach, though planned business spending of A$155.9 billion for 2025-26 signals optimism for future recovery.

France’s May inflation rate dropped to 0.7% (0.6% EU harmonized), signaling cooling price pressures, with Germany, Spain, and Italy expected to report inflation at or below the ECB’s 2% target on Friday, a rare occurrence since 2021. This trend, driven by a strong euro, falling energy costs, and easing wage pressures, supports expectations for an ECB rate cut on June 5 to stimulate growth, especially amid risks like potential U.S. tariffs on EU imports. EU trade chief Maros Sefcovic is leading negotiations to avoid trade conflicts, while Eurozone CPI expectations and German unemployment data, expected to show modest changes, are due today.

Japan’s Ministry of Finance surveyed banks and investors about demand for long-term government bonds, hinting at reduced issuance, which caused 30- and 40-year JGB yields to drop sharply, weakened the yen by over 1%, and spurred buying in U.S. Treasuries. Bank of Japan Governor Ueda signaled potential rate hikes if the economy improves, supported by April’s core inflation rising to 3.5% year-on-year, with May’s Tokyo CPI expected to show further price pressures. Japan’s trade negotiator aims to resolve U.S. tariff talks before the G7 summit (June 15–17), and a deal avoiding 25% auto tariffs could boost Japan’s economy and yen long-term, potentially enabling a BOJ rate hike in July, though markets remain skeptical, pricing in minimal hikes for 2025.

There have been more calls for a stronger Australian dollar against the U.S. dollar, driven by Australia’s better economic growth outlook, which isn’t fully priced into the Aussie’s recent slight gains. Australia’s April CPI stayed at 2.4% year-on-year, above the expected 2.3%, with trimmed mean CPI at 2.8%, signaling steady inflation that may delay RBA rate cuts. The RBA is expected to hold rates in July, with a possible cut in August, and banks predict a year-end cash rate of 3.10%–3.35%.

ECB President Christine Lagarde highlighted the potential for the euro to rival the US dollar, citing benefits like increased investment, lower borrowing costs, and protection from exchange rate fluctuations and sanctions. To achieve this, Europe must deepen its capital markets, strengthen legal and institutional frameworks, enhance military capabilities, and promote the euro in international trade through new agreements and improved payment systems. While joint borrowing, as seen in the COVID-19 recovery fund, faces resistance, particularly from Germany, it could pave the way for Eurobonds, strengthening the euro’s global role. ECB officials also noted the possibility of a June rate cut, with inflation risks leaning lower, and emphasized that uncertainty and potential US tariffs could impact the global economy. Eurozone economic data expected today may show slight improvements in economic and industrial confidence but a dip in services, while Germany’s consumer confidence is likely to continue its upward trend, reflecting growing optimism.

The CFTC data shows a slight reduction in net yen longs, though positioning remains near record highs, suggesting a need for significant yen-positive or dollar-negative news to sustain short positions. Bank of Japan Governor Ueda expressed cautious optimism about nearing the inflation target, supported by April’s core inflation rising to 3.5% year-on-year, with Tokyo’s May CPI expected to show further price pressures, potentially paving the way for rate hikes. However, former BOJ board member Sayuri Shirai warns that a fragile economy and weak domestic demand could limit the BOJ’s rate hike window, especially with a critical election looming for PM Ishiba amid falling approval ratings. Successful trade negotiations, particularly resolving auto tariffs before the July 9 deadline, could bolster the case for a BOJ rate hike at its July meeting, with Japan’s trade negotiator aiming for progress at the G7 summit in June.

Former President Trump’s recent threats of 50% tariffs on EU imports and 25% duties on foreign-made smartphones have reignited concerns about trade uncertainty, potentially driven by his push for tariff revenues to fund his proposed “Big Beautiful Bill” or a tougher negotiating stance, which could pressure the US dollar. RBA Deputy Governor Andrew Hauser noted that Australia has seen minimal direct impact from these trade disruptions so far, with stable economic indicators, and some Australian firms see opportunities in the US-China trade rift to gain a competitive edge in China. However, he cautioned that increased competition from Chinese firms redirecting goods from the US could pose future challenges. Australian inflation data, due tomorrow, is expected to soften, supporting predictions of RBA rate cuts later this year, with forecasts pointing to a year-end cash rate of 3.10%–3.35%.

Initially, tariff threats from former President Trump caused the U.S. dollar to strengthen against other currencies, but his recent proposal to impose tariffs on European goods unexpectedly boosted the Euro against the dollar. Despite expectations of stable 10% tariffs and upcoming trade deals before the July deadline, markets were reminded of ongoing trade war uncertainties, prompting a shift toward safe-haven assets. Meanwhile, Eurozone wage growth slowed to 2.4% in Q1 from 4.1% in Q4 2024, signaling cooling service prices and reinforcing ECB confidence in reaching their 2% inflation target, with an expected rate cut on June 5 and traders anticipating 2-3 additional cuts this year. Key upcoming data includes Germany’s June Gfk Consumer Confidence, May inflation figures from several EU countries, and EU-wide confidence surveys.

Japanese government bond yields, particularly for 20-year and 30-year bonds, have surged to record highs of 2.605% and 3.204%, respectively, raising concerns about a potential yen carry trade unwind as Japanese investors may repatriate capital from global assets like U.S. Treasuries and equities. April’s core inflation rose to 3.5% year-on-year, exceeding expectations, with persistent price pressures from food, labor, and energy, and upcoming Tokyo CPI data for May likely to show further increases, intensifying pressure on the Bank of Japan for a potential rate hike. However, weak domestic demand and a possible technical recession complicate the BOJ’s decision, with a narrow window for action before the July election and “Liberation Day” tariff deadline. Japan’s trade negotiations with the U.S., including discussions around auto tariffs and Nippon Steel’s proposed $14.1 billion acquisition of U.S. Steel, could influence BOJ policy if resolved favorably by the G7 meeting in June. This week, investors will watch Japan’s 40-year bond auction, BOJ bond-buying operations, and April PPI Services data, expected to show a 3.0% year-on-year rise, reflecting ongoing pricing pressures tempered by low business confidence.

President Trump’s recent threats of 50% tariffs on European imports and 25% duties on foreign-made smartphones have reignited market concerns about trade uncertainties tied to the “Liberation Day” tariffs, leading to a weaker U.S. dollar and gains for the Australian Dollar. Reserve Bank of Australia Deputy Governor Andrew Hauser noted that while Australia has seen little direct impact from global trade disruptions so far, the RBA is ready to adjust policy if needed, and some Australian firms see opportunities to gain a competitive edge in China due to U.S.-China trade tensions. Australian inflation data, due Wednesday, is expected to soften, supporting predictions of RBA rate cuts later this year, with major banks forecasting a year-end cash rate of 3.10% to 3.35%.

After three consecutive days of gains, traders took profits following weaker-than-expected Eurozone and German PMI data, though markets stabilized in today’s Asian session. The Eurozone Composite PMI slipped to 49.5 in May, signaling the first contraction in private sector activity this year, driven by a sharp decline in services (48.9), despite a slight improvement in manufacturing (49.4). Germany, the Eurozone’s largest economy, mirrored this trend with its Composite PMI at 48.6, as services weakened further, though manufacturing showed signs of stabilizing at a 33-month high. ECB minutes from April reveal a strong inclination toward further monetary easing, with expected rate cuts of 26 basis points in June and possibly September, aiming for a terminal rate of 1.75%, though decisions remain data-dependent amid concerns over U.S. tariffs and their uncertain impact on inflation. Analysts forecast sluggish Eurozone growth of 0.8% in 2025, with PMI expected to hover around 49.1 by mid-2025, improving to 51.0 by 2026, while Germany’s IFO Business Climate Index rose to 87.5, buoyed by optimism in export industries despite tariff tensions. Upcoming German data, including Q1 GDP and spending figures, will provide further insight into the region’s economic trajectory.

Japanese government bond yields have surged to record highs, with 20-year JGBs reaching 2.599% and 30-year JGBs hitting 3.204%, raising concerns about a potential yen carry trade unwind as Japanese investors may repatriate capital from global markets, particularly U.S. Treasuries and equities, if yields become attractive enough. The Bank of Japan could stabilize its yield curve by allowing U.S. Treasury holdings to mature without reinvesting, potentially strengthening the yen, though aggressive sales are unlikely amid U.S. trade talks. Despite official statements from U.S. and Japanese officials that exchange rates should be market-driven, speculation persists about a tacit agreement for yen appreciation to address trade imbalances, fueled by Trump’s criticism of Asian currency manipulation. BOJ’s Asahi Noguchi advocates a cautious, data-driven approach to rate hikes, citing increased risks from U.S. “Liberation Day” tariffs, while April’s hotter-than-expected inflation (core CPI at 3.5% YoY) strengthens the case for tighter policy. However, former BOJ member Sayuri Shirai warns that fragile domestic demand and a potential recession may limit the BOJ’s rate hike window, with a successful U.S. trade deal by July 9 potentially paving the way for a BOJ rate hike in July.

Reserve Bank of Australia Deputy Governor Andrew Hauser stated that the RBA is ready to implement policy measures if the global impact of Trump administration tariffs significantly affects Australia, though current forward indicators show no major local disruptions. He noted that many Australian firms view the U.S.-China trade tensions as an opportunity to strengthen their competitive position in the Chinese market.

The European Central Bank has warned that investor concerns over the riskiness of US assets, driven by Trump’s tariff policies, could destabilize global financial markets. The ECB’s Financial Stability Review noted unusual shifts away from safe-haven assets like the US dollar and Treasuries, signaling a potential “fundamental regime change” in global capital flows, with stretched US tech stock valuations adding to market vulnerabilities. Despite some easing of US-China trade tensions, uncertainties persist, prompting the ECB to lower interest rates to support growth as inflation nears its 2% target. Meanwhile, upcoming Eurozone PMI data for May is expected to show fragile recovery, with Germany’s Manufacturing PMI slightly improving to 48.8 and Services PMI rebounding to 49.5, while Eurozone Manufacturing and Services PMIs are forecast at 49.2 and 50.5, respectively, indicating modest expansion amid ongoing trade tensions and a stronger euro.

Yields on long-dated Japanese Government Bonds (JGBs) have surged to a 20-year high of 2.845% for the 30-year bond, raising speculation about when Japanese investors, holding over $1 trillion in U.S. Treasuries, might repatriate capital due to attractive domestic yields and U.S. policy uncertainties under Trump’s tariffs. Japan could stabilize its yield curve by letting U.S. Treasury holdings mature without reinvesting, potentially strengthening the yen without aggressive monetary actions. Despite U.S.-Japan talks affirming market-driven exchange rates, trade negotiations and a weakening South Korean won may support yen appreciation, as traders anticipate currency adjustments to address U.S. concerns over Asian export advantages. The Bank of Japan, as noted by board member Asahi Noguchi, favors gradual rate hikes, cautious of risks from Trump’s “Liberation Day” tariffs due July 9, 2025, while former BOJ member Sayuri Shirai warns that high inflation expected this Friday could force faster policy normalization. May’s PMI data—Composite at 49.8, Manufacturing at 49.0, and Services at 50.8—signals economic weakness, but a successful trade deal could pave the way for a BOJ rate hike in July, boosting yen bullishness.

The Reserve Bank of Australia has shifted its stance from cautious rate cuts to signaling readiness for faster reductions if economic conditions weaken, prompting markets to anticipate a cut as early as July, potentially lowering rates to 3.1% by year-end with three cuts, though some expect only one or two unless the economy deteriorates significantly. Recent data shows a mixed picture: April’s Westpac Leading Index slightly improved to -0.01%, while May’s PMI Composite dipped to 50.6, with Manufacturing steady at 51.7 and Services at 50.5, indicating modest growth. Bloomberg’s survey of 45 economists projects Australia’s economy to grow 1.8% in 2025, 2.3% in 2026, and 2.5% in 2027, with an 18% recession risk over the next year, stable Q1 2025 GDP at 0.5%, and CPI forecasts at 2.5% for 2025 and 2.7% for 2026, with the RBA rate expected at 3.60% by Q3 2025 from the current 3.85%.

The European Central Bank views the euro’s recent strength as an opportunity, potentially tolerating further appreciation toward the 1.20 mark, as suggested by historical regression analysis. ECB Governing Council Member Pierre Wunsch indicated that cutting the main deposit rate to just below 2% by year-end could support the economy and prevent inflation from falling below target, amid risks from trade tensions and despite no immediate recession concerns. Increased government spending, such as Germany’s €500 billion infrastructure plan, may bolster recovery. Despite expectations of sustained U.S. Federal Reserve rates and further ECB cuts, narrowing yield differentials between Eurozone and U.S. 10-year bonds, alongside rising gold and yen, suggest a shift away from U.S. assets. Recent Eurozone data shows a rising current account surplus (€50.924 billion in March), slightly improved consumer confidence (-15.2 in May), and a modest 0.1% increase in construction output, signaling cautious economic improvement.

As President Trump’s Tax Cuts and Spending Bill approaches a House vote, markets are on edge, with the U.S. 10-year Treasury yield nearing 4.6%—a level that previously prompted Trump to ease reciprocal tariffs—potentially signaling volatility if breached, driving safe-haven flows to the yen. Ahead of the G7 Finance Ministers meeting in Canada, traders favor long yen positions, anticipating remarks from U.S. Treasury Secretary Scott Bessent and Japan’s Finance Minister Katsunobu Kato, though Tokyo sources suggest currency discussions will be minimal, potentially triggering short covering in USDJPY if no significant news emerges, given the high cost of holding short carry trades. A sell-off in the dollar, U.S. equity futures, and Treasuries reflects capital repatriation to Asia, with the yen benefiting amid reluctance to fund U.S. deficits. Japan’s April trade data reveals a deficit of ¥115.8 billion, below forecasts, with exports (2.0% YoY) and imports (-2.2% YoY) underperforming, driven by a 1.8% drop in shipments to the U.S., Japan’s top export market. U.S. auto tariffs threaten Japan’s economy, which produces 9 million cars annually, exporting 1.5 million to the U.S. and 1.4 million via Mexico and Canada, contributing to Q1 GDP contraction and complicating the Bank of Japan’s monetary normalization plans amid trade policy uncertainty.

The Reserve Bank of Australia cut the Official Cash Rate by 25 basis points to 3.85%, as expected, but its less hawkish-than-anticipated rhetoric led to a drop in Australian yields, narrowing the 3-year Australia-U.S. yield spread and pressuring AUDUSD downward. The RBA downgraded its forecasts, projecting 4Q25 GDP growth at 2.1% (from 2.4%), inflation peaking at 3.1% in 2Q26 (down from 3.7% in 4Q25), and unemployment rising to 4.3% by year-end (up from 4.2%), with inflation now within the 2-3% target and wage growth expected to slow. This signals a shift toward prioritizing growth and employment over inflation control, with markets anticipating 2-3 additional rate cuts and the RBA prepared to act cautiously while monitoring global developments. Market focus is on the potential impact of Trump’s Tax Cuts and Spending Bill on bond markets and discussions between U.S. Treasury Secretary Bessent and Japan’s Finance Minister Kato at the G7 Finance Ministers meeting. Ongoing sell-offs in the dollar, U.S. equity futures, and Treasuries indicate capital flows back to Asia, benefiting antipodean currencies like the AUD amid reluctance to finance U.S. deficits.

The ECB President’s view of the euro’s strength as an opportunity suggests tolerance for further appreciation, potentially nearing 1.20. The European Commission cut its eurozone GDP forecast to 0.9% for 2025 and 1.4% for 2026, citing U.S. tariffs, with inflation projected at 1.7% in 2026, possibly prompting ECB rate cuts. A new EU-UK deal boosting defense and trade eased post-Brexit tensions, while April inflation held steady at 2.2% and May’s Consumer Confidence is expected to rise.

Speculation of Asian currency appreciation, especially the yen, is growing as Japan and South Korea discuss currency matters with the U.S. amid trade talks, with traders betting on stronger Asian currencies as part of U.S. trade agendas. Japan’s Finance Minister Kato will meet U.S. Treasury Secretary Bessent at the G7 meeting (May 20-22, 2025), while a weak GDP print and unresolved U.S. auto tariffs keep the BOJ cautious on rate hikes. A trade deal removing the 25% car tariff could shift focus to BOJ rate hikes, with upcoming inflation and trade data likely to complicate its stance.

Markets are nearly certain of a 25bps rate cut at the upcoming Reserve Bank of Australia meeting, lowering the Official Cash Rate (OCR) from 4.10% to 3.85%, despite strong job and wage data, as global growth concerns from the “Liberation Day” tariff shock and weak domestic indicators like retail sales and productivity outweigh labor market strength. Core inflation fell to 2.9% in Q1 2025, within the RBA’s 2-3% target for the first time since 2021, giving the RBA room to ease policy, though a hawkish cut is expected due to lingering inflation and labor market concerns, with markets pricing in two more cuts to reach 3.35% by year-end. A U.S.-China trade truce and potential currency appreciation in Asia, particularly in South Korea and Japan, could support a stronger Chinese yuan, boosting the Australian dollar as a yuan proxy, while a rising risk premium on U.S. assets may keep the U.S. dollar weak.

The narrowing Eur10yr-Us10yr yield spread has tempered EURUSD bullishness, with Trump’s tariffs fueling expectations of a dovish ECB, though recent US-EU tariff talk progress offers hope. ECB President Lagarde views the euro’s strength, driven by erratic US policies, as a chance to enhance Europe’s financial stability, advocating for a digital euro and deeper fiscal coordination to rival the dollar. Germany’s fiscal stimulus, backed by Chancellor Merz’s debt brake suspension, is set to bolster the euro, contrasting with US debt concerns, while the ECB prepares alternative scenarios for June 2025 projections to navigate trade uncertainties. Geopolitically, Russia and Ukraine plan a 1,000-prisoner swap but lack a ceasefire, with European powers coordinating with a hesitant US on further Russian sanctions. This week, key Eurozone data, including the Spring Economic Forecast, April ECB policy accounts, and May PMI and IFO releases, will shed light on the economic toll of US tariffs.

Speculation is growing that the US is pushing for stronger Asian currencies, particularly the yen, as part of trade agreements, despite Japan’s Finance Minister Katsunobu Kato affirming with US Treasury Secretary Scott Bessent that exchange rates should be market-driven. This sentiment, fueled by ongoing US-Japan and US-South Korea currency talks, could lift the yen if trade deals progress, with markets eager for insights from Kato’s potential meeting with Bessent at the G7 Finance Ministers meeting (May 20-22). Japan’s Q1 2025 GDP contraction of -0.7% annualized has put the Bank of Japan on a cautious footing, with Credit Agricole’s Takuji Aida predicting no rate hikes until January 2026, pending July-September economic data and a possible technical recession. A successful trade negotiation removing the 25% US auto tariff, a key hurdle, could shift focus back to BOJ rate hikes, though Prime Minister Shigeru Ishiba and negotiator Ryosei Akazawa stress Japan won’t rush or compromise on national interests. This week, markets will scrutinize Japan’s April Trade Balance, March Core Machine Orders, May preliminary PMI Manufacturing and Services, and April inflation data, expected to remain elevated, for clues on economic resilience amid Trump’s tariffs.

Markets are pricing in a near-certain 25bps rate cut at the RBA’s May 20, 2025, meeting, lowering the OCR from 4.10% to 3.85%, despite robust job and wage data, as the “Liberation Day” tariff shock and global growth concerns outweigh domestic labor market strength. Weak indicators like flat hours worked, retail sales, and household spending, coupled with disappointing productivity growth, suggest a less resilient economy, while core inflation’s drop to 2.9%—within the RBA’s 2-3% target for the first time since 2021—gives room for easing without reigniting price pressures, with two more cuts expected by year-end to reach 3.35%. The US-China trade truce bolsters Australia’s export sector, and a potential yuan appreciation, driven by Asian currency talks involving South Korea and Japan, could lift antipodean currencies, further supported by a weakened US dollar following Moody’s downgrade.

The Eurozone’s Q1 GDP growth was revised down to 0.3%, missing forecasts, yet marked five quarters of expansion, bolstered by robust March industrial production (2.6% MoM, 3.6% YoY) and steady employment gains (0.3% QoQ, 0.8% YoY), signaling cautious optimism that may lead ECB hawks to tread carefully on rate changes amid geopolitical trade risks. Meanwhile, the ECB targets early 2026 to finalize plans for a digital euro, aiming for a launch within two to three years to reduce reliance on U.S. digital payment systems, seen as a vulnerability after Trump’s Transatlantic alliance exit, while Russia-Ukraine ceasefire hopes dim as Putin ignores demands and Trump shows no sign of backing heavier sanctions.

USDJPY is tracking the narrowing US-Japan 10-year yield gap, with Japan’s yields nearing two-week highs and US yields easing after data signaled slowing US growth. Japan’s Q1 GDP contracted more than expected at -0.7% annualized, raising concerns about a technical recession and likely delaying BOJ rate hikes until at least January, as trade talks with the US remain unresolved. Japan’s Finance Minister Kato aims to discuss currency volatility with US Treasury Secretary Bessent at the G7 meeting in Canada, while PM Ishiba targets a July trade deal but resists agreements retaining high US auto tariffs. A successful deal could revive BOJ hike expectations, while the yen may benefit if Asian currency appreciation talks reignite, amid a global slowdown boosting haven demand.

The PBOC has kept the yuan fixing near 7.2, signaling reluctance to allow rapid appreciation that could hurt Chinese export competitiveness, with yesterday’s weaker fix marking the first in four sessions, tempering bullish bets on yuan proxies like antipodean currencies. However, a temporary US-China trade truce and talks of currency appreciation among Asian exporters like South Korea and Japan could ease China’s concerns, potentially allowing faster yuan gains and boosting the yen, won, and antipodeans. This truce also supports Australia’s export sector, while former RBA board member Warwick McKibbin urged the RBA to hold rates steady next week, citing Australia’s fiscal stimulus, strong employment, and inflation near target amid global uncertainty.