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.