The risk environment remains uncertain, with mixed signals from the US trade deal, ongoing geopolitical tensions in the Middle East, and growing concerns over the US Dollar’s stability due to Trump’s policies. China’s doubts about the White House undermining the Geneva trade deal and the possibility of no US agreement at this week’s G7 finance ministers’ meeting and the deadlock in Russia-Ukraine ceasefire talks further impact sentiment.
The Bank for International Settlements (BIS) warned of potential pressure on the US Dollar due to large off-balance-sheet FX swap positions. Additionally, the US Dollar faces weakness from Moody’s rating cut, cautious Fed statements, trade tensions with Japan and the EU, and rate cuts from the People’s Bank of China (PBoC) and the Reserve Bank of Australia (RBA). While news of the EU-UK trade deal and the White House’s efforts to address doubts about the USD briefly lifted market sentiment, allowing mild positive closing of Wall Street and testing the Treasury bond sellers, they couldn’t prevent the Greenback’s decline.
Amid these conditions, the US Dollar Index (DXY) stays under pressure after a weak start to the week, breaking through monthly support. Meanwhile, risk-sensitive currencies like the Australian, New Zealand, and Canadian Dollars reverse their recent gains, especially following rate cuts from the Reserve Banks of Australia and China.
The Euro (EUR) and British Pound (GBP) rise on trade deal optimism, while the Japanese Yen (JPY) strengthens due to its safe-haven status. Gold fades its recovery, while Crude Oil struggles to maintain its two-day rally.
European Central Bank (ECB) policymaker Muller emphasized the need for cautious rate cuts, while the Europe-UK trade deal and positive comments from Bank of England (BoE) officials helped EURUSD and GBPUSD rise, benefiting from a softer US Dollar and reaching their highest levels in over a week.
Meanwhile, deadlock in US-Japan trade talks and uncertainty over the Bank of Japan’s (BoJ) plans to reduce Japanese Government Bond (JGB) issuance couldn’t halt the USDJPY downtrend, which continued its six-day losing streak. The Yen benefits from the weaker US Dollar, its safe-haven status, and a hawkish outlook for the BoJ.
Despite the US Dollar’s weakness, AUDUSD struggles to hold gains, reversing Monday's uptick due to the RBA’s 0.25% and PBoC’s 0.10% rate cuts. Additional pressure comes from concerns over the US-China trade deal, global economic uncertainty, and political instability in Australia after the opposition coalition splits due to the Nationals’ withdrawal.
NZDUSD drops, ending a two-day winning streak, while USDCAD struggles to extend its losses as crude oil prices pull back, putting pressure on Canada’s key export. Overall, Antipodean traders remain cautious. Additionally, a wary mood ahead of Canada’s inflation data is weighing on USDCAD's recent moves.
Despite a weak US Dollar and a downbeat market mood, Gold and WTI Crude Oil struggle to extend their recent gains. Traders are cautious about a potential USD rebound, especially with bond market jitters and hopes that Washington will secure more trade deals. Gold faces additional pressure from challenges to bullish demand in China and India, while oil is tested by potential US sanctions lifting on Russia and Iran, alongside OPEC+ supply cuts.
Bitcoin (BTCUSD) struggles for direction after a volatile day, briefly hitting multi-week highs before closing lower. Meanwhile, Ethereum (ETHUSD) extends its gains with a three-day winning streak. Despite recent struggles, crypto traders remain optimistic about a major US cryptocurrency regulatory overhaul and technical breakouts, which continue to support these riskier assets.
As attention shifts to US growth, trade, and political updates, market moves will be influenced by Thursday’s global PMIs for May, Canada’s inflation data, weekly US oil inventories (API), and speeches from ECB, BoE, and Fed officials. The US Dollar could pause its recent decline, potentially weighing on commodities and Antipodean currencies. However, USDCAD may see further downside if Canada's inflation challenges the dovish Bank of Canada (BoC) outlook, especially with optimism around new leader Mark Carney. AUDUSD could fall further, while EURUSD and GBPUSD might lose some upward momentum. USDJPY sellers are likely to maintain control. Crude Oil could weaken more if US inventories show another surprise build.
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