The United States dollar index (DXY) enters the new week on a fragile footing, holding below 99.20 after a volatile period marked by mixed economic data and lingering trade tensions.
The ISM Services PMI for May dropped into contractionary territory at 49.9, missing forecasts and fuelling concerns about faltering economic momentum.
This followed a string of soft indicators, including declining factory orders, poor ADP private payrolls, and subdued manufacturing activity - all suggesting sluggish second-quarter growth.
Trade tensions added another layer of uncertainty after Trump declared that negotiations with China’s President Xi were proving “extremely hard”, reigniting market anxieties over prolonged tariff battles.
President Donald Trump also announced that Treasury Secretary Scott Bessent and other officials from his administration will meet with Chinese counterparts in London on Monday for trade talks.
While Friday’s nonfarm payrolls (NFP) report offered modest relief - showing a better-than-expected increase of 139,000 jobs and a steady unemployment rate of 4.2% - it wasn't sufficient to reverse the Dollar’s broader bearish tone.
U.S. Treasury yields climbed, but the outlook for Fed rate cuts remains in focus, with focus now turning to Wednesday’s consumer price index (CPI) release.
Euro Awaits Direction as ECB Sends Mixed Signals
The Euro had a choppy week, boosted temporarily by a hawkish tone from the European Central Bank (ECB) after it cut interest rates by 25 basis points.
President Christine Lagarde’s remarks suggested the policy cycle is nearing its end, adding that further moves would be determined meeting by meeting.
The euro climbed near 1.15 against the U.S. dollar before retreating to settle around 1.14.
Lagarde downplayed inflation concerns tied to the U.S.-led trade war, a view echoed by policymaker Mario Centeno, who warned of deflation risks into early 2026.
However, renewed U.S. dollar strength following the NFP report capped the Euro's gains, which remains supported long-term but vulnerable short-term to trade headlines and U.S. data surprises.
Aussie Struggles as NFP Eases Fed Cut Bets
The Australian Dollar continued to trade just below the key 0.65 resistance level against the U.S. dollar, with its rally halted for a fifth consecutive week.
A better-than-expected NFP report triggered a bounce in the USD, pushing Aussie lower late Friday.
Markets had started to price in a July rate cut from the Fed amid deteriorating U.S. data earlier in the week, however, the NFP print tempered those expectations, with rate cut odds dropping from over 30% to 16%, shifting focus to a potential September move.
The Reserve Bank of Australia remains cautious, and monetary policy divergence between the RBA and the Fed may continue to weigh on the Aussie.
Cable Looks to Reclaim 1.36
The British Pound (GBP) outperformed early last week, climbing above 1.3600 against the U.S. dollar - its highest level since February 2022 - before pulling back modestly after Friday’s NFP report lent support to the greenback.
The Pound was buoyed by broad U.S. dollar weakness and ongoing optimism around the UK’s economic resilience.
However, a strong rebound in the JOLTS job openings and mixed U.S. data prompted some dollar buying midweek, limiting the pair’s upside.
Looking ahead, a busy economic calendar awaits Sterling traders. UK labour market data is due Tuesday, followed by GDP and industrial production on Thursday.
Yen Feels the Pressure, Tests 145
The Japanese Yen extended gains last week, reaching a weekly high near 145.09 on the back of rising U.S. Treasury yields and robust U.S. jobs data.
The bullish momentum was driven by a shift in sentiment following the NFP report and a positive recalibration of Fed rate cut odds.
However, a failure to sustain gains above 145.00 could trigger a pullback toward the June 3 swing low of 142.37.
Yet, traders remain cautious amid mixed fundamentals, with global risk sentiment and U.S. policy developments likely to drive short-term moves.
Key Economic Events for the Week Ahead
On Monday, Australian financial markets will be closed in observance of the King's Birthday public holiday. Elsewhere in Asia, Japan will publish its current account and final GDP figures. China will also be in focus as it releases key inflation data, including the Consumer Price Index (CPI), Producer Price Index (PPI), and balance of trade numbers.
Tuesday will bring updates from the United States, including wholesale inventories and consumer inflation expectations. In Australia, the Westpac-Melbourne Institute Consumer Sentiment Index and NAB Business Confidence data are due. Meanwhile, the United Kingdom will report its latest unemployment rate.
On Wednesday, Japan will issue its PPI figures, while South Korea will release unemployment data. The spotlight, however, will be on the United States as markets await the highly anticipated May Consumer Price Index (CPI), which could significantly influence Federal Reserve rate expectations.
Moving into Thursday, the United Kingdom will release a slew of data, including the RICS House Price Balance, balance of trade, GDP, and industrial and manufacturing production. In the United States, the Producer Price Index (PPI) and weekly jobless claims will be published, offering further insight into inflationary pressures and the labour market.
Finally, on Friday, Japan will release its industrial production figures, while the United States will wrap up the week with the preliminary reading of the University of Michigan Consumer Sentiment Index, a closely watched measure of household confidence and inflation expectations.
