US

Political jawboning is adding to the fog of war, though market reaction remains relatively contained. Yesterday, US President Donald Trump said the US delayed the strikes “for a little while, hopefully maybe forever,” because “we've had very big discussions with Iran, and we'll see what they amount to.”

Regardless, the ongoing Strait of Hormuz blockade continues to be the dominant market driver because there is no clear endgame in sight and the buffer from global oil inventories is shrinking fast. As a result, crude oil prices are holding up well which can further weigh on global bond markets.

In our view, the dollar index (DXY) looks likely to overshoot the upper end of its nearly one year 96.00-100.00 range. The US has a positive net energy balance and resilient US economic activity backs a more restrictive Fed. Indeed, the Atlanta Fed GDPNow model estimates annualized real GDP growth of 4.0% in Q2 vs. 2.0% in Q1.

Moreover, underlying demand for USD remains strong. The US Treasury International Capital (TIC) data showed that in the twelve months to March, foreign investors accumulated $1553bn of long-term US securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds). While down from the record high of $1680bn in January and the lowest since October 2025, the amount still dwarfs the -$700bn accumulated US trade deficit over the same period.

Nevertheless, we expect foreign appetite for US long-term securities to dwindle over time. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities. That’s pure balance of payments mechanics and is a structural drag on USD.

On tap today: ADP weekly employment change and a moderated discussion with Fed Governor Christopher Waller.

CANADA

USD/CAD is up and nearing important resistance at its 200-day moving average (1.3813). Canada April CPI is up next (1:30pm London, 8:30am New York). Headline CPI is seen rising to 3.1% y/y vs. 2.4% in March, the highest since December 2023, due to higher gasoline and food prices.

The policy-relevant core inflation (average of trim and median CPI) is projected to be more muted at 2.25% y/y vs. 2.25% in March which can cool Bank of Canada rate hike bets (75bps to 3.00% in the next twelve months).

UK

GBP/USD retraced part of yesterday’s gains. Growing UK labor market slack will curb Bank of England (BOE) rate hike expectations. The unemployment rate unexpectedly rose 0.1ppt in March to 5.0% (consensus: 4.9%) and labor demand worsened as payroll employment plunged -100k in April (consensus: -10k, March: -28k), the biggest monthly drop since May 2020.

Meanwhile, the policy-relevant private sector regular pay growth slowed to 3.0% y/y in March (consensus: 3.1%) vs. 3.2% in February. That’s the lowest pace of wage growth since October 2020 and is well below the BOE’s Q1 projection of 3.5%.

The swaps curve continues to price in about 75bps of cumulative BOE rate hikes to 4.50% in the next twelve months. That’s too aggressive given the BOE estimates a negative output gap between -1.5% and -1.7% of potential GDP in 2026. Bottom line: scope for a downward adjustment to the UK swaps curve alongside domestic political uncertainty, can further undermine GBP.

JAPAN

USD/JPY is up above 159.00 on USD strength but should hold under 160.00 due to threat of currency intervention. Japan Q1 real GDP growth overshoots expectations and argues for tighter BOJ policy. The economy expanded by 0.5% q/q (consensus: 0.4%) vs. 0.2% in Q4 (revised down from 0.3%) driven largely by net exports (+0.3ppt). Inventory destocking was the only drag to growth (-0.1ppt).

The swaps market still price-in about 75% odds of a 25bps Bank of Japan (BOJ) rate hike to 1.00% at the June 16 meeting. Japan’s April CPI print on Friday should settle the debate around a June BOJ move.

On a side note, Japan’s firmer growth backdrop improves the country’s fiscal credibility. Japan nominal GDP growth of 4.0% y/y in Q1 vs. 3.7% in Q4 remains above 10-year JGB yields of 2.78%, easing concerns about debt sustainability.

AUSTRALIA

AUD/USD is extending its decline below 0.7200 and should stabilize a bit lower around 0.7000. The minutes of the RBA May 4-5 meeting reinforced the bank’s data-dependent pause. At that meeting, the RBA Board voted 8-1 to deliver a third consecutive 25bps hike to 4.35%. The dissenting member argued for a hold as inflation expectations remained anchored and demand risks were skewed to the downside.

Going forward, RBA Board members judged that “financial conditions would probably be somewhat restrictive after this decision” and preferred to wait to “see how the conflict in the Middle East develops and Australian households and businesses respond.”

RBA cash rate futures price-in roughly 65% odds of 50bps of tightening by year-end, with a full 25bps rate increase implied for September. We see limited scope for a big upward adjustment in the cash rate futures curve for two reasons. First, the RBA projects real GDP growth to be below potential over the next two years. Second, the cash rate currently sits within, but near the top of, the range of model-based central estimates .of the nominal neutral rate