FX Market is Between Uncertainty and Uneasy Optimism

The FX market remains riddled with ambiguity, where positive headlines and underlying fragilities battle for influence. While USD strength has faded slightly, a cohesive narrative has yet to emerge. The recent FOMC decision, which left rates unchanged, reaffirmed the Fed’s data-dependent stance. Chair Powell didn’t push back aggressively against rate cut expectations, yet also didn’t endorse them. The takeaway: the Fed is in "wait-and-see" mode, acknowledging signs of economic softening without abandoning caution over inflation especially with trade-related price pressures looming.

If you would like to read the full article from FOMC click here 

That stance aligns with market pricing. A rate cut for June is nearly priced out, but the July meeting remains in focus, contingent on how economic data unfold and whether the tariff situation deteriorates further.

AUD and NZD: Tariff Relief Not Enough

The initial lift from U.S.–China talks, set to resume in Switzerland, offered little fuel for the Aussie and Kiwi. These currencies, typically hypersensitive to global growth signals, appear desensitized. The problem isn’t that tariff de-escalation talks are unwelcome; it’s that they’re too little, too late. Market participants are working under the assumption that most of the growth damage is already baked in. Australian and New Zealand yields have slumped, underscoring the market’s conviction that rate cuts are on the horizon even if central banks are not rushing to deliver them.

AU10Y (Blue) NZ10Y Yields 

CNY: Stimulus Arrives, But Tariffs Loom Larger

Beijing finally pulled the trigger on a widely anticipated stimulus bundle. The PBoC’s 50bps RRR cut and 10bps trim on the 7-day reverse repo rate arrived alongside structural support for sectors like elderly care and small businesses. Yet markets met the package with a shrug. The reaction in Chinese equities and bonds was tepid, not because easing was unwelcome, but because it’s been so well-telegraphed and possibly not aggressive enough given the scale of the threat.

The CNY sits near 7.23 against the dollar, but that level may be living on borrowed time. MUFG expects a move toward 7.40 in Q2 and 7.45 by Q3, and it’s hard to argue against that view. With Trump-era tariff escalation effectively reinstated, a 40% average tariff on Chinese imports is a realistic risk. That’s a major headwind not just for Chinese exports, but also for sentiment and capital flows.

USDCNH H1 Chart 

GBP: Navigating Construction Slowdowns and Gilt Auctions

Sterling has found itself in a balancing act. April’s construction PMI came in at 46.0, confirming that the UK building sector is still struggling below the 50 threshold that marks expansion. However, upcoming gilt auctions particularly the 5-year tranche may support demand for UK assets as investors seek yield amid global policy hesitation. The Bank of England, for its part, remains cautious, and the pound has shown resilience, especially against the euro, helped by relative economic stability.

CAD: Steady as She Goes

The Canadian dollar has weathered the global storm better than many of its peers, though the path ahead is far from smooth. April’s leading index reading will offer another clue into the domestic economy’s pulse. Still, the CAD remains tethered to external factors, like, oil prices, U.S. policy, and risk appetite. Any disappointment in trade negotiations or a flare-up in geopolitical tensions (especially in Asia) would likely see CAD retreat alongside other risk-sensitive FX.

USD Outlook: Bearish Tilt Still Has Legs

Despite occasional spurts of strength, the broader picture for the dollar remains bearish. Treasury yields may have rebounded modestly, but the underlying trend in U.S. data softening growth, moderating inflation, and dovish Fed sentiment is pushing investors away from USD. Even the Beige Book, often overlooked, provided a subtle red flag: negative sentiment terms like “uncertainty” and “decline” hit their most extreme since the early COVID period.

Trade policy remains the wildcard. If the upcoming U.S.–China negotiations disappoint, we may see a renewed bid for safe havens. But if talks genuinely progress unlikely as that may seem risk appetite could lift further, weakening the dollar and boosting the yen, euro, and emerging markets.

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