Dollar Weakness Persists (11 – 15 May)

Global markets moved through another volatile week as investors balanced resilient US economic data against ongoing geopolitical uncertainty in the Middle East. The US dollar weakened further, falling below 98 and reaching a ten-week low despite stronger labor market figures. At the same time, fragile ceasefire conditions between the United States and Iran continued to shape energy markets, while tensions around the Strait of Hormuz remained a key source of inflation risk and market caution.

The broader macro environment remains mixed. Strong US employment data reinforced the view that the economy is still holding up despite slowing momentum in some labor indicators. However, weakening consumer sentiment, persistent geopolitical risks, and energy-driven inflation pressures continue to support expectations that major central banks will remain cautious. Markets still expect the Federal Reserve to keep rates elevated for longer, while expectations for additional tightening from the European Central Bank and Bank of England remain in place.

Market Drivers & Catalysts

• Strait of Hormuz Tensions: Renewed clashes and naval activity near the Strait of Hormuz kept markets alert to potential disruptions in global oil supply, despite the ceasefire formally remaining in place.
• Strong US Labor Data: US nonfarm payrolls rose by 115,000 in April, significantly above expectations of 62,000, while unemployment remained steady at 4.3%.
• Dollar Weakness Despite Data: The US Dollar Index fell below 98 and reached a ten-week low as markets focused more on policy expectations and geopolitical uncertainty than headline economic strength.
• Central Bank Tightening Expectations: Markets continue to price in additional tightening from both the ECB and the BoE later in the year, as inflation risks remain elevated.
• Trade and Tariff Concerns: Donald Trump’s renewed tariff warnings toward the European Union added another layer of uncertainty for European markets and currencies.

Fixed Income

• US 10-Year Treasury Note Yield: Declined to 4.35%, approaching recent two-week lows as geopolitical developments remained the main market driver. Strong jobs data contrasted with weakening consumer sentiment, reinforcing expectations that the Federal Reserve will keep rates steady for an extended period.
• UK 10-Year Bond Yield: Fell to 4.85%, its lowest level since April 20, supported by softer global risk sentiment and demand for government debt. Despite easing inflation concerns tied to improving geopolitical sentiment, markets still price in two Bank of England rate hikes by year-end.
• Japan 10-Year Government Bond Yield: Climbed to around 2.48% as Middle East tensions revived inflation concerns and increased volatility across global markets. Rising real wages in Japan also strengthened expectations for additional Bank of Japan tightening.
• Germany 10-Year Bund Yield: Slipped to just below 3% as easing geopolitical fears supported bond markets. However, markets still expect at least two ECB rate hikes, while trade tensions with the US remain a concern.

Commodities

Gold climbed above $4,720 per ounce, reaching its highest level since April 22 and heading for a weekly gain exceeding 2%. Optimism around a potential US-Iran peace agreement improved sentiment, while a weaker dollar and stable ceasefire conditions supported demand.

Silver surged above $80 per ounce, reaching its highest level since mid-March and moving toward a weekly gain of more than 7%. Easing geopolitical tensions and stronger US labor data supported broader market confidence.

Currencies

• U.S. Dollar Index (DXY): Fell below 98, reaching a ten-week low despite stronger labor market data. Markets continue to focus on geopolitical risks and expectations that the Fed will remain cautious.
• Euro: Rose above $1.175, its strongest level since April, supported by easing geopolitical concerns and expectations of tighter ECB policy. Trade tensions with the US also remained in focus after renewed tariff warnings.
• British Pound: Strengthened above $1.36, reaching its highest level since mid-February. Markets viewed UK political developments as manageable while continuing to price further Bank of England tightening later in the year.
• Japanese Yen: Held near 157 per dollar and ended the week broadly unchanged. Intervention warnings from Japanese authorities continued, while stronger wage growth supported expectations for further BOJ tightening.

Economic Data Highlights

• US Unemployment Rate (April): Held steady at 4.3%, matching expectations. However, the number of unemployed rose by 134,000 to 7.37 million, while labor force participation fell to 61.8%, its lowest since October 2021. The broader U-6 unemployment rate increased to 8.2%.
• US Job Openings (March): Declined by 56,000 to 6.866 million. Hiring rose to 5.6 million, while total separations remained stable at 5.4 million, indicating a relatively stable labor market despite sectoral weakness.
• China Trade Balance (April): Trade surplus narrowed to $84.82 billion from $95.85 billion a year earlier. Exports surged 14.1% to a record $359.44 billion, while imports jumped 25.3% to $274.62 billion.
• US Nonfarm Payrolls (April): The economy added 115,000 jobs, well above expectations of 62,000 and following a revised 185,000 gain in March. Job growth was led by health care, transportation and warehousing, and retail trade.

Macro Calendar Highlights

• Monday: US Existing Home Sales (4.05M)
• Tuesday: German CPI (0.6%), US CPI (3.7% YoY), and US 10-Year Note Auction
• Wednesday: US PPI (0.5%), Crude Oil Inventories (-2.313M), and US 30-Year Bond Auction
• Thursday: UK Q1 GDP (0.6%), US Retail Sales (0.6%), and US Initial Jobless Claims (206K)