May 22, 2025

Foreign Exchange Commentary

Mid-day Remarks

Summary

  • Canadian dollar flat ahead of Macklem-Champagne remarks.
  • Euro currency trades in constrained 1.25% range thus far this week as traders expect light trading Friday ahead of the U.S. Memorial Day weekend.
  • U.K. pound sterling touches highest level this week since February 2022.
  • U.S. Treasury yields remain elevated above 4.58% on the 10-year bond as tax bill passes houses yet fails to cut deficit spending as much as many hoped.
  • U.S. May Flash Composite PMI 52.1 versus 50.6 in April; year ago, reading was 54.5.
  • U.S. May Flash Manufacturing PMI 52.3; estimate 51.0.
  • Japan’s Akazawa to visit U.S. May 23-25 for trade talks; Japanese yen hits two-week high.
  • Rupture in JGB liquidity is a global warning says MacroScope.
  • Reserve Bank of Australia (RBA) ready to respond if needed to trade-related shock.
  • New Zealand dollar falls versus Australian dollar on New Zealand restrained growth outlook.
  • U.S. jobless claims 227,000 in May 17th week; estimate 230,000.
  • BofA revises China yuan 2Q forecast to 7.5 per dollar; bearish on HKD$.

Noteworthy

  • U.S. Dollar Little Moved After U.S. House Passes Tax Bill
  • British Pound Sterling Eases from Recent Highs

The U.S. dollar stayed slightly higher on the day, showing little reaction after the Republican-led House passes President Trump’s tax and spending bill. It comes after Republican leaders made a series of last-minute changes to unite the party. The measure now goes to the Senate.

Before changes were made, the bill was expected to add $2.7 trillion to the budget deficit over the next decade. This fueled concerns over the U.S. fiscal position following last week’s U.S. credit rating downgrade from Moody’s, hitting the dollar.

The DXY dollar index last traded up 0.5% at 99.8070, little changed from levels before the decision. However, it has only recovered marginally from the two-week low of 99.3360 reached Wednesday.

Meanwhile, the British pound sterling turns lower against the U.S. dollar after briefly hitting a three-year high Wednesday following higher-than-expected U.K. inflation data that prompted markets to scale back Bank of England interest rate cut expectations.

Sterling’s pullback shows the impact of revised rate expectations is “slowing wearing off,” Commerzbank said in a note. Sterling’s rise against the dollar mostly reflected a weaker dollar.

The inflation figures didn’t help sterling against the euro currency, or the G-10 average. That means sterling needs a fresh catalyst to rise, the note added. Sterling fell 0.2% to $1.3391 after hitting a high of $1.3469 Wednesday.

Sterling pares gains against the dollar after the key U.K. purchasing managers’ index survey for May was unexpectedly weaker.

The composite PMI fell to 49.4 in May from 48.5 in April, indicating a contraction in business activity. Analysts expected the reading to rise into expansionary territory at 50.8.

The survey also showed inflation pressures moderated. Coupled with signs of faltering economic growth and job losses, this likely keeps the door open for further interest-rate cuts in the coming months, S&P economist Chris Williamson says in the survey’s press release.

Elsewhere the euro currency trimmed losses slightly versus the dollar as an improved German business confidence survey offsets a weaker-than-forecast eurozone purchasing managers’ index survey.

The German ifo business climate index rose to 87.5 in May from 86.9 in April, as expected by analysts. The expectations index rose to 88.9 in May from 87.4 in April, above the 87.9 forecast.

However, the euro-zone composite PMI, which measures manufacturing and services activity, fell to a six-month low of 49.5 in May from 50.4 in April against an expected 50.8. A level below indicates a contraction in activity.

The euro currency fell after a key measure of German manufacturing and services activity unexpectedly fell into contraction territory in May.

The composite purchasing managers’ index fell to a five-month low of 48.6 in May from 50.1 in April, below the 50.3 reading expected by analysts. A level below 50 signals a contraction in activity while a reading above that indicates growth.

The euro currency fell to an intra-day low of $1.1266 after the data from $1.1324 before the data. The German 10-year Bund yield is last at 2.646%, down from 2.654% beforehand, Tradeweb data show. 

In general, the U.S. dollar is expected to stay steady at weak levels amid mounting concerns about the U.S. fiscal position. The House of Representatives passed President Trump’s tax and spending bill Thursday as previously noted.

The plan is expected to add trillions of dollars in debt over the next decade, fueling worries about the fiscal position in the wake of Moody’s downgrading the U.S. credit rating. “Investors are beginning to question whether this ever-growing U.S. debt load is truly viable, and perhaps more importantly, whether it’s as low risk as we pretend it to be,” Swissquote Bank says in a note.

The DXY dollar index reached a two-week low of 99.3360 on Wednesday also noted earlier in this commentary.

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