Foreign Exchange Commentary

Summary

• U.S. PCE inflation rose 0.1% MoM in April; YoY inflation fell to 2.1% (lowest since 2021); core PCE came at 2.5%.
• Fed minutes published on May 28th – officials acknowledged "difficult tradeoffs" with rising inflation and unemployment risks.
• President Trump met with Fed Chair Jay Powell. Mr. Trump insisted on his desire for lower rates.
• A trade court blocked the Administration blocked President Trumps tariffs saying it was beyond his authority under the (IEEPA). An appeal court kept tariff in place until June 9^th.
• Yields on 30-year gilts reached a 27-year high, closing at 5.37% on Friday, reflecting concerns about UK debt sustainability.
• President Trump threatened 50% tariffs on European imports.
• Inflation in Japan is increasing, and long-term Japanese Bonds are reflecting the changes in inflation and growth prospects.

United States – Inflation, Fiscal Policy and Political Pressures on the Fed  

U.S. Personal Consumption and Expenditure (PCE) inflation rose by 0.1% month-over-month in April, bringing the year-over-year reading to 2.1%—the lowest level since February 2021. Core PCE also recorded a 0.1% monthly gain, bringing the annual rate at 2.5%.

The week brought some new developments as the Federal Reserve meeting minutes were published on May 28th. The document disclosed comments from Fed officials acknowledging facing "difficult tradeoffs" between rising inflation and unemployment risks stemming from the uncertainty created by the Trump administration trade policies. This represents a shift in the Fed's outlook, pointing to a higher risk of stagflation, and potentially complicating monetary policy decisions in coming months.

In the minutes, Fed officials also highlighted recent cooling in inflation and labor market resilience as justification for maintaining a patient, data-dependent approach. Despite public remarks by President Trump urging immediate rate cuts, the Fed emphasized its independence, stating that "policy decisions will continue to be guided by incoming data."

This week, President Trump organized a meeting with Fed Chair Jerome Powell at the White House, insisting on his desire for lower borrowing costs. The political pressure on monetary policy independence has recently become a significant concern for market participants.

Congressional negotiations over the FY2026 budget proposal have focused on extending select tax incentives and infrastructure outlays without exacerbating deficits. However, several Republican lawmakers threatened to block Trump's spending bill unless debt is reduced, creating political obstacles for the Trump administration's "big, beautiful bill". The Congressional Budget Office (CBO) projects that the current proposed bill would widen the deficit by $3.8 trillion over a decade—because of this dynamic, the U.S. 10-year Treasury yield reached 4.60%, its highest level since early February.

An important legal development unfolded this week regarding the Trump administration's trade policy. On May 28, the U.S. Court of International Trade ruled that President Trump's implementation of sweeping tariffs was beyond his authority under the International Emergency Economic Powers Act (IEEPA). The court determined that the IEEPA does not authorize the president to impose extensive import taxes and issued a permanent injunction blocking these tariffs.

The following day, however, the U.S. Court of Appeals for the Federal Circuit granted a temporary stay of the lower court's decision, allowing the tariffs to remain in effect during the appeals process. The court of appeals established deadlines requiring plaintiffs and the administration to submit their respective briefs by June 9.

This ongoing legal dispute increases the uncertainty around U.S. trade policy, impacting both businesses and international partners. The administration has indicated its intention to explore other legal strategies to keep the tariffs, stressing their importance to national security and economic objectives.

United Kingdom – Fiscal Pressure and Bond Market Stress
The UK faced fiscal pressures this week, as Chancellor Rachel Reeves is being squeezed by rising borrowing costs and spending pressures. A global bond market sell-off produced by U.S. debt fears put fresh pressure on the Chancellor and her self-imposed fiscal rules. Yields on 30-year gilts reached a 27-year high, closing at 5.37% on Friday, reflecting concerns about UK debt sustainability.

In terms of price action, the British pound (GBP) traded in a narrow range, initially gaining on the back of stronger Q1 GDP revisions and BoE commentary suggesting limited room for further rate cuts. The British Pound then slipped slightly as risk appetite faded and the dollar rebounded midweek.

Europe – Trade Tensions
The European Union is facing escalating trade tensions as President Trump threatened 50% tariffs on European imports, while the EU vowed to defend its interests. Speaking in the Oval Office, the President emphasized that he was not seeking a deal with the EU but might delay the tariffs if European companies made major investments in the U.S.

The euro (EUR) was pretty much unchanged this week against the dollar, we saw some volatility during the week based on expectations of a June ECB rate cut and stable eurozone inflation data. Adding to the volatility were comments from ECB officials warning of medium-term inflation risks due to upcoming fiscal expansion in the EU.

Japan – Changing Inflation Environment
In Japan the corporate service price index rose 3.1% in April year-on-year, representing the fastest pace since 2023. This index tracks input costs for businesses, and this reading points to underlying inflationary pressures gaining momentum, particularly in the service sector. On the other, CPI figures were published this week and were pretty much in line with market expectations.

The Bank of Japan held its short-term policy rate at 0.5% last week (May 21), Like the Federal Reserve, the bank of Japan is maintaining a cautious stance given uncertainty over the impact of U.S. tariffs on Japanese exports.

Japan faced significant bond market pressure this week, with 30-year bond yields spiking. The bond market is signaling concerns about Japan's fiscal regime and growth prospects, with Germany and Japan now yielding the same on 30-year bonds.

the Japanese yen (JPY) depreciated this week reached a level of 146.29 on May 29th and as of the time of this writing is trading at 144.18. The sharp moves in JPY this week were caused by higher government bond yields.