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Headlines:

• Dollar a touch lower in European morning trade
• Watch out for these two key macro risks ahead
• Interest rate expectations remain largely the same amid lack of changes in macro picture
• Trump says it is extremely hard to make a deal with Xi
• EU’s Sefcovic: Constructive discussion with Greer, we are advancing in right direction
• US and Canada to strike trade deal as early as next week?
• Eurozone May final services PMI 49.7 vs 48.9 prelim
• UK May final services PMI 50.9 vs 50.2 prelim
• US MBA mortgage applications w.e. 30 May -3.9% vs -1.2% prior

Markets:

• AUD leads, JPY lags on the day
• European equities higher; S&P 500 futures up 0.2%
• US 10-year yields up 0.4 bps to 4.463%
• Gold down 0.1% to $3,349.30
• WTI crude flat at $63.40
• Bitcoin down 0.5% to $105,275

It was a relatively slow session with major currencies not really doing all too much. That comes as we continue to wait on more trade headlines, with some key developments to keep an eye out for during the latter stages this week.

The appeals court ruling on Trump’s reciprocal tariffs will need some response by the plaintiffs tomorrow and then by the administration by 9 June. So, that’s one to watch out for.

Then of course, there’s general trade negotiations with Trump aides continuing to talk up the notion of sealing trade deals before the early July deadline. The latest in this segment is that we might see one between the US and Canada as early as next week. So, we’ll see. 35 days to go. Tick tock, tick tock.

And then we also have Trump looking to get Xi on a phone call. He offered a light remark on that in the late hours of the US yesterday, saying it is “extremely hard” to make a deal with Xi. We’ll see how things go next but China clearly isn’t waiting around as they are reportedly weighing a major Airbus deal. Preliminary figures suggest they could put in an order between 200 and 500 aircrafts, bolstering ties with the EU instead.

In FX, the dollar is little changed for the most part as major currencies lack any real conviction during the session. EUR/USD moved up to touch 1.1400 before backing off to around 1.1380 again, up just 0.1% on the day. USD/JPY nudged a little lower to 143.80 but picked itself back up to 144.20 levels now, hinting at a push and pull mood more than anything else.

There wasn’t too much action elsewhere with only the antipodes holding slightly higher. AUD/USD is seen up 0.4% to 0.6485 but still lacking any real impetus to breach the 0.6500 mark.

In other markets, US futures nudged a little higher while European indices are holding up as well amid some calmer remarks from EU trade commissioner Sefcovic following his meeting with US trade representative Greer.

In the commodities space, gold is little changed as is oil so far on the day. So, all of that put together is not offering all too much to work with for now.

This article was written by Justin Low at www.forexlive.com.

Counterpoint Research revised down its 2025 global smartphone shipment growth forecast to 1.9% year-on-year from 4.2%.

Since the April 9 pause in the reciprocal tariffs, the de-escalation trend saw the markets pricing out a global slowdown and pricing in a rebound. Sure enough, that’s what happened as we started to get an improvement in the soft data.

The current expectations are for continued improvement in global growth and for the disinflationary trend to remain intact. That’s also what the central banks have been telling us as they keep their reaction function skewed towards easing.

There are two main risks to such expectations: renewed trade war and inflation.

Regarding the first risk, there’s lots of complacency around the TACO (Trump Always Chickens Out) trade. I can’t even blame people for that because actions speak louder than words, and we’ve seen countless times Trump escalating to de-escalate soon after.

I guess that’s his negotiating strategy. He wanted others to accept around 10% tariffs as a good thing, so he needed to set them much higher to make it look like an improvement.

We are in the final month of the 90 days pause though and what happens after the deadline is still unknown. It’s pretty clear though that the market will keep on fading any fear until the deadline because of wishful thinking. Therefore I wouldn’t expect much from this front until the actual deadline.

In any case, I think the risk that we get a breakdown and a renewed trade war is low but it’s worth to keep an eye on because it has the potential to change growth expectations and therefore move the markets a lot.

The second risk is inflation. And this one has higher probability compared to renewed trade war, in my opinion. This comes from the expectations that economic activity could rebound strongly in the next months after kind of a pause in Q1.

Moreover, we continue to have a global easing cycle, and tax cuts and de-regulation ahead. These are all strong drivers for growth and could increase inflationary pressures. Remember that inflation is a lagging indicator and it takes time before you see it in the actual data.

Some leading indicators like the US PMIs have been showing a pretty notable pick up already.

There’s been lots of media coverage on rising long term yields and they’ve been blaming it on fiscal spending. The reality is that the market has been just pricing in stronger growth and more inflation risk. For long term interest rates, the market takes into account three main
factors: future central bank policy, inflation expectations and future
supply and demand of Treasury debt issuance.

The US 10yr yield is currently at 4.45%, which is more than fine considering the risks and the policy rate at 4.25-4.50%. If the Fed was to hike tomorrow, you would see long term yields falling across the board as the market would price in slower growth, lower inflation and risk of recession.

As long as this inflation risk remains intact, the path of least resistance for long term yields will remain to the upside. And if it increases in the next months, we will see the market pricing out the rate cuts expected for 2025 and beyond. This will have implications for many markets.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

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The U.S. economy is now expected to expand by just 1.6% in 2025, while the global economy is set to grow by 2.9%.