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Hello everyone, today XM Foreign Exchange will bring you "【XM Foreign Exchange Market Analysis】: Collection of positive and negative news that affects the foreign exchange market". Hope it will be helpful to you! The original content is as follows:
The Trump administration announced that it would increase import tariffs on steel and aluminum from 25% to 50% from June 4, aiming to protect domestic industries. This move immediately aroused strong opposition from the EU, and the EU said it would be prepared to take countermeasures. If no solution was reached, the relevant countermeasures would take effect on July 14. Uncertainty in U.S. tariff policy has exacerbated global trade tensions, which may lead to a warming market risk aversion sentiment, pushing the dollar to strengthen as a safe-haven currency. However, tariff hikes may also curb global economic growth, weaken risk appetite, and put potential pressure on the US dollar.
The US ISM manufacturing PMI fell to 48.5 in May, the lowest since November 2024, shrinking for the fourth consecutive month, indicating that the manufacturing industry continues to be weak. The final value of S&P Global Manufacturing PMI was 52, slightly lower than expected, further reflecting the slowdown in manufacturing growth. In addition, the U.S. manufacturing new orders, employment and inventory indicators performed poorly in May, indicating that domestic and foreign demand weakened at the same time. Weak economic data strengthens market expectations for the Fed's interest rate cut. The swap market shows that although the probability of interest rate cuts in June is low, expectations for interest rate cuts in the second half of the year have risen, which may put long-term pressure on the US dollar.
The market generally expects that the ECB will announce its eighth interest rate cut on June 5, lowering deposit rates by 25 basis points from 2.25% to 2% in response to slowing economic growth and inflationary pressures. Berenberg analysts point out if inflation continuesThe rate cut may be the last rate cut for the European Central Bank, after which the interest rate will remain at 2%. The final value of the manufacturing PMI in the euro zone in May was 49.4, which was lower than the boom and bust line, but improved from the previous value, indicating that the manufacturing downturn has eased slightly. However, the eurozone economy still faces challenges from trade policy uncertainty and energy price fluctuations, and the expectation of interest rate cuts may put pressure on the euro against the dollar.
The Bank of England lowered the benchmark interest rate by 25 basis points to 4.5% on May 31, in line with market expectations. This is the third rate cut since June 2024. The UK's manufacturing PMI rose to 46.4 in May from 45.4 in April, the highest point in the past three months, but it is still in a shrinking range, indicating that manufacturing continues to be weak. The market expects the Bank of England to continue to cut interest rates in 2025, with the cumulative interest rate cuts for the whole year likely to reach 75 basis points to cope with slowing economic growth and inflationary pressures. Expectations of interest rate cuts may lead to further weakening of the pound against the dollar.
The Bank of Japan maintained the policy interest rate unchanged at 0.5% at the monetary policy meeting on June 3, which is in line with market expectations. The Bank of Japan stressed the high uncertainty of the economy and inflation, especially the impact of US tariff policies on the global economy. Japan's government bond auctions were poor in May, and yields rose, triggering concerns about liquidity tightening, which may put pressure on the yen exchange rate. However, the Bank of Japan said it will continue to pay attention to economic data, and if inflation continues to rebound, interest rates may be raised in the future.
The Bank of Canada kept interest rates unchanged at 2.75% on June 3, stopping seven consecutive drops, aiming to observe the impact of tariff policies on the economy. The RBA has started a cycle of interest rate cuts since February 2025, and the current cash rate is 4.1%. The market expects further interest rate cuts in 2025, and the cumulative interest rate cuts throughout the year may reach 100 basis points. The Australian dollar has performed strongly against the US dollar in recent years, benefiting from a decline in U.S. interest rates and a rebound in global risk appetite.
The risk of the US fiscal "gray rhino" is gradually emerging. In June, about US $6.5 trillion in US Treasury bonds expired in a concentrated manner. If the US government cannot borrow new bonds smoothly or the debt interest rate continues to rise, it may intensify fiscal pressure and even trigger systemic financial risks. In addition, the US sovereign credit rating was downgraded to AA1 by Moody's, and the US dollar's position as the world's major foreign exchange reserve was challenged. landIn terms of politics, the easing and escalation of the situation in the Middle East alternately occur, and there is still uncertainty, which may affect market sentiment at any time.
On June 3, 2025, the foreign exchange market faces the interweaving influence of multiple factors. U.S. tariff escalation, weak economic data and expectations of interest rate cuts put pressure on the US dollar; expectations of interest rate cuts by the European Central Bank and the Bank of England may cause the euro and pound to weaken; the Bank of Japan keeps interest rates unchanged, but volatility in the Treasury bond market may affect the yen; the escalation of the situation in the Middle East pushes risk aversion sentiment, which is beneficial to the US dollar and gold. Investors need to pay close attention to policy trends, economic data releases and geopolitical risks in major global central banks to cope with market volatility.
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