CAPITALDIGEST MARKET REVIEW, 18/05/2026
May 18, 2026
DOLLAR CLIMBS FOR FIFTH STRAIGHT DAY AS TREASURY YIELDS SURGE
The dollar strengthened for a fifth straight day on Friday and was set for its largest weekly percentage rise in two months, as market expectations for the Federal Reserve’s monetary policy path tilt further toward possible rate hikes. The dollar’s advance comes as U.S. Treasury yields continue to ascend, with the benchmark 10-year Treasury note reaching 4.599%, its highest in a year. A raft of economic data earlier this week pointed to rising price pressures as energy supplies through the Strait of Hormuz remain largely blocked due to the Iran war. The dollar index , which measures the greenback against a basket of currencies, gained 0.32% to 99.27 after climbing to 99.302, with the euro down 0.39% at $1.1623 after hitting a five-week low of 1.1617. “It’s looking to me that the bond market’s leading the charge on this one, as they often do, that they’re starting to get worried about inflation,” said Joseph Trevisani, senior analyst at FXStreet in New York.continue “If you’re going to get an oil price in WTI from 95 to 105, then a lot of inflation expectations have to be reset, and in fact, they’re resetting. Well, if they’re resetting, the bond market’s going to do exactly the same thing, and that’s what the bond market is doing.” West Texas Intermediate crude jumped 4.16% to $105.38 a barrel and Brent rose to $109.34 per barrel, up 3.42% on the day, after comments by U.S. President Donald Trump and Iran’s foreign minister further dented hopes of a deal to end ship attacks and seizures around the Strait of Hormuz.
POUND DIPS AS SENIOR UK MINISTER RESIGNS, RAMPING UP UK POLITICAL CRISIS
Sterling dropped on Thursday, while UK government bonds held on to their price gains, as a political crisis in the UK escalated with the resignation of health minister Wes Streeting turning up the heat on Prime Minister Keir Starmer. Starmer is under pressure to resign over hefty losses for the ruling Labour party in last week’s local elections. Sterling fell as much as 0.2% to $1.3502, having traded around $1.351 prior to the news. It was last at $1.3518. The pound weakened to 86.68 pence per euro , from 86.66 earlier. Britain’s 10-year UK gilt yield was down 4.2 basis points on the day at 5.026%, from around 5.05% earlier on, while London’s blue-chip FTSE stock index (.FTSE), opens new tab was last up 0.38%. “The big question is that the markets want to know how does this leave the direction of fiscal policy. It certainly opens up a huge amount of uncertainty, but we honestly don’t know yet,” Investec chief economist Philip Shaw said.
CANADIAN DOLLAR EXTENDS DAILY LOSING STREAK AS BOC MINUTES SHOW PATIENCE
The Canadian dollar edged lower for a sixth straight day against its U.S. counterpart on Wednesday, as the greenback posted broad-based gains and minutes from the Bank of Canada’s latest policy decision showed the central bank was content to remain on the sidelines. The loonie was trading 0.1% lower at 1.3705 per U.S. dollar, or 72.97 U.S. cents, after moving in a range of 1.3685 to 1.3718. The BoC’s Governing Council felt it could afford to be patient and hold interest rates at 2.25% ahead of its April 29 announcement, while acknowledging the situation might change quickly. inflation. “The Bank of Canada is comfortable standing pat for now amid heightened uncertainty on both sides of the outlook,” Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets, said in a note. “We’ll likely need to see a few inflation reports for policymakers to be convinced that price pressures are broadening … while the rise in the unemployment rate suggests the last thing the economy needs is higher policy rates.”Data on Friday showed that Canada’s economy lost 17,700 jobs in April and the unemployment rate rose to a six-month high of 6.9%, indicating continued weakness in a labor market that has struggled in the face of trade uncertainty. Still, investors are betting that the Bank of Canada will raise interest rates twice by December as the recent surge in oil prices boosts the inflation outlook. The price of oil settled 1.1% lower at $101.02 a barrel, giving back some recent gains. Oil is one of Canada’s major exports.
DOLLAR STEADY AS OIL CLIMBS, BOND SELLOFF DEEPENS
The dollar was on the defensive against most major currencies on Monday as fresh Middle East tensions lifted oil prices and a global bond selloff stoked rate-hike bets, while yen weakness kept traders on alert for a possible intervention. The euro was last at $1.1621 and sterling fetched $1.3320, both down roughly 0.03%. The risk-sensitive Australian dollar weakened 0.2% to $0.7132, while the New Zealand dollar was little changed at $0.5837. The dollar index , which measures the greenback against a basket of major currencies, was flat at 99.325. “It appears conditions for risk and bonds are deteriorating and conditions for the dollar rally to extend this week are ripe,” analysts at Barclays wrote in a note. Signs that the Strait of Hormuz will remain closed for longer are also exerting upward pressure, with the dollar gaining 0.5% to 1% for every 10% rise in oil prices, they added. Oil prices climbed on Monday, with Brent crude futures rising more than 1% to over $110 a barrel, after a nuclear power plant in the United Arab Emirates came under attack and efforts to end the U.S.-Israeli war on Iran appear to have stalled. Further denting risk appetite, a global bond rout deepened on Monday as rising energy prices fanned inflation fears and stoked wagers on rate hikes from global central banks. Benchmark 10-year U.S. Treasury yields jumped to 4.6310% and the two-year yield hit a high of 4.1020%, both near their highest points since February 2025. “Near term, USD may stay better bid on dips if yields remain elevated and markets continue to price a more hawkish Fed reaction function,” Christopher Wong, FX strategist at OCBC, said in a note. Minutes from the Federal Reserve’s last meeting and U.S. flash purchasing managers’ Indexes later this week should help clarify how concerned the central bank is about persistent inflation and whether activity momentum is holding up, Wong added. Markets are now pricing in a more than 50% chance that the Fed would raise rates by December, according to the CME FedWatch tool. Investors are also watching as the Group of Seven finance ministers and central bankers meet in Paris on Monday and Tuesday to discuss how to bring a lasting end to the war in Iran. The yen was last traded at 158.97, the weakest level since April 29, with its renewed weakness putting investors on alert for a possible intervention. Japan’s government is likely to issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the Middle East war, a government source with direct knowledge of the deliberations told Reuters on Monday. Elsewhere, the offshore yuan weakened to 6.8150 yuan per dollar . The meetings between U.S. President Donald Trump and Chinese President Xi Jinping last week offered no major breakthroughs, while data released on Monday showed China’s growth lost momentum in April.
STERLING EDGES LOWER AS STARMER PRESSURE KEEPS MARKETS CAUTIOUS
Sterling fell on Wednesday and was on track for its first weekly decline in six weeks, with market participants assessing political developments in Britain as Prime Minister Keir Starmer resisted calls to resign. The pound was last 0.2% lower against a broadly stronger dollar at $1.351. Fighting for his political life after dozens of his lawmakers called for him to quit, Starmer promised on Wednesday to press ahead with plans to reform Britain and warned of chaos if he were to be ousted. “The UK now looks set for a summer of severe political uncertainty,” said Kallum Pickering, chief economist at Peel Hunt, in a note. “Against the already inflationary backdrop of the Iran war, gilt markets will remain especially skittish and equity markets may struggle to make gains short of an (unlikely) quick resolution on the domestic political front.” Against the euro, sterling rose 0.1% to 86.59. Moves are more muted than in the previous session, when the pound shed 0.5% against the dollar in its biggest daily drop in nearly six weeks. “Maybe now that he’s saying he’s going to stay on, that is – in the short term – calming markets a little bit,” said Tommy von Brömsen, FX strategist at Handelsbanken in Stockholm. Moves have been more pronounced on the gilt market, but British government bonds clawed back some ground on Wednesday after being roiled in recent weeks by investor jitters around the potential for more spending if Labour gets a new leader.”But I think the bigger worry is that, not only are we seeing near-term volatility in gilt markets and in sterling, but also that this episode is another nail in the coffin for deep structural concerns about the UK’s ability to find leaders who can come up with a credible plan to fix the country’s finances and deliver growth,” wrote Neil Wilson, Saxo’s UK investor strategist. Traders are betting on a 50% chance of no change at the Bank of England’s (BoE) next meeting on June 18. Last month, the BoE kept interest rates on hold and set out scenarios for the economic impact of the U.S.-Israeli war on Iran, one of which could require a “forceful” increase in borrowing costs.
