CAPITALDIGEST MARKET REVIEW, 19/05/2025

DOLLAR FALLS AFTER COOLER-THAN-EXPECTED CONSUMER PRICE DATA

The dollar retreated on Tuesday, giving back some of its sharp gains a day earlier after an inflation reading came in below market expectations.nThe Labor Department said the consumer price index increased 0.2% last month, below expectations of economists polled by Reuters for a 0.3% gain, after dipping 0.1% in March.Still, inflation is likely to pick up steam in the coming months as U.S. tariffs lift the cost of imported goods. “While the headline number for inflation was better than expected, there are indicators that tariffs have already pushed prices higher,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin. “Turning down the temperature of tariffs is good as the price effects would start seeping into the consumer basket pretty quickly,” he said. “The trade reset with China might mean the Fed can go back to business as usual and gradually resume cutting rates later this year.” The dollar index, which measures the greenback against a basket of currencies, fell 0.67% to 101.05, with the euro up 0.81% at $1.11707.

STERLING SNAPS SEVEN-DAY STREAK OF GAINS AGAINST THE EURO

Sterling slid against the euro on Wednesday after seven straight days of gains, while it rose against a weakened dollar as the market shed the initial optimism from a de-escalation in U.S.-China trade tensions at the beginning of the week. The euro was up 0.35% to 84.33 pence, after seven consecutive days of declines. It hovered around early April levels, halting a progressive slide against the pound from a peak at 87.38 pence on April 11. “It does seem that the 84 level is offering pretty good support,” Rabobank’s head of FX strategy Jane Foley said, adding that sterling may struggle to advance further against the euro unless growth data starts to significantly improve in Britain relative to market expectations. “There is a risk that growth could come in below the 1% level for 2025. If those risks increase, I think sterling will again be on the back foot against the euro.” British GDP data for both March and the first quarter as a whole will be released on Thursday. It will give initial hints at where 2025 growth lands, but could also complicate the picture. Sanjay Raja, senior economist at Deutsche Bank, expects the quarterly data to show a significant jump, but a short-lived one, and that GDP will shrink in the second quarter.

US DOLLAR DIPS AS RETAIL SALES GROWTH SLOWS IN APRIL

The U.S. dollar fell against the majority of its peers on Thursday after a flurry of economic data, including a gauge of consumer health that showed retail spending slowed in April as an uncertain economic outlook weighed on sentiment. The Commerce Department said retail sales edged up 0.1% last month after an upwardly revised 1.7% surge in March, compared with the expectation of economists polled by Reuters to remain unchanged after a previously reported 1.5% jump in March. The boost in March was due in part to purchases of items such as automobiles being pulled forward ahead of U.S. President Donald Trump’s April 2 tariff announcement. In a separate report, the Labor Department said the producer price index (PPI) for final demand dropped 0.5% last month after an upwardly revised unchanged reading in March. It was pulled down by waning demand for air travel and hotel accommodation as Trump’s protectionist trade policy, immigration crackdown as well as references to Canada as the 51st state and a desire to acquire Greenland have contributed to a sharp drop in tourist travel.

STERLING ON TRACK FOR FIFTH WEEKLY RISE VERSUS EURO, AWAIT UK-EU MEETING

Sterling was on track for its fifth straight weekly rise against the euro on Friday, while hovering near its highest levels since early April. President Donald Trump’s April 2 announcement of aggressive trade duties triggered a sharp but brief selloff in U.S. assets in the following days, supporting the single currency. The greenback fell on Friday, tracking U.S. Treasury yields, but was set for its fourth weekly rise versus the euro. The euro area’s currency rose 0.1% to 84.14 pence but was on track for a weekly fall of 0.51%. It hit 84 pence on Tuesday, its lowest since April 3. Market focus is shifting to a UK-European Union meeting next week after the pound rose on Thursday on strong economic data. “Market participants will be hoping for a ‘reset’ of sorts in the relationship between Britain and the common bloc in the hope that an accord can be reached that reverses some of the damage done to trade relations,” said Matthew Ryan, strategist at global financial services firm Ebury.

DOLLAR HEADS FOR FOURTH WEEKLY GAIN DESPITE TARIFF-DRIVEN VOLATILITY

The U.S. dollar is on track for its fourth straight weekly gain against the yen and the euro on Friday, though it stayed well below levels seen before April 2, when President Joe Biden announced major tariffs on imports. Earlier this week, a brief pause in trade tensions between the U.S. and China lifted the dollar on Monday. But gains faded after weaker-than-expected U.S. data caused it to fall on Tuesday and Thursday. On Friday, the dollar held steady after dropping earlier in the session. This came as U.S. Treasury yields fell, with markets now expecting the Federal Reserve to cut interest rates later this year.Investors are currently pricing in two possible rate cuts by December, with the first one potentially coming as early as July. The yield on the 10-year U.S. Treasury note fell to 4.41%, while the two-year yield dropped to 3.94%.  The euro rose slightly to $1.1205 on Friday, but it was still down 0.38% for the week. The euro had gained earlier in March after Germany’s announcement of large investments and again in April following the U.S. tariff move, which shook investor confidence in the dollar’s safe-haven appeal.