The U.S. dollar traded mixed to start the week as traders digested a slew of data and rising political uncertainty. U.S. services sector data surprised to the upside, with the ISM Non-Manufacturing PMI rising to 51.6 in April (up from 50.8 and above the 50.2 expected). Notably, inflationary pressures remain stubborn – the ISM prices paid index jumped to 65.1, a two-year high, and preliminary Q1 figures showed nonfarm productivity dipping -0.4% while unit labor costs surged 5.3%. These signals of sticky price pressures and rising labor costs reinforce concerns that inflation may stay elevated. In Washington, businesses are growing uneasy over President Trump’s economic policies, as new tariffs and deep federal spending cuts aimed at shrinking the government are seen fueling costs. Political tensions around fiscal policy are high, with partisan debates on budget cuts and debt adding another layer of uncertainty to the outlook.
Against this backdrop, risk sentiment has been choppy. Global equities struggled and investors sought safety amid growth worries in Europe: fresh PMIs showed Eurozone service activity unexpectedly contracted (services PMI fell to 49.7 from 51.0) and the UK’s services sector sank into contraction at 48.9. Comparatively better U.S. data and higher Treasury yields lent the dollar support against risk-sensitive currencies, though safe-haven flows into the Japanese yen capped USD strength. The Federal Reserve’s policy meeting on Wednesday looms large – the Fed is widely expected to hold interest rates steady around 4.5%, maintaining a wait-and-see stance as it gauges the impact of tariffs and past hikes. Overall, the market tone is cautious: the dollar index is range-bound, and traders are positioning defensively ahead of central bank decisions and amid ongoing U.S. fiscal drama over inflation-fighting measures.
NZD/USD
NZD/USD, May 2–5, 2025: The Kiwi briefly tests resistance near 0.6000 after an early-week rally, but retreats on renewed USD strength late in the session.
NZD/USD saw a volatile start to the week. The pair climbed on Monday with the New Zealand dollar finding bids in early Asia, briefly propelling NZD/USD toward the 0.6000 handle. This rally was aided by a broadly softer USD in initial trade and some return of risk appetite. However, the Kiwi’s gains proved short-lived. As the day progressed, upbeat U.S. data – particularly the strong ISM services report – boosted U.S. yields and revived the dollar, causing NZD/USD to pull back from its highs. By late New York trade the pair had faded back under 0.5970, reflecting the Kiwi’s vulnerability amid a resurgent greenback. Lacking major domestic drivers, the NZD also traded cautiously ahead of RBNZ Governor Orr’s speech (due later today) and the RBNZ’s Financial Stability Report mid-week, which kept traders from pushing the currency beyond key resistance. Broader sentiment turned mixed as U.S. inflation fears (from rising labor costs) vied with a tentative risk-on mood, leaving NZD/USD roughly range-bound overall.
Technicals in Focus
NZD/USD’s attempt to break above 0.6000 failed, reinforcing that level as immediate resistance. The pair’s short-term bias has turned neutral within its 0.5920 – 0.6000 recent range. Momentum indicators are showing early signs of a potential shift: the 4-hour MACD is flattening out below zero and hinting at a possible bullish crossover as bearish momentum wanes. The RSI has recovered from oversold levels and now sits around the mid-40s, pointing to improving momentum after the prior sell-off. Meanwhile, slow stochastics have turned upward from oversold territory, suggesting the NZD may be trying to carve out a base. Still, upside traction is unconvincing until bulls clear 0.6000 decisively – a level that aligns with the 20-day moving average and where sellers re-emerged on Monday. Above 0.6000, the next resistance is seen around 0.6030, but on the downside, a break under 0.5920 (Monday’s low) would expose the late-April trough near 0.5890. Overall, technical signals hint at consolidation, with the Kiwi needing a fresh catalyst to escape its range.
Trading Strategy
We adopt a cautiously bullish bias on NZD/USD in the near term, given the pair’s ability to hold support and the fading downside momentum. Buy on dips is favored above the 0.5920 support. An entry around 0.5940 with a tight stop-loss below 0.5900 (just under the recent support zone) could capture a rebound towards the 0.6000 resistance. Initial target would be a retest of 0.6000, with a break above that opening the door toward 0.6030. Traders should remain nimble, however – if NZD/USD fails to sustain bounces and instead slips under 0.5920, the bias shifts back to bearish. In that case, a move below 0.5900 would signal a downside breakout, arguing for sidelining longs or even short positions targeting the 0.5850 area. With event risk from the RBNZ commentary and overall fragile risk sentiment, position sizing should be conservative. We prefer the upside lightly for now, but will quickly reassess should the U.S. dollar’s strength overwhelm the Kiwi beyond the noted support.
USD/JPY
USD/JPY, May 5, 2025: The pair oscillated in a choppy range (143.7–144.8) as higher U.S. yields lifted the dollar, but late-day risk aversion saw the safe-haven yen regain ground.
USD/JPY has been seesawing as competing forces drive the pair. Early in Monday’s session, the dollar edged higher against the yen, buoyed by rising U.S. Treasury yields in the wake of strong U.S. economic data. The solid ISM services report and lingering inflation signals (like surging prices paid and labor costs) reinforced expectations that U.S. rates will stay higher for longer, which typically underpins USD/JPY. Indeed, the pair climbed from the mid-143s into the mid-144s at one point, reflecting this yield spread support. However, upside momentum stalled short of the key ¥145 level as risk sentiment turned defensive later in the day. U.S. equities weakened amid inflation and fiscal uncertainty headlines, which prompted a rotation into safe-haven assets – the Japanese yen caught a bid, pulling USD/JPY back down. By the U.S. afternoon, the pair had retraced its gains, settling around the 143.8 area. Essentially, higher U.S. interest rates are battling against episodes of risk aversion. It’s also worth noting Japanese developments: while no major policy changes are expected from the BOJ in the near term (they remain ultra-accommodative), Japanese data like March household spending (+3.5% m/m) showed only a tepid recovery. With Fed policy on hold and global growth concerns simmering, USD/JPY appears to be in a holding pattern – rallies on U.S. yield strength are met with yen-buying whenever market jitters rise.
Technicals in Focus
On the technical front, USD/JPY remains within an emerging consolidation zone after its failure to break ¥145. The 144.80 area marked Monday’s intraday peak and is immediate resistance, just shy of the psychological 145.00 hurdle (also near the March highs). The pair has pulled back, but so far is holding above support around 143.50 (a level which has provided a floor over the past few sessions). Momentum indicators are mixed: the daily MACD is still in positive territory but its histogram is shrinking, indicating the recent uptrend in USD/JPY is losing steam. RSI readings have eased from overbought levels – the 14-day RSI, which was above 70 last week, has slid toward the mid-50s, reflecting the pair’s cooldown as it consolidates. Stochastic oscillators have turned down from high levels, suggesting some corrective pressure in the near term. Overall, the uptrend pause is evident, but not yet a reversal. As long as USD/JPY holds above the lower support at 143.0–143.5, the bulls retain a modest advantage. A drop below 143.00 would break the recent range and could trigger a deeper pullback towards 142.20 (April’s lows). On the upside, a clear push through 145.00 is needed to re-ignite the uptrend – beyond there, resistance is eyed at 146.00. The technical picture favors near-term range trading between support in the low-143s and resistance in the mid-144s.
Trading Strategy
Our directional bias is cautiously bullish on USD/JPY given the fundamental support of U.S.-Japan yield differentials, but we acknowledge that intermittent risk-off swings can strengthen the yen. Trading this pair may thus call for a range strategy until a breakout occurs. We prefer to buy dips toward the lower end of the range: for instance, consider long positions around 143.50, with a stop-loss under 143.00 to guard against a downside break. The first target would be a return to 144.50, with stretch targets at the pivotal 145.00 mark if momentum allows. Conversely, near the top of the range, short-term traders might also fade spikes – selling in the 144.8–145.0 zone (if reached) with tight stops above 145.30, aiming for a pullback to mid-143s. However, given our medium-term lean that USD/JPY will eventually grind higher, we favor long positions on pullbacks more than aggressive shorts. Importantly, keep an eye on the broader market mood: any flare-up in U.S. political tensions or a sudden equity sell-off could send USD/JPY lower swiftly via yen haven flows. Likewise, a surprisingly hawkish Fed tone (even if no rate change) could spur a fresh attempt at 145+. In summary, we’ll trade the range for now with an eye to buy on weakness, standing ready to ride an upside breakout if 145 gives way.
GBP/USD
GBP/USD, May 2 & 5, 2025: Cable jumped to a peak near 1.3330 on improved sentiment, but a sharp reversal followed as weak UK data and dollar strength took hold.
GBP/USD has been on a rollercoaster, whipsawed by contrasting forces. Coming off a long holiday weekend (UK markets were closed Monday), the pound initially benefited from last Friday’s momentum and some dollar softness, with GBP/USD pushing up toward 1.3330 in early Tuesday trade. However, Sterling’s fortunes turned quickly as troubling domestic data hit the wires: the UK’s April services PMI plunged to 48.9, a steep drop from March’s 52.5 and far below forecasts. This shock contraction in Britain’s dominant services sector underscored a rapidly cooling economy and immediately soured sentiment on the pound. GBP/USD reversed sharply from its highs, falling over half a cent as traders reassessed the Bank of England outlook. The timing is critical, as the BoE meets on Thursday and, in light of faltering growth signals, is now widely expected to cut rates by 25 bp (to 4.25%). This marks a dovish shift – previously, sticky inflation had kept the BoE in a hawkish stance, but with inflation easing and growth contracting, policymakers are eyeing stimulus. The anticipation of easier UK monetary policy has started to weigh on Sterling. At the same time, the dollar grew stronger Monday afternoon on the back of robust U.S. data (and rising U.S. yields), compounding GBP/USD’s decline. By Tuesday midday, the pair had dropped into the low-1.32s before stabilizing. In summary, weak UK fundamentals and dovish BoE expectations have eroded Sterling’s recent gains, even as relative U.S. economic resilience lends support to the dollar. Ongoing political jitters in the U.S. (fiscal fights) have limited the dollar’s upside somewhat, but for the pound the domestic outlook is clearly a headwind.
Technicals in Focus
The tone for GBP/USD has turned more neutral-to-bearish in the short run after failing to sustain a break above 1.3330. That level now stands as firm resistance – Monday’s high (~1.3330) aligns with the peak from late last week, suggesting a possible double-top formation in the 1.3320s. The subsequent pullback found interim support around 1.3240 (the area of Monday’s low and near last Friday’s low). This effectively puts Cable in a 1.3240 – 1.3330 range for now, with a slight downward bias given the series of lower highs. Technical indicators reflect the loss of bullish momentum: the 4-hour MACD has crossed bearishly and is slipping toward the zero line, indicating the recent uptrend has stalled out. The RSI, which was above 60 during the rally, has dropped back to the 50 area – momentum is now flat, neither overbought nor oversold. Meanwhile, the stochastic oscillator has rolled over from overbought territory and is pointing lower, hinting at further corrective downside risk. If GBP/USD breaks below 1.3240, the next significant support is around 1.3200, a round number and near the 50-day moving average. A breach of 1.3200 would signal a deeper pullback, possibly toward 1.3150. On the upside, bulls would need to reclaim 1.3330 to revive the uptrend. Above that, the next resistance comes in at 1.3400, but given the current fundamentals, that higher level seems distant. The pair is also hovering around its 20-day moving average, reflecting indecision. Overall, the charts show sterling’s rally has lost steam, and a period of consolidation or mild decline is likely unless a new catalyst (like a surprisingly hawkish BoE tone) emerges.
Trading Strategy
In the lead-up to the BoE meeting, we adopt a neutral to mildly bearish trading stance on GBP/USD. With the pound facing growth worries and likely policy easing, upside could be limited. That said, abrupt moves are possible depending on central bank signals, so caution is warranted. A sensible approach is to trade the range identified by recent support/resistance. We would look to sell into strength if GBP/USD approaches the upper bound near 1.3330, as long as UK fundamentals remain weak. For instance, short positions around 1.3300–1.3320 with a stop above 1.3350 could target a pullback to 1.3240, and potentially 1.3200 if bearish momentum builds. Conversely, should the pair slide further, we’d watch the 1.3200 support zone – there may be an opportunity to cautiously buy dips in that area for a short-term bounce, especially if the Fed sounds more dovish than the BoE this week. Buying near 1.3200 (stop ~1.3150) aiming for a rebound to 1.3270 could yield a quick trade, but we’d keep such a long bias very short-term and nimble. Overall, until the BoE decision passes, we expect range-bound volatility. It’s important to stay agile: a less-dovish BoE or any improvement in UK data could spark a pound recovery (squeezing shorts), whereas an emphatically dovish cut could break 1.3200 support. Thus, any trades entered should be lightly positioned and with clear stops. For now, leaning lightly short on GBP/USD rallies seems prudent given the UK’s weakening outlook.
Market Outlook
Looking ahead, forex markets are bracing for central bank outcomes and political cross-currents. The Federal Reserve (May 7) is poised to keep rates unchanged, especially after April’s solid 177k payroll gain and steady 4.2% unemployment rate affirm that the economy isn’t collapsing. However, the Fed will contend with a murky backdrop of contradictory forces: on one hand, persistent inflation signs (rising service prices, wage pressures) argue against any premature easing; on the other, President Trump’s aggressive tariff regime and fiscal austerity push are generating uncertainty and could dampen growth in coming months. We expect Fed Chair Powell to acknowledge these risks – likely maintaining a hawkish tone on inflation while also noting the potential drag from trade/fiscal headwinds. Any hint that the Fed sees tariffs driving up prices could reinforce the higher-for-longer rate narrative, supporting the USD. Conversely, if Powell emphasizes the hit to growth or expresses concern about financial conditions, markets might read it as a dovish lean, which would weigh on the dollar and boost safe-havens like the yen.
Across the Atlantic, the Bank of England (May 8) decision will be a key focus for GBP traders. With UK data rapidly deteriorating (as evidenced by collapsing PMIs) and inflation finally cooling, the BoE is expected to cut rates by 25 bps to 4.25%. The tone of Governor Bailey’s message will be crucial – a signal of willingness to accelerate easing (given Trump’s tariffs “darken the global outlook,” as the BoE has noted) could push GBP lower again. On the other hand, if any MPC members dissent or if the BoE expresses caution due to still-elevated wage growth, the pound might find some footing post-meeting. Political developments will remain in play as well: in the U.S., fiscal policy disagreements are simmering – the administration’s bid to slash deficits via spending cuts has met resistance, and debt-ceiling jitters could return, all of which could periodically spook markets. Inflation concerns are front and center politically, so any new measures (or missteps) out of Washington may directly impact yields and currency sentiment.