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ECB Executive Board member Isabel Schnabel said the Eurozone’s disinflation process remains on track, but “new shocks” — particularly from trade tariffs — are presenting emerging risks.

While tariffs may dampen inflation in the short term, Schnabel warned they pose medium-term upside risks, warranting a “steady hand” in monetary policy.

She emphasized the importance of not overlooking "supply-side shocks" if they appear persistent, as doing so could risk "de-anchoring inflation expectations".

Schnabel also highlighted the Eurozone’s relative resilience following the tariff escalation on April 2, noting Euro’s appreciation and a shift in perception toward the region as a "safe haven." She characterized this as a “historical opportunity” to strengthen the international role of Euro.

Today, the Reserve Bank of Australia (RBA) decided to cut the interest rate from 4.10% to 3.85%, continuing its easing policy after a previous cut from 4.35% in February.

According to Reuters, the RBA today cited:

→ progress made in bringing inflation under control;

→ economic risks linked to the ongoing global trade war.

Although the RBA’s decision was widely expected, the Australian dollar weakened noticeably against other currencies — including the New Zealand dollar. The AUD/NZD rate fell to its lowest level in nearly two weeks.

Technical Analysis of the AUD/NZD Chart

From a technical perspective, a bearish breakout occurred:

→ below the lower boundary of the upward trend channel that began in April;

→ and below the 1.087 level, which had served as support in mid-May.

It is possible that:

→ the decline may slow around the 1.083 support zone, where strong demand was evident in the long lower wicks of the 9 May candles (marked with an arrow);

→ the 1.0870–1.0880 area will act as resistance going forward, potentially leading to a retest of the bearish breakout zone on the AUD/NZD chart.

As the market continues to price in the RBA’s decision, attention will turn to the Reserve Bank of New Zealand meeting on 28 May, where a similar rate cut could be on the table.

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• GBPUSD increases odds of bullish continuation.
• A break above 1.3440 could hand over control to the bulls.

GBPUSD has broken above a bearish channel, as Moody’s credit downgrade of the US economy and improving EU-UK trade relations have brought bullish momentum into play.

A close above the 20-day simple moving average (SMA), along with a positive slope in the momentum indicators, continues to favor the bulls. However, the 1.3400–1.3440 resistance zone could still pose a challenge. A decisive break above this ceiling is likely needed to trigger a swift rally toward the 1.3645 resistance zone. Beyond that, the 1.3750 level - aligned with the 2021 high - may be the next obstacle before the 1.3830 barrier.

On the downside, the 1.3260 support base could keep bearish pressure in check. If that level fails, the price may drop toward the 50-day SMA, located near the 23.6% Fibonacci retracement of the 2025 uptrend at 1.3130, or potentially down to the lower boundary of the downward-sloping channel at 1.3070. A further decline could then target the 38.2% Fibonacci level at 1.2933 and the 200-day SMA at 1.2870.

In summary, GBPUSD is shaping a bullish path, with investors awaiting a confirmed break above the 1.3440 level to ramp up buying activity.

RBA cuts cash rate by 25bps as expected, policy still restrictive. Inflation now comfortably in the 2–3% target range with balanced risks.

As we expected and the market was pricing, the RBA cut the cash rate target by 25bps at its May Monetary Policy Board meeting. This brings the cash rate target to 3.85%, which the media release described as “somewhat less restrictive”, but nonetheless still at least a bit restrictive. The commentary at the media conference also showed a more dovish tone than what we heard in February and even April.

In the post-meeting statement and media conference, the Governor and Board noted that “underlying inflation is now expected to be around the midpoint of the 2–3 per cent range throughout much of the forecast period”. Inflation has tracked downwards broadly as both we and the RBA expected since the previous cut in February. Although the Governor expressed caution about using such shorter-run measures, it is noteworthy that trimmed mean inflation was already running at an annual rate of 2½% (the midpoint of the target) over the most recent two quarters.

In its April post-meeting statement, the Board said that it “needs to be confident that this progress [in getting inflation down] will continue so that inflation returns to the midpoint of the target band on a sustainable basis”. The further progress on inflation since then, in line with expectations, has allowed the rhetoric to shift to highlighting that inflation is now on target, and the policy challenge is to keep it there in the face of considerable uncertainty. In the media conference, the Governor described the moves as encouraging.

Indeed, with inflation inside the target range, and at its midpoint on some metrics, it would have been hard to construct a case to hold the cash rate unchanged at a clearly restrictive level. The domestic inflation story was, on its own, enough to warrant this rate cut, a fact acknowledged by the Governor in the media conference. Also, in the media conference, the Governor noted in response to a question that the case to hold was discussed but quickly dismissed.

At the same time, the RBA has no need to rush or to accelerate the pace of easing. At the new level of 3.85%, it is not that far from most estimates of the ‘neutral’ level that neither weighs on nor stimulates the economy; the RBA does not seem to have revised its estimate of neutral since February, judging by the material in the Statement on Monetary Policy (SMP). And while it is possible that it will end up needing to provide support to the economy with expansionary policy, rather than simply being less restrictive, we are not there yet. In the media conference, Governor Bullock highlighted that the Board has scope to move a lot should that be necessary.

Offshore risks were key in the RBA’s change of view. The current “roller-coaster” trade war is seen as weighing on both global and domestic growth. That said, one of the key judgements in the RBA’s forecasts is that, like Westpac, it assesses that the Chinese authorities have a “high appetite” to achieve the 5% growth target for 2025, and thus that the Chinese economy will slow only modestly. (The RBA’s forecast is just shy of the target at 4.8%.)

It is also noteworthy that the RBA now regards recent trade developments as disinflationary for Australia (as do we). Back in April, the Board said that “Inflation… could move in either direction” because of the trade war. The possibility of higher inflation is now said to arise only if the trade dispute induces significant supply-chain disruption – an outcome that looks less likely now following the recent US–China interim deal.

In the end, the inflation forecasts were only scaled back slightly, with the trimmed mean outlook shifting from flat at 2.7% to flat at 2.6% for the entire forecast period. The Board now describes this as underlying inflation returning to and remaining sustainably around the midpoint of the 2–3% target rate.

One area that the RBA had previously pointed to as a reason for not being confident that inflation can be sustained at current levels is the tightness of the labour market. While it still highlighted indicators that suggested remaining tightness, the forecasts for unemployment have been lifted slightly, while those for employment and wages growth have been reduced slightly.

Documents released under Freedom of Information show that, as at March this year, the RBA’s models were implying that the NAIRU was 4.69%, only marginally down from the 4.75% estimate these models produced at the time of the February 2025 SMP. This is noticeably above the average estimate of the market economists that the

RBA itself polls, and slightly above the maximum estimate reported in its survey. The May SMP noted that its assessment of the location of full employment was unchanged, but both there and in the media conference, it was acknowledged that they could be overestimating the NAIRU and underestimating full employment. This contributed to some downward judgement in their inflation and wages growth forecasts.

While the staff are clearly grappling with the possibility they have been underestimating full employment, much of the analysis released in March centred on a ‘straw-man’ alternative hypothesis of a 4% NAIRU. Yet a NAIRU of 4¼% (in line with average estimate of market economists) would be enough to overturn the RBA’s concerns that the labour market is still too tight. Of course, the Governor would counter that they look at a broader range of metrics than just the unemployment rate relative to NAIRU estimates when assessing where the labour market is relative to full employment. In the end, though, their inflation models require a NAIRU estimate, so their inflation outlook hinges on the realism of those estimates.

The refreshed forecasts also significantly downgraded the RBA’s view on consumption. As we had previously highlighted, the RBA was well out of consensus in its bullish 2.6% forecast for growth in household consumption as at February. This was reduced to 1.9% in the current forecasts, though part of this is the near-term effect of Cyclone Alfred and there is some payback on the downgrade later on. In the media conference, Governor Bullock acknowledged that consumption growth had picked up more slowly than expected and that households were “being a little bit cautious” – a signal that has been evident for some time in Westpac’s Card Tracker and the Westpac–DataX Consumer Panel.

This month also marked the beginning of the RBA’s new system for implementing monetary policy. The media release accordingly no longer included an announcement of the exchange settlement funds rate, the rate that the RBA pays banks and others on deposits with the RBA.

Overall, this is a much less hawkish set of communication than February, or even April, and recalibrates the RBA away from its outlier view on the tightness of the domestic economy. We see no reason to adjust our view that the cash rate will be cut twice more this year (in August and November), taking it to 3.35% by year-end. This is contingent on underlying inflation trends remaining steady and no further downside shocks from abroad. As highlighted in the SMP scenario and in the Governor’s media conference, the Board has scope to cut further to support the economy should that become necessary.

Gold (XAU/USD) has staged an impressive positive performance of 19% in the first quarter of 2025, which even outperformed other cross asset classes, such as the US S&P 500 (-4.6%), US Dollar Index (-4%), and Bitcoin/USD (-11.7%) over the same period.

• Gold (XAU/USD) rose 19% in Q1 2025, outperforming major asset classes like the S&P 500, US Dollar Index, and Bitcoin.
• After hitting an all-time high of US$3,500 on 22 April, Gold corrected 10% to US$3,120 by 15 May, driven by a stronger US dollar and improved risk sentiment.
• Weak US consumer sentiment and rising inflation expectations suggest a lingering stagflation threat, supporting potential demand for Gold as a hedge.
• The 10% decline found support at the 50-day moving average, with bullish elements emerging, including a higher low and RSI stabilization.
• A break above US$3,305 could trigger a bullish reversal toward US$3,435–US$3,500, while a drop below US$3,056 may expose deeper support levels near US$2,833.

The yellow metal extended its bullish impulsive up move sequence in April to record a monthly gain of 5.3% and hit a fresh all-time intraday high of US$3,500 on 22 April 2025.

Thereafter, Gold (XAU/USD) staged a 10% corrective decline to print an intraday low of US$3,120 on 15 May 2025, within its ongoing major uptrend phase. This was triggered by a revival of the US dollar and risk-on sentiment due to optimism arising from the de-escalation of US-China trade tensions.

Interestingly, there are several factors at play now that suggest Gold (XAU/USD)’s recent three weeks of corrective decline have hit an inflection zone to kickstart a potential medium-term bullish reversal process.

Stagflation risk is still lingering around

Fig 1: University of Michigan Consumer Sentiment & Inflation Expectations as of May 2025 (Source: TradingView)

Consumer sentiment survey results are considered leading “soft” economic data, which may translate into similar outcomes for “hard” data such as retail sales in the coming months.

Given that retail sales in the US play a pivotal role in shaping the trend of services activities, which contribute close to three-quarters of US economic growth, such “soft” data on consumer sentiment is likely to be scrutinized by market participants, in turn, triggering a feedback loop back into the financial markets.

Despite the recent conclusion of the 90-day pause on reduced tariff rates between the US and China that was agreed on 11 May, the latest preliminary University of Michigan Consumer Sentiment survey results for May, conducted between 22 April to 13 May dropped sharply to 50.8 down from 52.2 in April and well below market expectations of 53.4. This marks the fifth consecutive monthly decline, the lowest reading since June 2022, and the second lowest on record (see Fig 1).

In addition, the subcomponents of the University of Michigan survey also cover inflationary expectations (future inflationary trends in the US). The one-year head inflation expectations in the US accelerated for the sixth consecutive month to 7.3% in May 2025, reaching a new high since November 1981.

Meanwhile, the five-year inflation expectations quickened for the fifth month to 4.6% in May, its steepest reading since March 1991.

Overall, these observations point to a persistent risk of stagflation in the US, which could drive increased hedging demand for Gold (XAU/USD).

Let’s review Gold (XAU/USD) to decipher its medium-term directional bias from a technical analysis perspective.

Technical chart of Gold -10% corrective decline managed to stall at the 50-day MA

Fig 2: Gold (XAU/USD) medium-term & major trends as of 20 May 2025 (Source: TradingView)

Interestingly, in the past week, several technical conditions have emerged to suggest that the bearish momentum of the 10% corrective decline from 22 April to 15 May has eased, where the next price movement of Gold (XAU/USD) may stage a bullish reversal.

Firstly, the corrective decline has managed to stall right at the rising 50-day moving average, acting as an intermediate support at around US$3,130 on 15 May, thereafter price actions staged a rebound of 3.8% before a retest on the 50-day moving average on Friday, 16 May, and formed a “higher low”.

Secondly, the daily RSI momentum indicator has managed to find “support” at the 44 level on 14 May, where two prior similar observations occurred previously on 30 December 2024, and 8 April 2025 led to significant bullish reversal in the price actions of Gold (XAU/USD) (see Fig 2).

Watch the US$3,056 key medium-term pivotal support, and a clearance above US$3,305 (also the 20-day moving average) increases the impetus of a potential bullish reversal to see the next medium-term resistances coming in at US$3,435 and US$3,500 in the first step.

However, failure to hold at US$3,056 invalidates the bullish reversal scenario for an extension of the corrective decline sequence to expose the next medium-term support at US$2,955, and a break below it may see a further drop towards the US$2,833 long-term pivotal support area (also the key 200-day moving average).

Following RBA’s decision to cut the cash rate by 25bps to 3.85%, Governor Michele Bullock revealed in the post-meeting press conference that the Board briefly considered holding rates but quickly moved to debate between 25 and 50 basis point reductions.

Ultimately, the more measured 25bps cut was preferred, given that inflation is within target and unemployment remains resilient. Bullock emphasized that while easing was justified, "it doesn't rule out that we might need to take action in the future."

Bullock also noted that the Board views recent global trade developments as broadly "disinflationary" for Australia. However, she cautioned that risks remain tilted both ways.

"There is a risk to inflation on the upside, trade policies could lead to supply chain issues, which could raise prices for some imports, much as we saw during the pandemic," she emphasized.

Markets

The 30-yr bond yield at some point yesterday surged more than 13 bps, including last Friday’s late-session move, to 5.03%. Trump’s Big Beautiful but costly Bill getting shaped in the House only proved Moody’s point for its AAA-rating downgrade and added fuel to the fire. But the Treasury sell-off lured dip buyers into the arena and by the end of yesterday’s trading day we saw a full recovery of all losses – to the exact basis point. The symbolical 5% resistance area lives to fight another day but it’s clear fiscal sustainability as a market theme is again front-and-center. It’s another argument next to the developing trade story for the Fed not to rush into cuts. Both Bostic (Atlanta) and Williams (NY) yesterday stressed it could take well into or even after the summer before things have cleared up somewhat to allow for informed, data-based decisions. As US bonds found some footing, so did UK gilts. The UK is trapped in a similar tricky budget situation and yields, particularly long-term ones, shot up to 10 bps higher as well before paring gains to just 2.5 bps tops (30-yr). German yields followed the US intraday pattern, outperforming them along the way. Net daily changes eventually varied between flat (30-yr) and -1.2 bps (2-yr). The dust quickly settled on equity markets too. Wall Street gapped lower but recovered throughout the session. Both bonds and stocks fully erased their intraday losses but the dollar did not. EUR/USD rose to a 1.1288 high and closed at 1.124 compared to 1.116 at the open. The trade-weighted DXY came close to the 100 barrier. USD/JPY returned sub 145 with JPY extending gains this morning after Japan’s finance minister Kato is arranging a meeting with USTS Bessent to discuss FX. Japanese yields trade sharply higher. A poor 20-year Japanese bond sale this morning flings long-term rates up in the sky and ups the ante for next week’s 40-yr auction. The 30-year yield adds more than 13 (!) bps and smashes through the 3% to 3.11%. Since Japan began issuing 30-year bonds in 1999 yields have only been higher in 2000. The 3.13% hit back then is about to get tested. At the heart lie … fiscal risks. The topic will continue to draw attention all week as Trump’s bill gets discussed in the House and given the relatively light eco calendar, with the exception of Thursday’s PMIs. That should offer downside to US/core bond yields. In terms of market momentum, we could see some hesitation or consolidation after a recent push towards the levels seen in the aftermath of Liberation Day. EUR/USD remains trapped in a sideways trading range where 1.14 serves as an intermediate resistance area. Sterling hovers north of EUR/GBP 0.84. Yesterday’s announcement of a broad-ranging post-Brexit deal where defense lies at the center had limited impact. The UK releases CPI numbers tomorrow.

News & Views

The Reserve Bank of Australia (RBA) this morning cut its policy rate by 25 bps to 3.85%. The RBA said demand and supply are closer towards balance. Inflation continues to ease. Trimmed mean Q1 annual inflation (2.9%) for the first time since 2021 returned below 3.0% and headline inflation (2.4%) remained within the 2-3% target band. New forecasts indicated that headline inflation might drift back higher due to temporary factors, but underlying inflation would to stay around the mid-point of the 2-3% target. (International) uncertainty remains high and might have adverse effects on the economy. Even so, the RBA assess that domestic demand appears to have been recovering, that real household incomes have picked up and that the labour market remains relatively tight. Still businesses continue to report weakness in demand. The RBA expects GDP growth to pick up, but at a more gradual pace than initially expected (2025 2.1%; 2026 2.2%). The outlook for inflation also has been revised a little lower (trimmed mean EoY 2025 and 2026 2.6% from 2.7%). Markets expected a more hawkish assessment. The 3-y bond yield dropped 10 bps to 3.53%. Money markets see two more cuts this year with the next 25 bps step fully discounted for August. The Aussie dollar eases marginally (0.644), holding within the recent narrow range (0.6315/0.6515).

The head of the Swiss National Bank (SNB), Martin Schlegel, in a speech said that inflation in the country can turn negative in certain months this year. Y/Y inflation in the country printed at 0.0% in April. The SNB head pointed to a negative contribution from external factors. With giving guidance on next month’s policy meeting, Schlegel indicated that the interest rate is very important for the exchange rate. In this respect, the SNB according to Schlegel, is prepared to bring the interest rate into negative territory if required. Interest rates remain the main policy tool of the SNB, but FX interventions might also be put in place. Markets expected SNB to cut the policy rate from 0.25% to 0.0% in June. EUR/CHF, after a CHF rally early April, recently held a tight range between 0.93 and 0.945.

The People’s Bank of China (PBoC) and the Reserve Bank of Australia (RBA) lowered their interest rates today, hoping to tame and counter the negative impact of the global trade war on their economies and job markets. The moves were expected and received mixed reactions across stock markets.

The CSI 300 index is up by 0.62% at the time of writing, while the Hang Seng has jumped around 1.30%, boosted by CATL’s IPO, which went according to plan and led to a 14% surge in its Hong Kong debut. Meanwhile, the ASX is giving back earlier gains as trade headlines are turning sour. Remember, the US—unhappy with the pace of negotiations—announced last week that it would impose unilateral tariffs on trade partners before the end of the 90-day pause period. Trump insists that Apple manufacture its phones in the US and now wants the company to abandon its AI partnership with Alibaba for devices sold in China. This is another blow to Apple’s Chinese business. AI-powered systems could have helped reverse Apple’s falling market share in the country, and partnering with a local player made strategic sense given the severe restrictions on accessing data in China. Alas, it may no longer be possible. Apple, which pledged to invest up to $500 billion in the US, could now be pressured to spend that money on manufacturing infrastructure instead of innovation and R&D...

Meanwhile in China—despite the demographic and housing crises—technological advancements continue to challenge Western peers. Companies like Alibaba and Baidu are developing AI models; Huawei and SMIC are producing chips; and BYD, Xpeng, and Xiaomi are challenging Tesla globally by building powerful but more affordable EVs. Xiaomi announced that its new model, competing directly with Tesla’s Model Y, will launch this Thursday in China. Its share price is up 4% today and approaching all-time highs.

In summary: sentiment in Chinese tech is improving. Lower interest rates and ample fiscal support should help bolster this momentum. Investor appetite for US Big Tech remains strong, but current valuations could prove excessive if Trump’s trade war backfires—forcing companies to waste resources reorganizing supply chains or fight costly regulatory battles (I am thinking of a possible EU retaliation). These risks are not insignificant and could be avoided.

A Brexit breakthrough

Good news came from Europe, as the EU and the UK sealed their most comprehensive deal since Brexit and pledged ‘to discuss British access’ to Europe’s €150 billion defense fund. The Stoxx Europe Aerospace & Defence ETF soared 2% to a fresh high, while the Stoxx 600 eked out a small gain despite looming tariff concerns. The index has now recovered around 80% of its March–April losses and is approaching all-time highs and potentially overbought territory.

On the data front, yesterday’s CPI print confirmed an uptick in euro area’s April core inflation. However, that unwelcome development was somewhat offset by new EU Commission forecasts showing eurozone inflation could slow toward the 2% target by mid-year and average around 1.7% in 2026. This outlook should give the European Central Bank (ECB) enough room to keep rates in a sweet spot alongside easing energy prices and a possible resolution to the war in Ukraine.

The EURUSD rallied to 1.1288 yesterday and remains bid against a broadly softer US dollar, while German bonds continue to attract buyers seeking low-risk alternatives to US debt.

What rating cut?

Interestingly, markets rapidly shrugged off the US rating downgrade. The 10-year yield eased below 4.50%, and the 30-year fell back under the 5% threshold. Still, the broader narrative of declining confidence in US Treasuries and the US dollar remains intact. This opens a window of opportunity for investors looking beyond US markets—an exciting prospect for those seeking the next big destination.

On the Federal Reserve (Fed) front, New York Fed President Williams said ‘It’s not going to be that in June or July we’re going to understand what’s happening’ —emphasizing that it will take time to gather data and assess the situation. Atlanta Fed President Bostic echoed the cautious tone, saying he expects no more than one rate cut this year.

The S&P 500 reversed early-session losses to close slightly higher, but concerns remain: trade tensions, the Fed’s reluctance to provide support amid rising inflation expectations, and ongoing political uncertainty.

In corporate news, Nvidia announced that it will allow third-party chips to use its NVLink Fusion program and ‘connect their own third-party CPUs with Nvidia’s GPUs in AI data centers.’ The move aims to turn a competitive threat—of others building their own chips—into an opportunity to become the high-performance bridge everyone uses. Nvidia shares recovered early losses and closed above the $135 mark.

Elsewhere, Home Depot and Lowe’s earnings are in focus as investors complete the US consumer picture in the midst of trade turmoil. These companies remain heavily exposed to the trade war and may be forced to raise prices despite declining sales in order to protect their margins. A company like Home Depot has a net profit margin of around 9%, while Walmart operates closer to a 3% net profit margin. With tariffs ranging between 10% and 30%, price increases seem inevitable.

Higher prices mean higher inflation, limited Fed support, slower economic growth and – potentially – stagflation: a recipe for a deeper debt spiral and more financial pain.

In focus today

In the euro area, we will receive consumer confidence data for May, which will show how consumers have reacted to the improvements in trade talks between the US and China and following risk on sentiment in markets.

In Denmark, the government releases a new economic forecast, which according to media reports will show 3.0% GDP growth in 2025, which would imply quite weak q/q growth during the year. We also receive consumer confidence and flash Q1 GDP figures are being released. We anticipate a 0.5% q/q decline in GDP for Q1, following strong growth in 2024. However, there's high uncertainty due to unreliable real indicators for GDP growth, measured from the production side. While industrial production appears to have sharply decreased, the survey data may not accurately reflect current industry conditions.

Economic and market news

What happened overnight

China's central bank cut the 1-year and 5-year Loan Prime Rates by 10bp to 3.0% and 3.5% respectively, following the reverse repo rate which was lowered by 10bp on 6 May. These anticipated rate cuts aim to stimulate consumption and loan growth as the economy softens.

In Australia, the RBA cut it cash rate by 25bp to 3.85%, as expected, marking the second rate cut this year. This decision follows the return of underlying inflation back inside the RBA's target band.

What happened yesterday

Ukraine-Russia peace talks, following Trump's call with Putin, Trump stated that Russia and Ukraine would commence immediate negotiations aimed at achieving a ceasefire and ending the war, though the Kremlin cautioned the process would require time. Trump briefed Zelenskiy and EU leaders in a group call. European leaders agreed to intensify sanctions on Russia, while Trump opted not to introduce fresh sanctions.

In the euro area, the European Commission released its updated economic projections. It forecasts real GDP growth to be 0.9% y/y in 2025, down from November's estimate of 1.3% y/y. This revision is primarily due to increased tariffs and uncertainty stemming from recent changes in US trade policy. Next year, growth is expected to improve to 1.4% y/y. Inflation is projected at 2.1% y/y for 2025 and 1.7% in 2026. The 2026 inflation forecast has been reduced from 1.9% y/y aligning with ECB's December projections. This adjustment suggests the ECB might also lower its March forecast of 1.9% when the June projections are released, indicating a dovish stance given the similarity in their modelling frameworks.

Equities: Global equities ended higher yesterday, in what turned out to be a notable turnaround session. Early in the day, risk sentiment was soft, and we saw broad-based selling, particularly in US-linked assets. However, as the session progressed, sentiment reversed, and markets closed close to flat or slightly positive. This marked yet another day of gains in equities, continuing the positive streak we've seen over the past month. The S&P 500 is now nearly 20% above its recent lows just over a month ago. VIX ticked up slightly, while defensives outperformed cyclicals once again.

However, it is worth noting that this outperformance is happening in an up-market and comes on the heels of a strong month for cyclicals leading to P/E premium being back close to 30% again in cyclicals. In the past three sessions have seen consistent relative strength in defensives, but overall volatility remains anchored near historical norms, which is remarkable given the current level of political uncertainty. This likely reflects the resilience of the macro backdrop, which remains relatively strong. In the US yesterday Dow +0.32%, S&P 500 +0.09%, Nasdaq +0.02%, Russell 2000 (0.42%). Asian markets are mostly higher this morning after China cut rates, and there is some catch-up after yesterday's gains in Western markets. US equity futures are pointing slightly lower, while European futures are trading in positive territory.

FI&FX: This morning, we have made a slight change to our Fed forecast, now calling for the next 25bp cut in September (prev. June) but still maintaining our terminal rate view at 3-3.25%. As we pencil in quarterly rate cuts, the terminal rate will now be reached in September 2026. Market sentiment improved yesterday afternoon as the headwinds to US assets faded, and equities closed marginally in the green and 10y UST fell back almost to the same levels as before Moody's announcement on Friday. The USD remains on the backfoot however, with EURUSD lifting above 1.12 yesterday and our revised Fed call does not alter our EUR/USD outlook. We remain bearish USD and reiterate our 12M EUR/USD target of 1.20. We think the paid case in Norway has run a little too far relative to peers. Consequently, we yesterday booked profit on 3 of our short-end payer trades.

Daily Pivots: (S1) 192.86; (P) 193.47; (R1) 194.16; More...

Intraday bias in GBP/JPY stays neutral and more more consolidations could be seen below 196.38. Further rise is in favor as long as 190.22 support holds. On the upside, firm break of 195.95 will suggest that whole choppy decline from 199.79 has completed, and target this resistance next.

In the bigger picture, price actions from 208.09 are seen as a correction to rally from 123.94 (2020 low). Strong support should be seen from 38.2% retracement of 123.94 to 208.09 at 175.94 to contain downside. However, sustained break of 175.94 will bring deeper fall even still as a correction.