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We expect Canada’s trade balance swung back to a surplus in March and the labour market shed more jobs in April as early signs of how the Canadian economy evolved with the onset of U.S. tariffs.

To recap, blanket 25% tariffs on virtually all U.S. imports from Canada were briefly imposed on March 4 before being rolled back for trade compliant with the CUSMA/USMCA free trade deal days later. Still, tariff fears drove a surge in U.S. imports as seen in the advance estimate of U.S. trade data for March. We expect those U.S. imports came partially from Canada as Canadian rail traffic bounced back in March after falling in February, but from other regions as well. China reported a rise in exports to the U.S. in March.

We expect exports from Canada rose in March, enough to flip the trade balance back into a surplus from a deficit in February. We’re also watching the share of trade that’s now categorized as compliant with USMCA. Only 38% of U.S. imports from Canada reportedly used the CUSMA/USMCA in 2024, but we expect that share will rise relatively quickly as traders rush to satisfy the rules of origin requirements under CUSMA to avoid paying substantial tariffs.

Outside of trade, tariffs also appear to be choking off early signs of improvement in the Canadian labour market with employment falling by 33,000 in March, while the participation rate dropped for a second consecutive month and unemployment rate ticked up to 6.7%. In April, we expect those trends persisted and look for another 10,000 decline in jobs, alongside a 6.8% unemployment rate.

The bottom hasn’t fallen out yet in the labour market – the unemployment rate remains below the 6.9% peak late last year. But, softening hiring demand shown by a persistent decline in the number of job openings suggests more weakness is likely ahead. We expect the unemployment rate will continue to edge higher into the second half of this year.

Week ahead data watch

Fed governor Jerome Powell will be in the spotlight again the coming week with the upcoming FOCM meeting on Wednesday where rates are widely expected to stay on hold (market prices only 7% probability of a rate cut). That is likely to draw the ire of US President Donald Trump who repeated this week that "he should reduce interest rates". Importantly, Trump earlier stated he will not fire Powell, which was crucial for restoring calm in US bond markets where bond yields have declined 20bp lower since then. We agree with markets that Fed's policy rate will be on hold on Wednesday but look for a cut in June.

The US news flow was skewed to the downside when it came to activity this week, although not yet pointing to a severe slowdown. GDP for Q1 showed a negative print of -0.3% q/q annualised, but mainly due to a sharp increase in imports related to front loading ahead of tariffs. Domestic demand growth was still healthy. A string of labour market data (ADP employment, job openings and jobs plentiful index) showed softening (non-farm payrolls released after deadline) and consumer confidence slipped further. On a positive note, consumer spending was robust in March, partly lifted by some front loading ahead of tariffs, and the ISM manufacturing surprised to the upside. We do expect to see a weakening US economy in coming months, with payback from frontloading on consumption and rising pain from the de facto trade embargo between China and the US.

There is still no sign of US and China initiating trade talks as both sides are waiting for the other to take the first step. We expect this to happen quite soon, though, as Trump could otherwise be facing empty shelves and steep price increases before long and China also faces growing pain on exporters. We look for talks to start within the next 4-6 weeks and expect that tariffs will be lowered to around 60% at an early stage to get trade rolling again. The US says it is close to making deals with Asian countries such as South Korea, Japan and India. The first deals will be key to watch as they will give a sense of whether tariff rates will stay at the current 10% for most countries or be lifted to say 15-20%. Trump will need tariffs at a certain level to be able to fund tax cuts with tariff revenue.

In the euro area inflation data was a bit to the high side with a rise in core inflation from 2.4% to 2.7% y/y (consensus 2.5% y/y). It was lifted by higher service inflation related to Easter, though, so it should not be a too big concern. Looking ahead ECB's wage tracker points to a clear decline in wage growth and we also look for falling commodity prices and more Chinese overcapacity to drive goods inflation lower leaving room for more ECB cuts.

Stock markets saw further upside this week driven by positive earnings reports from big US tech companies and as the trade war is in de-escalation mode, at least for now. S&P500 has pretty much erased all losses since 'Liberation Day' on 2 April and the USD has recouped some of its losses. We still expect a bumpy road ahead, though, as the pain from the trade war shows up in the data.

Apart from the FOMC meeting focus over the coming week will be on trade talks and the negotiations on the US budget bill. It is a very light calendar on the data side where we get Euro Sentix, German IP and factory orders and Japan labour earnings.

Full report in PDF.

• We expect the Bank of England (BoE) to cut the Bank Rate to 4.25% on Thursday 8 May in line with consensus and market pricing.
• Inflation has surprised to the downside over the past months and combined with elevated uncertainty and downside risks to growth from the trade war, we expect the MPC to deliver a slightly dovish twist.
• We expect EUR/GBP to end the meeting higher on dovish commentary. We stay negative on GBP.

We expect the Bank of England to cut the Bank Rate to 4.25% on Thursday 8 May in line with consensus and market pricing. We expect the vote split to be 8-1 with the majority voting for a 25bp cut and dove Dhingra voting for a larger 50bp cut. Note, this meeting will include updated projections and a press conference following the release of the statement.

We expect the BoE to deliver a dovish twist to its guidance on Thursday signalling that the bar for consecutive rate cuts has been lowered. We think they will stick to the formal guidance repeating that a "gradual and careful approach to removing monetary policy restraint remains appropriate". Removing the notion of a "gradual" cutting cycle would be a strong signal of the MPC considering consecutive cuts. Inflation has surprised to the downside and with energy prices moving lower since the February meeting, the inflation forecast will likely be revised downwards although the conditional market implied rate path is significantly lower than in the February forecast. Wage growth has likewise been slightly lower than expected with private sector regular wage growth coming in at 5.9% (vs Boe forecast of 6.2% for Q1). Growth has been slightly better than expected and retail sales point to improvement in private consumption but the impact from tariffs poses a downward risk. We think the former will lift the 2025 forecast and the latter will be reflected in a downward revision of the GDP forecast in 2026. PMIs have shown tentative signs of a more stagflationary backdrop with price pressures accelerating and growth being more muted.

BoE call. We expect the BoE to stick to quarterly cuts, leaving the Bank Rate at 3.75% by YE 2025, which is a higher level than markets are expecting. Markets are pricing around 97bp for the remainder of the year. However, we highlight that the risk is skewed towards a swifter cutting cycle in 2025 given the downside risks to growth from the trade war.

Market reaction. We expect markets to react by sending UK yields lower and EUR/GBP higher on the dovish twist to the BoE's communication. More broadly, while we see domestic factors as GBP positives, we think the global investment environment will be in the driver's seat for EUR/GBP in the coming months. An investment environment characterised by elevated uncertainty, widening credit spreads and a positive correlation to a USD negative environment, in our view, favours a weaker GBP. We therefore expect EUR/GBP to move higher towards 0.88 on a 6-12-month horizon.

• Fed to sit on the sidelines amid tariff uncertainty.
• BoE to cut by 25bps, but could still disappoint the doves.
• China trade data to reveal wounds amid US-Sino trade war.
• Japan wages, Canada job numbers and AMD earnings also on tap.

Dollar slide pauses amid easing trade tensions

The US dollar recovered some ground this week as US President Trump continued to soften his stance on trade by signing orders to moderate the blow of his auto tariffs. The US administration also said that it is very close to signing trade deals with India and South Korea.

Still, the greenback recorded its weakest monthly performance in April since November 2022, with investors remaining fearful about serious economic consequences due to Trump’s tariffs against China, the world’s second-largest economy. It seems that it will be very difficult for the US-Sino conflict to deescalate as China does not seem willing to play Trump’s game. This is evident by a social media post this week from China’s Foreign Ministry that said, “China won’t kneel down.”

The elevated uncertainty and worries about the future of the global economy have prompted market participants to price in around 90bps worth of Fed rate cuts by the end of the year. This corroborates the notion that despite the easing tensions, the recovery in the US dollar, the recovery on Wall Street and the pullback in safe-haven assets, recession risks remain elevated – especially after this week’s GDP data revealed that the US economy contracted in Q1.

How dovish will the Fed sound?

With that in mind, investors are likely to pay attention to Wednesday’s FOMC decision. At the March meeting, the Committee kept rates unchanged and noted that they are in no hurry to cut, continuing to signal only 50bps worth of additional reductions this year through their ‘dot plot.’

Next week’s meeting will be the first after Trump’s ‘Liberation Day,’ but it will not be accompanied by updated economic projections nor a new dot plot. Thus, given that policymakers are largely anticipated to stand pat, all the attention is likely to fall on the statement and Powell’s press conference.

After the tariff announcements and the resulting market turbulence, Fed officials, including Powell, reiterated the view that there is no urgency for a change in policy, as they seek more information to determine how tariffs are affecting the economy. And this despite snowballing pressure by Trump to lower borrowing costs. There are even some policymakers who are more concerned about the upside risks tariffs pose to inflation.

All this suggests that the Fed could sound somewhat more concerned about economic growth and provide hints about slightly more than 50bps worth of rate cuts by December, but officials are unlikely to sound more dovish than the market currently seems to be. Thus, a less-dovish-than-expected outcome will solidify the notion that the Fed continues to contact monetary policy without the influence of the US President and could help the dollar recover some more of its recently lost ground.

The ISM non-manufacturing PMI for April on Monday will give more insights about how businesses behaved after Trump’s tariff announcements.

BoE to cut, guidance and projections in focus

On Thursday, the central bank torch will be passed to the Bank of England. With UK inflation remaining very sticky, the Bank has cut interest rates by less than the ECB and the Fed since last summer.

Its previous meeting was held on March 20, with policymakers deciding not to act. They warned against assumptions that they would cut over the next few meetings, reiterating that they are taking a “gradual and careful approach.”

Since then, GDP data showed that the UK economy grew 0.5% m/m in February after stagnating in January, taking the year-over-year rate up to 1.4% from 1.2%. What’s more, inflation slowed somewhat in March, but it remained well above the BoE’s objective of 2%, with the core CPI rate standing at 3.4%. Retail sales for the same month came in on the strong side as well.

The PMIs for April raised concerns, as the composite index dropped into contractionary territory, reflecting the uncertainty among companies following Trump’s ‘Liberation Day’. BoE Governor Bailey also sounded concerned lately, saying that they are focused on the potential economic shock from Trump’s tariffs, but he added that the UK economy is not close to recession at the moment.

The PMIs and Bailey’s remarks justify expectations of a quarter-point rate cut at next week’s gathering, but they don’t explain the very dovish bets for the remainder of the year. According to UK Overnight Index Swaps (OIS), after next week’s reduction, investors are penciling almost three additional quarter-point cuts.

Given the data and the fact that the UK was only subject to the US administration’s 10% baseline tariff, this assessment seems overly dovish, and the BoE is unlikely to satisfy it. Even if the BoE sounds somewhat more dovish than it did at its latest meeting, the new economic projections are unlikely to paint a picture more worrisome than the market’s current pricing. A less-dovish-than-expected outcome could help the pound drift higher.

China trade numbers to attract special interest

Investors are also likely to pay extra attention to China’s import and export numbers for April, due out on Friday. China’s factory activity contracted at the fastest pace in 16 months during last month according to the PMIs as Trump’s tariffs snapped two months of recovery. Thus, should the trade data point to severely hit exports, calls for further stimulus by Chinese authorities will intensify.

The aussie and kiwi could suffer given that China is Australia’s and New Zealand’s main trading partner, but also due to perhaps another round of deterioration of the broader market sentiment. Stocks could pull back and gold could gain on speculation that China will accelerate its gold purchases to further loosen its dependency on the US dollar and Treasuries.

Kiwi traders will also have to digest New Zealand’s employment report early in the Asian session Wednesday.

Japanese wages and Canada’s jobs reports also on tap

In Japan, the overall wage income of employees for March is coming out, also on Friday. Although yen traders have significantly scaled back their BoJ rate hike bets due to the global tariff turbulence, comments by Governor Ueda that the Bank remains committed to raising interest rates and the acceleration in Tokyo CPIs prompted them to bring some of their bets back to the table.

That said, just yesterday, the BoJ held interest rates unchanged, with Ueda tying the timing of the next hike to Trump’s tariff plans. Currently, investors are assigning a less-than-50% chance of another 25bps increase by year-end, and strong wage data is needed to drive that probability up again.

Canada releases employment data later in the day. Around two weeks ago, the BoC held its policy rate unchanged at 2.75%, the first pause after seven consecutive reductions. The Bank said that the uncertainty surrounding tariffs made it impossible to issue economic forecasts and instead they produced two scenarios of what could happen. Governor Macklem said that they would proceed carefully from here onwards.

Investors are also confused about how the BoC may proceed, assigning a 60% chance for a rate cut at the next gathering, with the remaining 40% pointing to a pause. Therefore, should the employment data come in on the strong side, the likelihood of policymakers keeping their hands off the rate-cut button could increase, thereby adding more support to the surprisingly strong loonie.

AMD announces earnings amid trade uncertainty

On the earnings front, Advanced Micro Devices (AMD) will deliver its quarterly earnings. On April 16, the firm announced that it expects a hit of up to $800mn due to Trump’s restrictions on exports of advanced processors to China. Although the US administration has made some tariff exemptions for electronics, including semiconductors, it warned that separate levies could come in the future. Thus, even though the results will not reflect the turbulence that started on April 2, the firm’s guidance for the future may suggest a much more cautious approach.

As high inflation fades into the rear-view mirror, has everyone noticed the other signs of a slowing in economic momentum?

The torrent of tariff-related headlines eased this week, allowing markets to take a bit of a breather and the rest of us to focus on other things. In a world of continuous data flow, it is all too easy to get stuck to a previous view or change it only incrementally. Sometimes, though, we should take a step back and more deeply assess what has changed. This week’s CPI data confirmed that the post-pandemic inflation surge is firmly in the rear-view mirror. But have observers, including the RBA, fully absorbed the implications of this change?

Signs of an unchanged mental narrative manifest in many ways. Some might worry about any and all categories of inflation still running above the 2½% target midpoint, as if that were not also true pre-pandemic when overall inflation undershot the RBA’s target for years. Others might extrapolate temporary blips into the future, without having a good explanation for why that blip would continue. Still others fret about a ‘tight’ labour market and ‘strong’ domestic demand.

It is true that Australia’s labour market was tighter than average and did not ease further in the second half of 2024. It is less clear that the latest data support the same characterisation for early 2025. As Westpac Economics colleague Ryan Wells noted at the time, the last two monthly labour force releases were a bit of a mixed bag. Employment was essentially flat, and the participation rate declined. While the latter helped keep the unemployment and underemployment rates low, it was also to be expected as cost of living pressures ease and the additional labour supply to make ends meet becomes less necessary.

Beyond the labour force survey itself, indicators such as job ads and business surveys are easing, and labour market tightness indicators from business surveys have resumed declining after their late-2024 pause. None of this is definitive, but the weight of data is pointing to a possible loss of momentum.

Likewise, it is true that household consumption growth is likely to pick up over the course of the year, as real income growth continues to recover. The crucial question is not whether this pick-up happened at all, though, but rather how large it will be. We are currently forecasting consumption growth over the year to the December quarter 2025 at 1.5%, the same as the median forecast of other market economists. Importantly, the RBA’s February forecast, at 2.6%, was noticeably above even the highest private-sector forecast, even after a downward revision from 2.9% in the November 2024 round. When assessing the outlook and its policy implications, then, we need to go beyond detecting whether spending has picked up at all and evaluate how that pick-up compares to our current view.

So far, a range of early indicators would suggest that consumption has not picked up as much as the RBA’s current forecast would imply. Card spending measures and the broader ABS Household Spending Indicator got off to a slow start in 2025. Perhaps even more salient, our Westpac DataX Consumer Panel (PDF 516KB) continues to indicate that people are spending less out of the extra income from the tax cuts – just 20 cents per extra dollar of take-home income once the Q1 data are incorporated – than historical experience would suggest. Real (inflation-adjusted) spending per person was broadly flat in the March quarter, according to the Panel. The strength in household deposit growth recently is consistent with households saving much of the extra income, at least for now.

None of these data points are truly definitive; rather, they are more like jigsaw puzzle pieces. Collectively, though, they point to some loss of momentum in the labour market from the surprisingly robust second half of last year, and less of a pick-up in momentum from the consumer than earlier believed.

A common thread here is the simultaneous loss of momentum in population growth. We have long predicted that the surge after the international borders reopened would roll over, and population growth would normalise. As it has turned out, the slowdown in population growth has been a bit sharper than leading indicators implied (PDF 3MB). The official data show growth in the estimated resident population already down to 1.8%yr in the September 2024 quarter, from a peak of around 2½%yr a year previously. Both we and the RBA had previously expected 2.0%yr for calendar 2024. Softer labour demand being matched by lower supply, along with relatively subdued increases in consumption growth, could both be consistent with that unwind in population growth continuing into 2025.

These subtler shifts in momentum will of course be swamped by shifts in the outlook coming from recent developments overseas. It will therefore be all too easy to let them slip by and fail to learn from them. It is best, then, to take a breath and examine all those jigsaw puzzle pieces and see how they fit together.

Summary

• In a widely expected decision, the Bank of Japan (BoJ) held its policy rate at 0.50% at this week's meeting. Uncertainty around trade policy appears to be a key factor that kept BoJ policymakers on the sidelines this month, and dovish-leaning elements of the decision and updated economic forecasts suggest this rate pause may extend for a bit longer.
• In its updated projections, the BoJ downwardly revised its GDP growth and underlying inflation forecasts for fiscal years 2025 and 2026, and noted that risks for both economic activity and prices remain skewed to the downside. The central bank now sees the 2% inflation target being reached in FY2027 instead of FY2026. Comments from Governor Ueda were somewhat mixed, as he noted that a delay in the achievement of the price target does not necessarily mean a delay in rate hikes.
• Given this mix of a somewhat dovish-leaning policymaker stance, elevated uncertainty, but also recent encouraging wage and price growth data and our own more-optimistic view of GDP growth, we do forecast another BoJ rate hike, though expect it to now come later than we previously anticipated. We see the BoJ hiking its policy rate by 25 bps to 0.75% in October of this year. By that point, we suspect that policymakers will have more clarity around global trade policy and local economic growth and inflation developments.
• We see a gradual pace of yen appreciation against the dollar this year as the BoJ hikes while the Fed is cutting rates. However, around the turn of the year when the Fed concludes its easing cycle, U.S. growth improves and the BoJ is on hold, we expect to see renewed yen weakening against the dollar through late 2026.

Bank Of Japan Announcement Holds Steady Amid Uncertain Outlook

In a widely expected decision, the Bank of Japan (BoJ) held its policy rate at 0.50% at this week's meeting. Uncertainty around trade policy appears to be a key factor that kept BoJ policymakers on the sidelines this month, and dovish-leaning elements of the decision and updated economic forecasts suggest this rate pause may extend for a bit longer. In the Outlook for Economic Activity and Prices, policymakers highlighted that Japanese economic growth is likely to moderate in the nearer-term before rising again in the medium term. In turn, during the period while economic growth is somewhat modest, this should lead to sluggish underlying inflation as well, before it gradually rises again later in the forecast horizon. The central bank also noted that risks to both its economic and inflation outlook are skewed to the downside for fiscal years 2025 and 2026.

In terms of the updated forecasts, policymakers notched up their Fiscal Year 2024 (April 2024-March 2025) real GDP forecast to 0.7% from 0.5% previously, but downwardly revised their projections for FY2025 and FY2026, to 0.5% (1.1% previously) and 0.7% (1.0% previously), respectively, citing changes in trade policy. The BoJ also introduced fiscal year 2027 into its forecast horizon, for which it projects real GDP growth to pick up further, to 1.0%. As for underlying price pressures (CPI ex-fresh food inflation), the BoJ kept its fiscal year 2024 forecast unchanged at 2.7% and revised its FY2025 and FY2026 forecasts down to 2.2% and 1.7%, respectively. For FY2027, the central bank sees CPI ex-fresh food inflation at 1.9%. In the accompanying commentary, officials noted that they see inflation reaching a level consistent with the 2% inflation target in the second half of the projection period, around fiscal year 2027. This marks a delay in the achievement of the price target as compared to the forecasts from January; those projections saw the target being achieved in FY2026.

In Governor Ueda's press conference, he offered a somewhat more balanced tone in contrast to the policy statement. He began by acknowledging heightened uncertainties both concerning global trade policy and BoJ policymakers' confidence that their economic projections will be realized. Ueda framed the forward-looking path for domestic inflation as one that would see more of a stalling before the 2% inflation target is sustainably achieved, but in notable remark, stated that a delay in the achievement of the price target does not necessarily mean that rate hikes will be delayed. In our view, his press conference comments appeared to balance a somewhat dovish economic outlook while also maintaining a degree of policy flexibility.

It appears that market participants interpreted the statement and accompanying comments as somewhat dovish-leaning, as the yen weakened noticeably against the dollar, to around the 145 per dollar mark after hovering between 142.50-143.00 per dollar yesterday prior to the announcement.

As we will detail in the remainder of this report, while we do see some economic reasons that further BoJ tightening can be delivered, the dovish tilt of the commentary and forecasts has led us to see policymakers waiting until October of this year to raise the policy rate by 25 bps, in order to wait to gain more clarity on the developments of global trade policy and the domestic economic growth and inflation outlook.

Wage and Price Trends Still Supportive of Eventual Further Bank of Japan Tightening

Regarding recent economic news, both wage and price growth developments appear to be consistent with additional BoJ tightening, in our view. Inflation has been above the central bank's 2% target for quite some time now, and while readings from 2024 saw price growth slowing closer to the 2% mark, national CPI inflation popped again around the turn of the year. March CPI inflation came in at 3.6% year-over-year, and the underlying measure—which excludes fresh food—has been gradually accelerating in recent months and printed at 3.2% in March. We will see the release of the April national CPI report toward the end of May. In the meantime we received the Toyko CPI inflation figures for April, which surprised to the upside.

Given that Bank of Japan policymakers have long highlighted the desire for a “virtuous cycle” between wages and prices to take hold in order to help the economy to sustainably achieve on-target inflation, it is also important to consider recent trends in wage growth. Early results from this year's spring wage negotiations have generally been encouraging, with Rengo—Japan's largest group of labor unions—reporting their latest tally of an average wage increase of 5.4% year-over-year for its members, which is noticeably elevated by historical standards. The final tally from this year's negotiations has not yet been released, but it appears that the momentum seen last year—for which the final tally was 5.1%—remains. Last year's reading was the highest since the early 1990s. Looking into monthly labor earnings data, which are more backward-looking, the picture is somewhat mixed. Headline labor cash earnings growth has been reasonably solid, coming in at 2.7% year-over-year in February. Real earnings growth was negative in January and February, following two months of positive growth at the end of last year. Measures that examine the same sample base of workers from month-to-month also appear to be of interest to BoJ policymakers. Earnings growth for all workers in this group came in lower than expected in both January and February, though the readings are still elevated by historical standards. While within the details of the monthly wage growth data there may be some signs that the momentum is somewhat uneven, we believe that price and wage growth trends as of late are overall consistent with an additional BoJ rate hike.

Growth Trends Mildly Encouraging Overall, Though Risks Remain

Turning to the growth outlook, recent activity data and sentiment surveys have shown some mildly encouraging signs, suggesting Japan's economy was in a reasonable position ahead of the U.S. tariff announcements in early April. While we don't view these growth trends as providing a decisive argument for further Bank of Japan tightening, nor do we view recent trends as a significant impediment to further rate hikes. Looking first at GDP growth, Japan's economy grew 2.2% quarter-over-quarter annualized in Q4-2024, and, indeed, has shown steady growth over the past three quarters. During that time, both consumer spending and business capital spending have enjoyed perceptible gains. In another encouraging development, income trends have also firmed in recent quarters, reflecting wage gains as well as the government's tax cuts and income support measures. For Q4-2024, real household disposable income rose 4.4% year-over-year and real employee compensation rose 3.2%, both outpacing the 1.1% growth in consumer spending. Those firming income trends suggest that Japan's consumer can continue to support the economy in 2025.

We also see indications that Japan's economic growth held up through at least the first quarter of this year. Notably, the Q1 Tankan survey was relatively upbeat. The large non-manufacturers' diffusion index rose 2 points to +35, while (perhaps not surprisingly, given the threat of tariffs) the large manufacturers' diffusion index fell 2 points to +12. Both indices, however, remain at relatively elevated levels. In another promising development, Japan's April Purchasing Managers Indices—one of the first post-tariff-announcement indicators—also showed improvement. The April manufacturing PMI edged up to 48.7, while the services PMI rose more noticeably to 52.2. As a result, the composite, or economy-wide, PMI moved into expansion territory at 51.1. While we would seek to avoid over-interpreting the gains seen in the April PMIs, at a minimum we think it is something of a relief that sentiment did not slump sharply following the tariff announcements.

Of course, some question marks remain regarding Japan's economic prospects, in particular a weaker outlook for two of Japan's key trading partners, China and the United States. While exports to China have decreased a bit in importance in recent years, China still accounted for around 19½% of Japan's total merchandise exports in 2024. On the other hand, exports to the United States have increased in importance in recent years, accounting in 2024 for around 18½% of merchandise exports. With both U.S. and Chinese economic growth expected to be noticeably slower in 2025 and 2026 amid heightened global trade tensions, Japan's export sector appears likely to come under some pressure as this year progresses.

The increasing prominence of the United States as a trading partner for Japan also highlights the importance of Japan and the U.S. reaching some kind of agreement on trade in the months ahead. The United States announced a “reciprocal tariff” of 24% on imports from Japan in early April, although that rate has been temporarily been reduced to a 10% floor during a 90-day reciprocal tariff pause. To the extent that Japan and the United States can, during that time, reach a full trade agreement—or perhaps, more likely, a framework to continue trade negotiations—that allows for U.S. tariffs on imports from Japan to remain at 10% or lower, that would clearly be beneficial for the Japanese economic outlook. Finally, there have been mixed news reports on whether Prime Minister Ishiba is considering a new economic package at this time to help absorb the impact of tariffs. To the extent that any such package is pursued it would, at the margin, help Japan's growth outlook. Taking into account the growth momentum around the turn of the year, potential disruptions from tariffs, and the possibility of government support measures, our base case forecast envisages Japanese GDP growth of 1.2% in 2025 and 0.9% in 2026. While, similar to the Bank of Japan, we acknowledge there are some downside risks to the growth outlook, in our view the economy's momentum still appears solid enough to eventually elicit further Bank of Japan tightening.

Overall, taking into account the combination of a slightly dovish-leaning BoJ annoucement, along with what we view as overall encouraging wage and price trends, and our own outlook for Japan's economic growth to maintain a reasonably steady pace, we do expect another BoJ rate hike, but we also expect it will be some time before that tightening is delivered. In the interim, we antcipate policymakers will wait as they seek a bit more clarity on trade tensions and local economic conditions. To that point, we have pushed back our expected rate hike timing to October, from July previously. We forecast a 25 bps rate hike at their October meeting, to reach a rate of 0.75%, in what we expect will be the final rate hike for this year. Our view of a BoJ rate hike in contrast to several Fed rate cuts later this year should still translate to yen appreciation, albeit likely only at a gradual pace, against the dollar over the remainder of this year. Around the turn of the year, however, as the U.S economy likely recovers and Fed easing comes to an end, we expect the yen could show modest renewed weakening through much of 2026.

The euro has posted gains on Friday. In the European session, EUR/USD is trading at 1.1325, up 0.37% on the day. Today's gains follow a three-day slide. US nonfarm payrolls came in at 177 thousand, much stronger than the market estimate of 130 thousand.

Eurozone inflation higher than expected

Eurozone inflation for April was a surprise on the upside. Headline CPI remained steady at 2.2% y/y, edging above the market estimate of 2.1%. Lower energy prices were offset by a rise in service inflation and food prices. Monthly, CPI was also unchanged at 0.6%, above the forecast of 0.4%.

Core CPI, which excludes food and energy and is a better gauge of inflation trends, jumped to 2.7% y/y, up from 2.4% in March and above the market estimate of 2.5%. This was the first acceleration in the core rate since May 2024. Services inflation, a key component in Core CPI remains hot and jumped to 3.9% from 3.5% in March.

The rise in core CPI is a worrisome sign for the European Central Bank and could complicate plans to gradually lower interest rates. The ECB has been aggressive, cutting rates by 175 basis points in the current easing cycle. Still, more cuts are needed to boost the ailing eurozone economy.

US nonfarm payrolls beats forecast

US nonfarm payrolls came in at 177 thousand in April, slightly below the downwardly revised gain of 185 thousand in March. This easily beat the market estimate of 130 thousand and is a sign that the US labor market remains in decent shape. Wage growth was unchanged at 3.8% y/y, just below the market estimate of 3.9%. Monthly, wage growth dropped to 0.2% from 0.3%, shy of the market estimate of 0.3%.

EUR/USD Technical

• EURUSD pushed above resistance at 1.1299 and is testing resistance at 1.1332. Above, there is resistance at 1.1374
• There is support at 1.1257 and 1.1224

EURUSD 1-Day Chart, May 2, 2025

The U.S. economy added 177k jobs in April, slightly above the consensus forecast of 135k. Revisions for the prior two months subtracted a total of 58k jobs.

Smoothing through the volatility, non-farm payrolls averaged 155k over the last three-months.

Private payrolls rose 167k – nearly matching March's 170k – with the largest gains seen in health care & social assistance (+58.2k), transportation & warehousing (+29k) and leisure & hospitality (+24k). Federal hiring declined by 9k and has now shed 29k jobs since January.

In the household survey, both civilian employment (+436k) and the labor force (+518k) rose sharply, holding the unemployment rate steady at 4.2%. The labor force participation rate ticked higher by 0.1 percentage points to 62.6%.

Average hourly earnings (AHE) rose 0.2% month-on-month (m/m) – following a gain of 0.3% m/m in March. The twelve-month change held steady at 3.8%, while the three-month annualized rate of change dipped to 2.6% – suggesting further downward pressure on the year-ago measure over the coming months.

Aggregate weekly hours rose 0.1% m/m, following stronger gains of 0.3% m/m and 0.4% m/m in the two months prior.

Key Implications

Across the board, this was a healthy employment report. At 177k, job creation is nearly bang-on last month's gain and slightly higher than both the three-and-twelve-month averages of 155k, and 157k, respectively. The breadth of hiring across industries remained healthy. Also encouraging was the uptick in the labor force participation rate, which climbed to a three-month high. The jump in labor supply helped to put further downward pressure on average hourly earnings, with the three-month annualized rate of change slipping to a four-year low.

But it's important to not become complacent. The employment survey for April was conducted just a few weeks after the reciprocal tariff announcement on April 2nd, too soon to show a meaningful spike in layoffs. However, heightened trade uncertainty has already started to weigh on economic growth, and the impacts are likely to soon spillover to the labor market – as evidenced by this week's jump in initial jobless claims. With price increases from tariffs in the pipeline and the unemployment rate expected to drift higher, the Fed could soon find itself in a tricky position. Provided inflation expectations remain well anchored, policymakers are likely to look through the inflation shock and deliver a few "insurance cuts" this summer to better support the economy.

Daily Pivots: (S1) 143.60; (P) 144.67; (R1) 146.46; More...

USD/JPY retreated after hitting 145.90 and intraday bias is turned neutral. Overall near term outlook will stay bearish as long as 38.2% retracement of 158.86 to 139.87 at 147.12 holds. Break of 141.96 will argue that the rebound has completed as a corrective move. Retest of 139.87 should then be seen next in this case.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low), with fall from 158.86 as the third leg. Strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.8248; (P) 0.8290; (R1) 0.8339; More….

USD/CHF is staying in range below 0.8333 and intraday bias remains neutral. On the upside, above 0.8333 will resume the rebound from 0.8038 short term bottom. But upside should be limited by 38.2% retracement of 0.9200 to 0.8038 at 0.8482. On the downside, below 0.8196 minor support will bring retest of 0.8038. Firm break there will resume larger down trend.

In the bigger picture, long term down trend from 1.0342 (2017 high) is still in progress and met 61.8% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.8079 already. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.8783) holds. Sustained break of 0.8079 will target 100% projection at 0.7382.