US intelligence warning "there is something big" in the Middle East

Affected by Fed officials' more cautious remarks about the economy, the U.S. dollar index continued to fall on Tuesday. The market focuses on the U.S. Congress’ tax reform vote.

Moody's downgraded its U.S. sovereign credit rating due to the U.S. deficit, and the dollar weakened across the board.

Another factor in the weakness of the dollar comes from U.S. President Trump’s failure to convince opposition in Congress to support his tax reform bill.

UBS FX strategist Vassili Serebriakov said: "The market's basic stance on the dollar is still relatively short, and I don't think that has changed."

Feder officials further expressed concerns about the possible impact of the Trump administration's trade policy on the economy on Tuesday. St. Louis Fed Chairman Mousalem pointed out that despite the recent easing of U.S.-China trade tensions, the U.S. labor market may weaken and prices may rise.

Cleveland Fed Chairman Hamak said current trade developments could lead to stagnant inflation, but she also pointed out that other government policies may help offset the impact.

Other Fed officials on Monday also expressed their opinions on the downgrade of the U.S. credit rating, market turmoil and uncertainty in the economic outlook, indicating that policymakers remain highly vigilant about the current environment.

The market focus is currently turning to the key vote of the U.S. House of Representatives on the tax reform bill later this week. Despite the uncertainty, Republican leaders said they would push for the vote. According to independent agencies' analysis, Trump's tax reform bill may increase U.S. debt by 3 trillion to 5 trillion US dollars.

The ever-expanding fiscal deficit, trade frictions and weak confidence have become important factors in suppressing US assets. The dollar index has fallen more than 10% since its January high.

Asian Market

After the RBA decided to lower the cash rate by 25 basis points to 3.85%, Governor Michele Bullock revealed at a post-conference press conference that the board had briefly considered keeping interest rates unchanged, but soon turned to debate between 25 and 50 basis points cuts.

Ultimately, given that inflation is within the target range and the unemployment rate remains elastic, a more cautious 25 basis point rate cut is the first choice. Brock stressed that while easing is reasonable, it is "not ruled out that we may need to take action in the future."

Bullock also noted that the board believes that recent global trade developments are generally "anti-deflationary" for Australia. However, she warned that the risk remains two-way.

“There is an upward risk of inflation, and trade policies can lead to supply chain problems, which may raise the prices of some imported goods, as we have seen during the pandemic,” she stressed.

European Market

Klaas Knot, a member of the ECB Management Committee of the Netherlands, said today that the rate cut at the June meeting was still under discussion, but an agreement was far from reached.

"I can't rule out that we will decide to cut interest rates again in June, but I can't confirm either," he told reporters, stressing that the ECB must continue to focus on medium- and long-term inflation risks, rather than short-term volatility.

Knot said new employee forecasts will be included next month's scenarios that reflect the impact of recent U.S. trade policy and potential EU countermeasures.

While the outlook may indicate a decline in inflation in 2025 and 2026, the greater concern is after this window given the long-term impact of tariff-related distortions. “It’s more interesting to see what happens after that time,” he noted.

Bank of England chief economist Huw Pill explained that he voted at a May Monetary Policy Committee meeting to keep bank interest rates unchanged, a "skip" rather than a pause for a broader easing cycle.

Pill said in his speech today that while deflation is still underway, the pace of cutting interest rates by 25 basis points per quarter since last summer may be “too fast” given the current inflation dynamics.

He was particularly concerned that structural changes in wage and price setting behaviors exacerbated the “intrinsic durability” of inflation in the UK.

Pill therefore believes that it is necessary to adopt a more cautious approach to monetary easing, which strengthens the need to slow down the pace of interest rate cuts while continuing wider policy normalization.

U.S. market

Canada's overall consumer inflation rate fell to 1.7% year-on-year in April, down from 2.3% in March and slightly higher than expected 1.6%. The slowdown is mainly due to a sharp drop in energy prices year-on-year-on-year-on-year-on-12.7%, of which gasoline fell by -18.1% year-on-year, and natural gas fell by -14.1% year-on-year. Calculated monthly, the overall CPI fell by -0.1% month-on-month.

However, the details below the surface do not give policy makers a sense of relief. Excluding energy, inflation actually accelerated, with CPI rising 2.9% year-on-year, compared with 2.5% year-on-year in March.

In addition, all three core inflation indicators rose significantly. Median CPI rose from 2.9% year-on-year to 3.2%, higher than the year-on-year expectation of 2.9%. The CPI increase rose from 2.8% year-on-year to 3.1% year-on-year, higher than the year-on-year expectation of 2.8%. The general CPI jumped from 2.3% to 2.5% year-on-year, higher than the 2.3% expectation.

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