Markets Rally as Trade Optimism Outweighs Economic Concerns | Weekly Market Analysis

Key events this week:

Monday, May 19, 2025

• Eurozone - CPI (YoY) (Apr)

Tuesday, May 20, 2025

• Australia - RBA Interest Rate Decision (May)

Wednesday, May 21, 2025

• UK - CPI (YoY) (Apr)
• USA - Crude Oil Inventories

Thursday, May 22, 2025

• USA - Initial Jobless Claims
• USA - S&P Global Manufacturing PMI (May)
• USA - S&P Global Services PMI (May)
• USA - Existing Home Sales (Apr)

Friday, May 23, 2025

• USA - New Home Sales (Apr)

The S&P 500 ended Friday on a strong note, concluding the week with impressive gains as investor confidence remained buoyant despite weaker-than-expected consumer sentiment data. Optimism surrounding the recent developments in US-China trade relations served as a powerful tailwind, helping equity markets to overcome broader economic concerns.

By the close of Friday's session, the S&P 500 had risen 0.7%, while the Dow Jones Industrial Average gained 331 points, or 0.8%. The tech-heavy NASDAQ Composite added 0.5%. These daily advances capped a robust weekly performance across all three major US indices. Over the week, the S&P 500 advanced 5.3%, the Dow rose by 3.4%, and the NASDAQ soared 7.2%, buoyed by news that the United States and China had agreed to a 90-day pause in their trade dispute. This temporary truce reduced fears of an escalation in tariffs, which had been casting a shadow over the global economic outlook for months.

The thawing of trade tensions led to increased market optimism and prompted a reassessment of economic growth forecasts. Barclays, for instance, revised its US GDP outlook in response to the trade deal, stating that the world’s largest economy is now expected to grow 0.5% this year and 1.6% in 2026, reversing earlier predictions of a 0.3% contraction in 2025. The bank’s revised projections suggest that the US might avoid slipping into a recession in the near term.

However, not all recent economic data painted a rosy picture. Reports released on Thursday highlighted a decline in retail sales and an unexpected drop in the Producer Price Index (PPI) for April. These followed earlier figures indicating subdued consumer price inflation, further reinforcing market speculation that the Federal Reserve could implement multiple rate cuts this year. Traders are now betting on at least two rate reductions, expecting that the central bank will act preemptively to support growth amid softening economic indicators.

In the currency markets, the USD/JPY pair experienced fresh selling pressure on Monday during the Asian trading session, falling to around 144.80  -  its lowest level in over a week. Market sentiment continues to favor the Japanese Yen, with growing expectations that the Bank of Japan could tighten monetary policy again in 2025. This shift in policy expectations is making the Yen more attractive relative to the US Dollar, which is weighed down by the prospect of Fed rate cuts and a generally weaker outlook for the US economy.

Despite the pair's decline, there was some hesitation among traders to push the USD/JPY below the psychologically significant 145.00 level, signaling a degree of caution before committing to deeper bearish positions. The broader outlook still appears to favor the Yen, but short-term dynamics could lead to some volatility.

The New Zealand Dollar also saw modest support early Monday, with the NZD/USD pair attracting dip-buyers and edging above the 0.5900 level. However, its upward momentum appeared limited as mixed Chinese economic data failed to significantly sway market sentiment. Retail Sales in China rose 5.1% year-over-year in April, missing expectations, while Industrial Production exceeded forecasts at 6.1% growth. Fixed Asset Investment, on the other hand, fell short of projections. Despite this, ongoing optimism stemming from the US-China trade truce continued to lend modest support to antipodean currencies like the Kiwi.

The Australian Dollar followed a similar path, trading just above the 0.6400 level and remaining within a familiar range established over the past month. Market participants were cautious ahead of the Reserve Bank of Australia’s upcoming policy meeting, scheduled for Tuesday. The RBA is broadly anticipated to reduce interest rates by 25 basis points, with the potential for further cuts later in the year. While easing inflation and economic concerns justify a dovish stance, the recent improvement in global trade relations has reduced expectations for aggressive rate reductions. As such, traders are likely to remain on the sidelines until clearer policy signals emerge.

In Canada, the USD/CAD pair showed little movement in early trading, fluctuating near the 1.3965–1.3970 range. Crude oil prices began the week on a softer note, weighing on the Canadian Dollar, which is heavily correlated with commodity prices. Nonetheless, selling pressure on the US Dollar helped prevent a significant upside in the USD/CAD pair, keeping the currency pair range-bound for now.

Over in the UK, the British Pound rebounded against the Dollar, with the GBP/USD pair trading near the 1.3300 level. The Pound’s recovery was partly driven by a downgrade in the US credit rating by Moody’s Investors Service, which lowered the US rating from Aaa to Aa1. Moody’s cited rising debt levels and mounting interest obligations as key risks. This marks the third downgrade of the US credit rating by a major agency in recent years, following earlier actions by Fitch and Standard & Poor’s. The agency now forecasts that US federal debt could climb to 134% of GDP by 2035, up from 98% in 2023, driven by increased entitlement spending, higher debt-servicing costs, and weaker tax revenue growth.

Meanwhile, the Pound drew additional strength from unexpectedly strong UK GDP data released last Thursday. Both monthly and quarterly figures indicated solid economic growth, bolstering expectations that the Bank of England may refrain from cutting rates in the near term. If inflation in the UK remains sticky or accelerates further, the central bank may even opt to maintain its current policy stance longer than previously anticipated.

Looking ahead, the start of the week offers little in the way of major US economic data releases. As a result, the US Dollar is likely to be influenced more by upcoming speeches from Federal Open Market Committee (FOMC) members than by hard data. Their comments will be closely monitored for any hints regarding the Fed’s outlook on inflation, growth, and the pace of future interest rate adjustments.

In sum, despite some pockets of economic weakness and uncertainty about central bank policy moves, investor sentiment remains largely positive. The easing of trade tensions between the US and China has provided a meaningful boost to global risk appetite, fueling strong equity market performance and supporting several key currencies. As markets digest upcoming central bank decisions and data releases, the interplay between policy expectations, trade developments, and economic fundamentals will continue to drive volatility and shape investor positioning.