2026-05-23 · generated by deepseek-v4-flash

Nonfarm Beat Supports USD, but Inflation Hopes Cool; CNY Rallies on PBOC

US nonfarm payrolls beat expectations at 115k, but downward revisions and lower Michigan inflation expectations temper USD upside. CNY strengthens on PBOC policy support, while geopolitical tensions over the Strait of Hormuz keep safe havens bid.

The US dollar traded mixed on Friday as a stronger-than-expected April nonfarm payrolls report was offset by downward revisions and a surprising drop in consumer inflation expectations. The headline payrolls rose 115,000, well above market consensus, while the unemployment rate held at 4.3%. However, the Labor Department revised down February and March data by a net 16,000, and the University of Michigan’s May 1-year inflation expectation fell to 4.5% from 4.7%, below the 4.8% forecast. The 5-year expectation also eased to 3.4%. These data points reinforced the view that the labor market is cooling gradually and that price pressures may be peaking, prompting a reassessment of the Fed's rate path.

USD/JPY and Fed Policy Bank of America dramatically revised its outlook, now expecting the Fed to hold rates until at least 2027, citing persistent inflation and a robust labor market. Chicago Fed President Goolsbee echoed caution, saying rate cuts require more positive inflation data that have not yet emerged. The combination of a strong headline payroll but softer inflation expectations kept USD/JPY in a tight range around 139.50, with the yen also drawing support from safe-haven flows amid Middle East tensions. The market is pricing in a prolonged pause, and any further escalation in geopolitics could push USD/JPY lower toward the 138.00 support.

EUR/USD: ECB and Energy Risks EUR/USD edged higher to 1.0850, supported by a weaker dollar and hawkish ECB commentary. ECB Governing Council member Escrivá warned that AI risks require a fresh look at financial infrastructure resilience, while Nagel reiterated the bank’s readiness to act on energy-driven inflation. The euro also gained as oil prices stabilized after initial spikes from Iran-US clashes in the Strait of Hormuz. The UK’s decision to deploy a destroyer to the region added to geopolitical uncertainty, but the euro area’s exposure to energy imports limited upside. With the ECB signaling it may move before the Fed, EUR/USD could test the 1.0900 resistance if risk appetite improves.

USD/CNH: Yuan Strengthens on Policy and Trade Data The offshore yuan strengthened 116 pips to 6.7971, and the onshore yuan rose 63 pips to 6.8005, supported by China’s continued capital account liberalization. The Qianhai Free Trade Zone launched two FX facilitation pilot programs, with the first transactions completed. Separately, Jiangsu province reported 17.2% year-on-year growth in foreign trade in Q1, well above the national average, while Chongqing saw cross-border yuan settlement of 85.05 billion yuan for goods trade, ranking first in central and western China. These data points, along with strong foreign capital inflows highlighted by the 'stable anchor' narrative, underpinned the yuan. If the PBOC maintains its accommodative stance, USD/CNH may drift toward 6.7800.

Geopolitical Risks and Safe Havens The geopolitical backdrop remains a major driver for FX markets. Iran is drafting legislation regarding the Strait of Hormuz, and Iranian forces engaged in skirmishes with US vessels, escalating tensions. Meanwhile, President Putin signaled the Ukraine conflict is moving toward an end, which could ease broader risk aversion. The divergent geopolitical paths mean that safe-haven currencies such as the Swiss franc and the yen are likely to remain bid, while commodity currencies could face headwinds from potential supply disruptions. The pound sterling saw modest gains as the UK’s naval deployment was seen as a show of force, but Brexit-related uncertainty and geopolitical risks limited GBP/USD upside around 1.2550.

In the week ahead, focus will remain on Fed speakers and any fresh developments in the Middle East. The dollar’s direction hinges on whether inflation data confirms a softening trend or if the labor market continues to defy expectations.