Monthly Foreign Exchange Review

Iran-related market volatility dominated May, yet oil prices fell drastically over last 10 days of the month. Crude oil traded to $87 on the final day of May, after touching $105 on May 18. Oil prices remained extremely volatile, with a range of over $20/barrel. The markets are shrugging off warnings of oil shortages. Tanker traffic is still at zero in the Strait of Hormuz.

U.S. inflation remains above target, with housing and energy dominating inflation numbers. Gasoline prices peaked at $4.56 nationwide average. PCE price index was 3.5% in late May, matching April’s number. CPI again showed a hot month-over-month increase at 0.6%; annualized, this is 7.7%. Inflation in the U.S. shows no signs of moderating at the moment. Globally, we see above-target inflation nearly everywhere. Despite this, many central banks show signs of tolerating elevated inflation rates to focus on supporting weakish economies and slack labor markets.

Labor market showed moderate strength in May, with some evidence of increasing layoffs. New jobs created came in at 115k, which is solid growth, while headline unemployment stayed unchanged at 4.3%.  Hours worked was stable at 34.2 hours, yet wage growth remains near post-COVID lows and was negative in real terms, while JOLTS layoffs increased to get back to post-COVID highs. The data adds up to a sluggish yet still positive labor market in the U.S.

The U.S. economy showed some signs of improvement. Trucking data shows a red-hot market for transport, and durable goods came in at 7.9%—one of the best numbers of the last 10 years. At the same time, sentiment numbers reached record lows, and home sales are depressed. GDP in Q1 was revised down to 1.6%. We continue to see mixed signals, but overall, May economic data improved over April’s.

The USD was mixed against major currencies, showing some strength vs EUR while seeing moderate weakness vs the MXN and CNY. The Iran and energy issues, combined with inflation concerns, are forcing the USD to respond on a currency-by-currency basis. Moderate strength vs the EUR and JPY was offset by slight weakness vs the MXN and CNY. Keep in mind that the USD remains THE safe-haven currency, and any future energy squeeze could result in a flight to USD quality.

Rate expectations responded to above-target inflation data with a shift to favoring higher rates. The change from one or two rate cuts to one rate hike is surprising nearly everyone. Inflation is a consistent topic of conversation with business leaders and consumers alike. New Fed Chair Warsh has been vocal about reducing the size of the Fed’s balance sheet, which would be a large change in Fed policy. Importantly, a balance sheet reduction could be a way to fight inflation without raising rates. Will Warsh start these changes in June—or will he wait?  

June outlook: USD steady with warning on possible Iran and energy volatility spikes. Energy prices and the Iran conflict are no longer in lockstep—Iran could be resolved, yet energy could still become scarce and prices extremely volatile. There are higher than usual chances of large movements across FX and markets more generally, but without an oil shock, expect moderate, currency-pair specific movement.   

EUR/USD

Source: Bloomberg Finance LP

EURUSD traded slighly lower in May in a quiet trading month. EU inflation crept up to 3.0%, and the EU expects inflation to be 3.6% for all of 2026. This is fueling talk of a rate hike at the June 11 ECB meeting. Talk of using tariffs to reduce the balloning trade deficit w/China is growing, and the tariffs with the USA ended up tiny after big talk in 2025. Watch for energy volatility in this pair.

USD/CAD

Source: Bloomberg Finance LP

CAD was weaker against USD nearly every day in May, and Canada is technically now in a recession after two consecutive quarters of mild economic contraction. Trade relations with Canada are so bad that Canada was not invited to negotiate a new agreement at the USMCA talks, and it is expected the U.S. will present Canada with a “take it or leave it” trade proposition. Stable BoC policy rate will not change at 6/10 meeting as inflation remains low enough (2.8%) to ignore during this mild recession.

USD/MXN

Source: Bloomberg Finance LP

USD/MXN crept closer to the 17.0000 support level, as Mexico’s economy continues to perform. Relatively high interest rates in Mexico (compared to inflation) support the popular USD/MXN carry trade, and Mexico’s economic performance support going long MXN. Trade relations with the U.S. are better for Mexico than Canada, and all economic indicators are lining up for continued MXN strength. Note: MXN is a volatile currency, so announcements may cause large MXN negative moves, even as overall data supports a stronger peso.

USD/CNY

Source: Bloomberg Finance LP

USD/CNY strengthened again in May and has gained 3.75% in 2026 vs the USD. China cut oil imports by 40% in May, using reserves to make up the 6.6m barrel/day difference. China cut holdings of U.S. treasuries to a 16-year low, which would slow any CNY gains. Retail sales hit a 40-month low, and pork prices fell to a 16-year low, showing a slowing economy, and PBOC held rates steady at 3%.

GBP/USD

Source: Bloomberg Finance LP

UK showed some surprising signs of a stronger economy in May, while inflation remained above target. Consumer confidence in the UK may be mirroring the U.S., with weak sentiment and lots of negative talk despite moderate economic growth and new global normal inflation. The UK is quite dependent on Middle Eastern oil, so the timing of when oil starts to flow again is very important. GBP may surprise in 2026.  

USD/JPY

Source: Bloomberg Finance LP

Japan’s Ministry of Finance confirmed a $74B intervention in the currency markets in May to prop up the JPY. Inflation slowed to 1.3% and GDP exceeded expectations at 2.1%, yet the BoJ is still expected to raise rates at the 6/16 meeting. Note: Inflation is suppressed by Japan’s government subsidizing some purchase and capping prices; without this policy, inflation would be higher. USD/JPY will test the 160 level again, and it is uncertain if the MoF will intervene if it does.  

Associated Bank can transact foreign exchanges in more than 100 currencies. Companies interested in learning more about making payments in foreign currencies or in hedging currency exposures should contact their Associated Bank Relationship Banker or the bank’s Corporate Foreign Exchange Department at 866-524-8836 or email fxcapmarkets@associatedbank.com.