US Treasury yields declined, with the benchmark 10Y yield moderating to 4.57%, while the 30Y yield eased below 5.10%. Meanwhile, the US dollar index (DXY) remained broadly firm at 99.18, supported by stronger-than-expected US economic data and hawkish FOMC minutes.

FOMC Minutes: April FOMC minutes leaned hawkish, with members citing risks from high energy prices and supply disruptions. A majority of the officials indicated that some policy firming could be needed if inflation stays above the 2% target (markets have priced in a ~60% chance of a rate hike by Dec 2026). 

US Data: The US economy and labour market continued to exhibit resilience. Initial jobless claims edged lower to 209k (vs 212k in the previous week), indicating layoffs remain subdued despite elevated economic uncertainty. Meanwhile, the flash composite PMI held steady at 51.7 in May. Manufacturing activity strengthened further, with PMI rising to 55.3 (vs 54.5 in Apr’26), while services PMI eased marginally to 50.9 (vs 51.0 previously).

Euro Area PMI (Flash, May): Euro area economic activity weakened further in May, with the composite PMI falling to 47.5 (vs 48.6 in Apr’26), marking the sharpest contraction in over two-and-a-half years. Manufacturing PMI eased to 51.4 (vs 52.2 last month). Services PMI remained in contractionary territory at 46.4 (vs 47.6 last month), as elevated energy costs continued to weigh on demand conditions.

EUR/USD: The pair is trading lower at 1.1617 (at the time of writing), weighed down by cautious sentiment surrounding the Eurozone growth outlook and broader US dollar strength. We expect EUR/USD to trade in the 1.16-1.17 range in the near term.

 India PMI (May): Manufacturing PMI index inched down to 54.3 from 54.7 in April.  Input cost pressures continued to intensify; however, activity remained steady, supported by inventory accumulation. New orders stood at a 19-month low, indicating soft external demand conditions. Meanwhile, the services PMI index rose slightly to 58.9 (vs 58.8 last month), showing steady domestic service growth.

USD/INR: In the domestic market, INR strengthened by 0.6% (vs USD) to close at 96.20 yesterday, supported by likely RBI intervention and reports that the central bank was considering a host of options to support the rupee including interest rate hikes. We expect USD/INR to trade in the 95.50-97 range in the near term.

India Bond Yields: The 10Y benchmark yield closed 4 basis points higher at 7.11% yesterday. We expect the 10Y yield to trade in the range 7.00-7.20% in the near term.

System Liquidity: The liquidity balance stood at a surplus of INR 1.28 lakh crore as of May 20, 2026. The liquidity surplus moderated this week due to GST-related outflows and drag from likely RBI intervention in the FX market. To ease liquidity conditions, RBI announced a USD 5bn USD/INR buy/sell swap auction on May 26 to inject durable rupee liquidity into the banking system. Additionally, RBI will conduct a 3-day VRR auction for INR 1 lakh crore today to address near-term liquidity requirements.