Dollar on the Back Foot: Why Markets Aren’t Buying the Bounce.
Dollar pressure persists as markets remain bearish, with options markets pricing in further downside despite a calmer bond market.
EUR/USD’s rally could continue toward 1.150, driven by safe-haven outflows from the USD and euro’s liquidity appeal.
ZEW sentiment may overstate weakness, with markets likely to look past soft survey data given its timing and the recent tariff pause.
UK jobs data surprised positively, but hiring risks loom due to rising employer costs and softening wage growth.
BoE and ECB rate cuts are fully priced in, leaving risk sentiment and CPI surprises as key drivers for GBP and EUR direction.
USD: Momentum Slows Despite Reprieve
US markets started the week on firmer footing, with gains in both equities and bonds. However, Trump’s broad exemptions on Chinese tariffs didn’t pack enough punch to meaningfully shift sentiment. Investors continue to demand a risk premium for holding US assets, with the dollar still pricing in a 2–5% premium versus other G10 currencies. But FX volatility and correlation breakdowns make it hard to trust these figures blindly.
Options markets remain firmly bearish on the greenback, and Monday’s price action suggests traders are still selling into any rallies. Even if the worst of the US market turmoil is behind us, expectations are building for weaker economic data and lingering fallout from erratic trade decisions.
Treasury Secretary Scott Bessent denied any foreign dumping of US bonds—pinning recent losses on deleveraging instead. While reassurances were offered, markets aren’t convinced support measures are imminent. All in, the dollar faces continued downside risks, regardless of bond market stabilisation.
EUR: Sentiment Slips, But Reaction May Be Muted
Today’s German ZEW survey is the first real Eurozone indicator post-“liberation day,” but it could exaggerate negativity. The expectation index is forecast to drop sharply, but some responses likely predate Trump’s tariff pause. As a result, markets may shrug off any soft data.
While EUR/USD is technically stretched and overbought, there’s strong interest around 1.130. We still think the pair leans toward 1.150 in the short term, supported by the dollar’s fading appeal as a reserve/safe-haven asset. The euro’s deep liquidity continues to draw in flows from exiting USD positions.
The big risk? A dovish surprise from the ECB tomorrow. Still, with 75bps of cuts already priced in for 2025, the central bank has a high hurdle to shift expectations significantly.
UK jobs data, released this morning, showed a bigger drop in payrolls than expected—but these numbers are prone to revisions. Wage growth softened slightly, but fundamentals remain solid. We expect the BoE to start cutting rates in May and continue gradually into 2026.
Given that ECB and BoE easing are already priced in, EUR/GBP now trades mainly on risk sentiment. If equities wobble again, EUR/GBP could head higher. Otherwise, it may drift toward 0.850 as the ECB leads the easing cycle.
GBP: Labour Market Strength Masks Future Risks
Sterling edged higher after strong UK job figures, with 206K jobs added versus 144K prior. The unemployment rate held steady at 4.4%, lending support to the pound. However, concerns loom as April’s hike in employer National Insurance contributions could cool hiring.
Wage growth excluding bonuses rose 5.9%, slightly below estimates, and the previous figure was revised down. Including bonuses, pay rose by 5.6%, again undershooting forecasts.
These mixed earnings figures won’t shift the BoE’s expected path much. Markets are still pricing in a May rate cut, followed by more through 2026. Attention now turns to Wednesday’s CPI print, with core inflation expected to hold at 3.5%.