Dollar’s Dull Rally, Euro’s Resilience, and Sterling’s Trade Tailwinds.
USD Rally Falls Flat: Despite positive trade news with China and equity gains, FX and bond markets remain cautious; USD/JPY underwhelms, and DXY struggles below 101.00.
Bessent’s Testimony Risks: US Treasury Secretary’s remarks on FX policy and bond market stability may introduce fresh dollar downside.
Fed Steady for Now: Markets expect no action from the Fed until July, with a modest pullback in easing expectations failing to boost the dollar.
Euro Defies Political Drama: EUR/USD proves resilient despite Merz’s stumble, supported by Chinese stimulus and holding technical support.
Sterling Eyes Trade Boosts: UK trade agreements and improving EU ties support GBP, with limited BoE cuts expected — keeping GBP/USD tilted higher.
USD: Dollar’s Bounce Lacks Conviction
Hopes of a thaw in US-China trade tensions briefly lifted the dollar overnight, with USD rising around 0.4–0.5% on news that formal talks will take place on May 10–11. Normally, this kind of de-escalation would see safe havens like the yen and Swiss franc unwind a bit, giving USD/JPY and USD/CHF room to recover. Yet, the move in USD/JPY has been underwhelming — particularly surprising given heavy long-JPY positioning. Bond markets are also flashing some caution: the 10-year US swap spread remains wide at 55bp, hinting at lingering concerns over Treasuries. So, even though equities have bounced, the FX and fixed income markets still look hungover from recent volatility.
Today’s focus shifts to two key US events. First, Treasury Secretary Scott Bessent testifies before Congress at 16CET, where he’s expected to defend US bond market health and reiterate a strong-dollar stance. However, he may face questions about whether currency agreements are part of broader trade negotiations — a potentially tricky subject given USD strength versus Asian FX like TWD and KRW. His comments could weigh on the dollar.
Second, the FOMC meets, followed by Powell’s press conference. No big surprises expected here — the Fed seems comfortable delaying action until July and letting data guide the pace of future rate cuts. With the market already scaling back expectations by around 20bp, the dollar’s failure to strengthen is noteworthy. Technically, DXY has stalled right where you’d expect in a weak bear-market rally. Unless it clears 101.00, a drift back toward 99.25 would confirm the dollar is still under pressure from political uncertainty.
EUR: Political Wobble, Not a Knockout
EUR/USD slipped briefly after Friedrich Merz failed to secure confirmation in German parliament, but the move was contained — falling to just 1.1310 before bouncing. The euro remains resilient. Some traders argue that China’s latest stimulus may actually support global demand and, by extension, the euro.
Attention today will also be on eurozone retail sales (expected weak) and soft Swedish inflation data. That said, the latter is unlikely to sway expectations that the Riksbank holds its policy rate at 2.25% tomorrow. EUR/USD has defended support at 1.1260, and with continued poor USD performance, a quiet push toward 1.1380–1.1420 remains a possibility.
GBP: Political Progress Offers Lift
Sterling is holding steady, and this month’s political backdrop may offer some upside. A new UK-India trade deal was confirmed yesterday, and speculation is rising about a potential US-UK agreement this week. Even if the UK can’t remove the 10% base US tariffs, it may secure reductions in 25% duties on cars and steel — a potential boost for GBP.
Eyes also turn to the upcoming UK-EU summit on May 19, which could further warm post-Brexit relations and help sterling. Meanwhile, the Bank of England meets tomorrow. Our economist, James Smith, warns that markets are pricing in too many rate cuts. This sets the stage for GBP/USD to push back toward the 1.3445 highs in the near term.