Confidence, Clarity, and Caution: A Mixed Bag for the Greenback.
US consumer confidence rebound and positive manufacturing data boosted the dollar.
Trump’s softer tone on EU trade and potential Japan deal helped squeeze USD shorts.
Markets await FOMC minutes for clarity on the Fed’s inflation outlook post-tariffs.
Euro holds 1.130 support, but deflationary EU data could increase pressure on ECB.
Sterling weakened as dire UK retail data overshadowed improving trade headlines.
USD: Dollar Finds Strength in Sentiment and Softened Rhetoric
After a shaky start, the dollar found firmer footing thanks to a better-than-expected rebound in US consumer confidence. The May index surged to 98.0, beating consensus and April’s 86, indicating that optimism around the US-China deal and equity market recovery is feeding into consumer sentiment. The Dallas Fed’s manufacturing index also posted a surprise gain, reinforcing a more constructive outlook for USD.
On the political front, President Trump’s more measured approach to EU trade negotiations and signs that EU leaders may push for a quick deal supported the dollar further by pressuring bearish positions. Additionally, Japan’s aim to secure a trade deal with the US before the G7 summit raised the possibility of currency-related commitments—particularly limits on JPY depreciation—that could ripple through broader Asian trade dynamics and potentially dent USD strength.
All eyes are now on the FOMC minutes from the 7 May meeting. Investors hope to glean insights into the Fed’s inflation outlook amid tariff-related distortions. With two rate cuts already priced in, the market still leans dovish, though the outlook may shift as new data—including updated tariff estimates—emerge.
Despite recent gains, skepticism remains. Continued deficit concerns, de-dollarisation narratives, and Trump’s longer-term ambition for a weaker USD keep upside rallies in check. While the jump in consumer confidence reduces immediate downside risk, we’re still cautious about chasing DXY levels above 100.
EUR: Anchored at 1.13 but Watching the Horizon
The euro has been resilient, outperforming many of its G10 peers amid hopeful EU-US trade headlines. However, data continues to send mixed signals. France’s May CPI slipped into negative territory, reinforcing the possibility of deflationary pressure from tariffs. Should upcoming figures echo this trend, markets may begin pricing in deeper ECB cuts below 1.75%.
The Swedish krona’s unusual behaviour also caught attention. Instead of mirroring euro strength, SEK has been trading almost inversely to the dollar, likely due to US equity repatriation flows. With EUR/SEK slipping last week on US Treasury jitters, the krona seems more responsive to USD than EU developments at present.
Technically, EUR/USD has tested 1.130 multiple times without a decisive break. While strong US data or Trump surprises could push it lower, markets still appear reluctant to fully shed the USD risk premium. For now, 1.130 acts as a firm anchor, with upward potential remaining if the eurozone avoids further economic setbacks.
GBP: Pound Undermined by UK Retail Woes Despite Trade Progress
Sterling softened against the dollar on Tuesday, hampered by dismal UK retail data despite favourable trade developments. The CBI’s latest survey showed a sharp drop in retail sales sentiment, plunging to -27 from -8 in April and missing expectations. This hinted at a more fragile UK consumer base and muted demand for GBP.
On the upside, trade headlines offered a glimmer of hope. Toyota’s consideration to move GR Corolla production to the UK was interpreted as a vote of confidence in Britain’s post-Brexit manufacturing appeal. Progress on trade deals with the US and India adds to the UK’s positioning as a potential export hub, though this wasn’t enough to offset economic worries.
Meanwhile, the dollar regained ground following a recent sell-off, bolstered by Trump’s decision to delay EU tariffs. Originally scheduled for 1 June, the 50% levy is now on hold until 9 July, following a conciliatory call with EC President Ursula von der Leyen. This easing of trade tensions added to USD strength against the pound.