Dollar Softens as Yields Ease, Euro Firms, Sterling Supported but Capped by UK Headwinds.

USD – The dollar is softening as safe-haven demand and yields ease, though it remains supported by a relatively restrictive Fed outlook.

EUR – The euro is firmer on USD weakness and stabilising energy prices, but gains are limited by weak fundamentals and a cautious ECB stance.

GBP – Sterling is modestly stronger on improved sentiment and steady BoE expectations, though upside is capped by a challenging UK economic backdrop.

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USD:

The US dollar is trading with a softer tone, as markets continue to unwind some of the safe-haven positioning built up during the recent period of heightened geopolitical tensions. An improvement in global risk sentiment—alongside a modest pullback in oil prices—has reduced immediate demand for defensive assets, leading to some USD weakness across major pairs. A key driver behind this move is the recent moderation in US Treasury yields, which has reduced the dollar’s relative attractiveness. As inflation concerns ease slightly with stabilising energy prices, yields have edged lower, prompting some repositioning out of USD longs. However, yields remain elevated in a broader context, meaning the dollar still retains a degree of structural support. From a policy perspective, markets continue to reassess the Federal Reserve’s rate path, but the overarching narrative remains one of caution. While some near-term easing expectations have resurfaced, the Fed is still expected to maintain a relatively restrictive stance compared to other major central banks. This divergence continues to underpin the dollar and limit the extent of any downside move.

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EUR:

The euro is trading with a firmer tone, supported primarily by the softer US dollar and a modest improvement in global risk sentiment. EUR/USD has pushed higher from recent lows, although the move appears to be more of a USD-driven rebound rather than a shift in eurozone fundamentals. A key factor for the euro is the recent stabilisation in energy markets. While oil and gas prices remain elevated, the absence of further sharp increases has eased some pressure on the eurozone outlook. This has helped reduce immediate downside risks for the euro, given the region’s sensitivity to imported energy costs. However, energy prices remain high enough to continue weighing on growth expectations over the medium term. From a policy perspective, the European Central Bank remains cautious, maintaining a balanced stance between inflation risks and a fragile economic outlook. While inflation remains a concern, especially from energy, weaker growth dynamics are limiting the ECB’s ability to adopt a more aggressively hawkish position. This continues to cap euro upside relative to currencies where central banks are perceived as more restrictive.

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GBP:

Sterling is trading with a slightly firmer tone, supported by the softer US dollar and improved global risk sentiment. GBP/USD has edged higher from recent lows, while GBP/EUR remains relatively stable as both currencies benefit from reduced safe-haven demand for the dollar. A key driver for the pound remains Bank of England policy expectations, with markets continuing to price a relatively cautious but still restrictive stance. While inflation pressures have shown some signs of easing, they remain elevated enough to keep the BoE from moving quickly toward rate cuts. This has helped support UK gilt yields and provided a modest underpinning for sterling. However, the UK macro backdrop remains challenging, with growth momentum still subdued and households facing pressure from elevated living costs. While the recent stabilisation in energy prices has offered some relief, it has not been sufficient to materially improve the economic outlook. This continues to limit stronger upside potential for the pound.

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