Dollar Caught in the Crossfire: Trade Hope vs Fed Fears.
USD rebounded on easing trade tensions and positioning corrections, though downside risks remain due to political pressure on the Fed.
US Treasury Secretary Bessent hinted at imminent tariff de-escalation, helping support market sentiment.
EUR remains vulnerable to USD strength despite positive trade news, with today’s PMI likely reinforcing a dovish ECB outlook.
GBP is less impacted by PMIs, with inflation and retail sales being more relevant for the BoE’s outlook.
Market focus remains on the balance between Fed independence concerns and evolving US-China trade developments.
USD: Market Calm Lifts the Greenback
The US dollar bounced back with US equities yesterday, as anxiety over tariffs began to fade. While calmer markets helped, we also think some of this rebound is linked to traders rebalancing positions. As we flagged in the previous FX Daily, Trump’s remarks challenging Fed independence introduced fresh downside risks for the dollar. Still, the greenback had become oversold and undervalued, so Tuesday’s return to normal market conditions allowed for a recovery.
US Treasury Secretary Scott Bessent helped ease nerves with optimistic comments on trade, calling current tariff levels “unsustainable” and hinting at a near-term resolution with China. The dollar may now be caught between two opposing forces: the risk of a Fed under political pressure and soothing developments on the trade front. Among G10 currencies, the dollar remains the most sensitive to trade headlines.
Overall, we still see near-term risks skewed against the dollar, though we’re unlikely to see the same relentless selling seen recently. Looking forward, we expect more stability rather than a deeper decline.
Today’s S&P Global PMIs are out across key economies. While not as impactful as the ISM surveys in the US, they offer good cross-country comparison. Barring major surprises, they shouldn’t move FX markets much.
EUR: Eyes on Tariffs, But USD Still in the Driver’s Seat
When US sentiment improves and boosts the dollar, it typically leads to pullbacks in safe-haven currencies like the euro, franc, and yen. In this case, the specifics of why the dollar rallies seem less important than the fact that it does. Despite the optimistic trade tone, the euro is still vulnerable to dollar strength due to market positioning.
Eurozone PMIs today are expected to show only a slight dip, thanks in part to being conducted after the announcement of a 90-day tariff pause. This lines up with a relatively upbeat market view. The European Central Bank is more focused on the growth risks from tariffs than inflation risks, so a weak PMI would likely reinforce market expectations for further rate cuts (75bps priced in by year-end). A reading below 50 would be seen as a negative signal for the euro.
That said, EUR/USD is still mostly driven by what happens with the dollar. If concerns about Fed independence flare up again, a push beyond 1.15 is entirely possible.
GBP: PMIs Take a Back Seat to Bigger Drivers
The pound will take today’s PMI data into account, but a moderate decline in sentiment due to US tariffs probably won’t push the index below the 50.0 mark.
Unlike the ECB, the Bank of England doesn’t place heavy emphasis on PMIs, focusing more on inflation. Retail sales later this week will provide a better gauge of UK domestic momentum after a strong March.
Improved global risk appetite should benefit sterling more than the euro. If the US continues to strike a conciliatory tone on trade, EUR/GBP could dip below 0.850. However, if the Fed comes under more political pressure and is forced to act, the euro would likely attract more USD outflows than the pound.