Dollar Drama & Euro Edges: Volatility in the Crosshairs.
Volatility Spike: USD volatility hit extreme levels (20%) briefly, driven by erratic US tariff policy — but such spikes rarely last long without broader financial stress.
Yield-Dollar Decoupling: The rare breakdown in USD and Treasury yield correlation may reflect unwinding of leveraged positions; not expected to persist.
“Mar-a-Lago Accord” Rumors: A new global trade strategy could involve Washington pushing for stronger partner currencies (weaker USD/JPY, USD/KRW).
EUR/USD Breakout: The pair smashed through a long-term downtrend — markets eye a 1.12–1.15 range while waiting for US data to reflect tariff pain.
Sterling Risks Ahead: GBP faces potential weakness from UK macro data — rising unemployment and slowing services inflation could weigh on the currency.
USD: Volatility’s Flash in the Pan?
EUR/USD and USD/JPY briefly saw one-week implied volatility spike to 20% last week — an exceptional level typically reserved for crises. Thankfully, no systemic damage is showing in financial plumbing for now. The trigger? Washington’s unpredictable trade maneuvering. Tariff exemptions for some Chinese electronics (accounting for ~20% of China’s US exports) were announced — then called “temporary.” Markets are now on edge as potential actions targeting semiconductors and pharma loom.
Another key theme: the usual positive correlation between US yields and the dollar broke down. Historically, such divergences are rare and usually short-lived, emerging during periods of high stress. Last week may have seen heavy deleveraging in US Treasuries — possibly due to basis trades being unwound. We’ll be watching repo market data for confirmation. Unless market dislocations continue, this inverse yield-dollar relationship likely won’t last long.
A bigger narrative may be brewing: a Mar-a-Lago-style strategy to reshape global trade. Following aggressive tariffs, Washington may be eyeing agreements to encourage stronger foreign currencies. US Treasury Secretary Scott Bessent is leading trade talks with Japan and South Korea — raising the possibility of FX deals that could soften USD/JPY and USD/KRW.
This week, tariff chatter will likely continue to shake markets. US retail sales (due Wednesday) might surprise to the upside as consumers preemptively stock up. The Fed is staying tight-lipped on rate cuts or Treasury interventions, so all eyes are on key Fed voices: Waller today, Powell on Wednesday.
Last week’s dollar drop appeared driven by the buy-side, as confirmed by CFTC futures data. The DXY index broke long-term support — watch for sellers to return near the 100.50–100.75 zone if bearish momentum sticks.
EUR: A New Chapter Begins for EUR/USD?
EUR/USD made a significant technical break last week, busting out of a downtrend that had shaped price action since 2008. The 1.11/1.12 zone now marks key support. With US data yet to fully reflect tariff impact, buy-side flows may support EUR/USD on dips.
While speculation grows that China is selling Treasuries, fund flow data through last Wednesday still showed net buying — particularly at the long end. We’ll know more when the March TIC report drops on May 16.
This week, EUR/USD is likely caught between a softening US economy and a dovish ECB. The central bank may not love the euro’s strength (it’s hitting multi-decade highs on a trade-weighted basis), but it’s not all bad — it helps lower eurozone borrowing costs. German Bunds, for example, have outperformed Treasuries by 50bps over the last ten days.
Although EUR/USD is running above levels justified by interest rate differentials, a near-term range of 1.12–1.15 seems more likely than a breakout to 1.18–1.20.
GBP: Macro Forces Take the Wheel
Sterling gained on the dollar last week but lost ground to the euro. As a reserve currency, GBP has benefitted from the dollar’s weakness — but the euro remains more liquid, and Europe’s large trade surplus with the US is likely driving greater capital repatriation into the bloc than into the UK.
This week, macro data comes to the forefront. UK labour figures land tomorrow, with unemployment likely rising ahead of higher employer taxes introduced in April. Wednesday’s inflation report is expected to show March services inflation falling to 4.8% YoY from 5.0%, posing downside risks to GBP.
EUR/GBP could retest the recent 0.8730 high, though a dovish ECB on Thursday may curb euro gains.