Dollar Drifts, Europe Waits: FX Caught Between Calm and Data.

  • Markets Calm Down: Easing geopolitical tensions and solid tech earnings have reduced financial market volatility and trimmed the dollar’s risk premium.

  • Eyes on ISM Data: Today’s US manufacturing print could reintroduce dollar weakness; a soft reading may push DXY lower.

  • BoJ Turns Dovish: Japan’s central bank cut growth and inflation forecasts, helping push USD/JPY above 144—but 145 may attract sellers.

  • EUR Gains Modestly: EUR/USD edges toward 1.1250 as dollar sentiment cools, but ECB dovishness limits further upside.

  • Sterling’s EU Opportunity: UK-EU summit may bring policy progress, potentially boosting GBP if closer ties improve the UK’s economic outlook.

USD: Calm Before the ISM Storm

Volatility is ebbing across global markets, helped by easing geopolitical tensions and strong US tech earnings. US equities have rebounded nearly 90% from the post-‘Liberation Day’ sell-off, buoyed by solid Meta and Microsoft results, with Amazon and Apple still to report. Hints of renewed US-China trade talks and potential EU negotiation progress have further lifted sentiment. Meanwhile, a US-Ukraine minerals agreement implies subtle but symbolic security guarantees.

This improving backdrop has chipped away at the dollar’s risk premium, which was as high as 4-5% when EUR/USD pushed above 1.15. However, upcoming US data could test this optimism. A weak Q1 GDP report failed to dent the dollar due to its import-related skew, but today’s ISM manufacturing data (expected at 47.9) could prove more decisive. A softer print may push the dollar lower still, with DXY facing resistance at 100.25/100.50. A break higher, though, could force a rethink of ultra-bearish dollar bets, with 102 a possible upside surprise.

In Asia, the Bank of Japan struck a dovish tone—cutting growth and inflation forecasts and flagging downside risks. Japanese bond yields slid, pushing USD/JPY above 144. A stretch to 145 is possible, though sellers may return at those levels.

EUR: 1.1250 Still in Sight

EUR/USD’s climb toward the 1.1250 mark may finally materialize, thanks largely to falling US risk premiums rather than euro strength. European markets are mostly closed for Labour Day, but unless ISM data significantly underwhelms, the pair could continue drifting higher toward the 1.1250/60 zone.

Yet, a dovish European Central Bank remains a drag. Markets are pricing two to three more rate cuts in 2025, limiting the euro’s upside. As previously noted, the end-of-quarter target for EUR/USD stands at 1.13.

Elsewhere in Europe, EUR/CHF looks sluggish even amid recovering equities. The Swiss National Bank’s limited scope for dovish policy and FX intervention means 0.92 is a likely destination, especially if broader risk appetite fades.

GBP: Looking to Europe for a Lift

Local UK council elections are underway, with the ruling Conservatives at risk of losing ground—perhaps more so than Labour this time. The Reform Party stands to gain, underscoring the fragmentation of UK politics.

Politics matters because May 19 marks the first UK-EU summit since Brexit. A new Security and Defence Pact could be signed, with further summer developments possible around customs checks, carbon markets, and youth mobility. The aim: to convince the Office for Budget Responsibility to boost UK growth forecasts, giving Chancellor Rachel Reeves more fiscal space.

Stronger UK-EU ties typically support sterling. If EUR/GBP breaks below 0.8500, a move toward 0.8430 looks feasible—especially with political momentum building toward greater European alignment.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.