Dollars, Doves & Deals: The FX Market’s Balancing Act.
USD Strength Built on Trade Hopes & Hawkish Fed: Positive trade sentiment and a firm Fed stance are boosting the dollar, but dovish Fed speakers today could soften this trend.
US-China Talks Are Critical: Future USD momentum depends heavily on tangible progress in US-China negotiations, with markets pricing in the status quo on tariffs.
EUR/USD Breaks Lower: The euro’s recent drop signals a shift in sentiment, and a move toward 1.1000 could be on the cards if US positivity continues.
BoE Surprises with Hawkish Lean: Despite cutting rates, the Bank of England’s internal division and unchanged forward guidance supported GBP strength.
Sterling Supported by Trade Deal Momentum: Back-to-back trade agreements are encouraging for GBP, especially ahead of key EU-UK talks on 19 May.
USD: Market Eyes on Fed Voices Amid Trade Optimism
The US dollar has enjoyed a strong close to the week, lifted by optimism around trade negotiations and the Federal Reserve’s hawkish tone. While formal trade talks with China are still in their early stages, markets took heart from President Trump’s upbeat remarks and the announcement of a US-UK trade agreement. That deal, though symbolically important, didn’t remove the existing 10% base tariff—signaling that this tariff level might become a standard fixture under the Trump administration. Markets appear comfortable with this scenario, at least for now.
Today’s US economic calendar is light, with only April’s federal budget data on the docket. However, attention turns to Fed commentary, with Michael Barr and Christopher Waller both speaking. Both are considered dovish, and Waller has recently suggested that inflation tied to tariffs is likely temporary. No hawkish Fed voices are scheduled today, so markets may interpret the messaging as slightly dovish.
Despite recent hawkish signals from the Fed, Chair Jerome Powell’s cautious tone could be a move to assert the central bank’s independence amid political pressure for rate cuts. However, softer comments from individual Fed members could temper recent market bets on aggressive tightening—currently pricing in 68 basis points of cuts by year-end, beginning in September.
Overall, trade developments remain the key driver for the dollar. While current sentiment is positive, any dovish signals from Fed speakers today could challenge the dollar’s recent momentum.
EUR: Dollar Dominance Could Drag EUR/USD Toward 1.10
After holding firm in the 1.1250–1.1300 range, EUR/USD finally broke lower yesterday, reflecting growing market confidence in the dollar. The change has been spurred by Trump’s more market-friendly tone and hopes for trade progress, which are providing a mild boost to US assets.
Markets aren’t yet rushing to re-establish long-term bullish positions on the dollar, but short-term optimism is enough to halt bearish momentum. Meanwhile, models suggest that EUR/USD remains around 2% overvalued, and further positive surprises from the US side—particularly on trade—could reduce the risk premium embedded in the euro.
With little in the eurozone calendar today, traders are watching whether 1.1200 will form a new base. A break below that could signal deeper losses, potentially targeting the 1.1000 level as the next key support.
GBP: BoE Surprise Supports Sterling, But Trade Hopes Do the Heavy Lifting
Sterling gained ground yesterday, buoyed by a surprisingly hawkish tone from the Bank of England, even as it delivered a 25bp rate cut. The later announcement of a UK-US trade agreement offered temporary support to the pound, but that deal was largely priced in and offers limited macroeconomic impact.
Still, with back-to-back deals now signed (US and India), investor sentiment is improving. Hopes are rising that this momentum could carry into EU-UK trade talks—critical for the UK’s long-term outlook.
The BoE surprise came in the vote split: four members dissented—two wanted no change, while two called for a 50bp cut. Notably, Chief Economist Huw Pill voted for a hold, reinforcing the hawkish narrative. The forward guidance remains cautious, suggesting easing will continue to be measured. Markets now expect two more cuts in 2025, likely in August and November.
EUR/GBP remains vulnerable heading into the 19 May EU-UK summit, especially with positioning imbalances and steadier market sentiment. A test of the 0.8400 level seems increasingly likely as technical pressure builds.