FX Markets on Edge as Trade Tensions Return.
USD under pressure due to weak manufacturing data and growing US deficit concerns.
Bond market fragility is a key risk factor for continued dollar downside.
EUR rally capped by ECB rate cut expectations and limited inflation surprises.
Sterling vulnerable to equity market volatility, particularly vs the euro.
Trade tensions escalating again, with China-US developments in sharp focus.
USD: Strategic Shorting Ramps Up Again
The US dollar’s decline gathered momentum at the start of the week, driven by two key concerns: rising trade friction and bond market jitters over the ballooning US deficit. Monday’s ISM manufacturing report surprised on the downside, marking a reversal in what had been a streak of resilient data. Notably, the export component fell to its lowest level in five years, suggesting that retaliatory tariffs may now be taking a toll on US industry, compounded by policy uncertainty and waning domestic demand.
Market focus now turns to April’s JOLTS job openings report and durable goods data — both expected to show weakness. Any further signs of a cooling labour market could push the dollar closer to April’s lows.
However, the more pressing story is in the bond market. With Treasury yields under pressure, the USD’s risk premium (especially with DXY under 98.0) is increasingly difficult to justify based on economic data alone. A meaningful drop in yields could drive the dollar even lower.
Trade relations remain a swing factor. China’s influence through chip and rare earth supply chains is growing, and this week’s expected phone call between Trump and Xi could provide a rare upside surprise — one that might briefly stabilise the dollar.
EUR: Momentum Limited Despite Rate Cut Hopes
Preliminary inflation data for May out of the eurozone is mixed. Germany’s headline inflation held steady at 2.1%, but French and Spanish prices unexpectedly fell month-over-month. Consensus forecasts expect overall eurozone inflation to slow to 2.0% headline and 2.4% core.
With the ECB poised to cut rates this week, a downward revision to growth and inflation forecasts is expected. The rate cut is already priced in, but the data could lead President Lagarde to strike a more dovish tone. Markets are currently anticipating 55 basis points of easing by year-end.
Despite this, EUR/USD is unlikely to break significantly higher without further instability in US Treasuries. While a brief rally toward 1.15 remains possible, we don’t expect it to extend into the 1.15–1.20 range under current conditions.
GBP: Sterling Struggles as Volatility Returns
Sterling is on the defensive against the euro as global risk appetite wavers. Renewed trade tensions — sparked by US threats to increase tariffs — are feeding into equity market volatility, which tends to weigh on GBP/EUR.
TD Securities’ Mark McCormick notes that optimism around tariffs may have peaked, and geopolitical uncertainty is once again driving market swings.
China, for its part, responded strongly to US accusations of stalling on rare earth export controls — a critical element of the fragile Geneva truce. Beijing’s tough rhetoric increases the risk of escalation.
Given the pound’s inverse relationship with volatility, any renewed pressure on equity markets will likely translate to further softness for sterling, making the current environment especially difficult for GBP to perform.