G7 Watch: Will Canada Stir the FX Pot?.

• USD Softness: The dollar continues to weaken despite being undervalued, with markets leaning into short positions ahead of potential headline risk from the G7 summit in Canada.

• G7 Focus: There’s low-probability but high-impact potential for the US to push for a weaker dollar, possibly through bilateral talks—any such signal could shift global FX markets.

• EUR Outlook: Euro momentum remains supported by geopolitical optimism, but 1.150 looks too soon; 1.130 is a more realistic target given lack of strong ECB signals.

• GBP Inflation Reaction: April’s hot UK CPI print was mostly due to one-offs like tax hikes and holiday timing—unlikely to shift BoE’s dovish bias significantly.

• EUR/GBP View: With BoE rate cuts likely to remain measured, EUR/GBP may continue to drift lower, with a sub-0.840 move still in play.

USD: Waiting on Signals from Canada
Periods of quiet in the data calendar often expose the market’s underlying biases—and this week, it’s been clear: traders are leaning into USD shorts. Despite still appearing undervalued against most G10 currencies based on short-term fundamentals (like interest rate and equity differentials), the dollar continues to be sold.

Focus now turns to the G7 summit in Canada, where chatter could ramp up. While it’s a long shot, there’s a non-zero chance the group could hint at revisiting its traditional stance on free-floating exchange rates. If discussions suggest the US is pushing for stronger partner currencies—essentially trying to engineer a weaker dollar—it could trigger significant FX market shifts. US Treasury Secretary Scott Bessent’s bilateral meetings will be closely watched for any such signals.

Aside from currency speculation, little else from the summit is likely to pressure the dollar. Unlike earlier in the Ukraine conflict, peace overtures are no longer driving USD lower as the greenback sheds its safe-haven halo. And if talks help ease trade tensions, as they often do, that could lend the dollar some support.

That said, market appetite for selling dollar rallies is still strong. Any move above the 100.0–100.5 level in DXY may not last long.

EUR: Not Quite Time for 1.150
European currencies are having a solid run. The Swiss franc and Swedish krona are leading the pack, supported by a mix of dollar-alternative flows and optimism over potential Ukraine-Russia peace talks. The euro stands to benefit from both trends. However, should a peace deal materialize, the franc may face a positioning-driven reversal.

Domestically, not much is happening to drive the euro. A few ECB speakers, including Chief Economist Philip Lane, are on the docket, but the central bank seems comfortable with current rate cut expectations—two are priced in for this year—which limits rate-driven upside for the euro.

Some USD-positive headlines from the G7 summit could stall EUR/USD’s rise before the weekend. Although 1.150 is the next key resistance level, markets may need softer US data and stronger peace prospects to justify that move. For now, 1.130 seems a more realistic near-term target.

GBP: Inflation Surprise Not What It Seems
April’s UK inflation data caught markets off guard, with services CPI jumping from 4.7% to 5.4% (vs 4.8% expected). But a deeper look reveals the surge was largely driven by road tax changes and Easter-influenced spikes in airfares and package holidays. Core components like rents and healthcare continued to ease.

So, the Bank of England may well look past this inflation blip. While a June hold looks locked in, this isn’t enough to rule out an August rate cut, given that the underlying inflation trend—excluding temporary distortions—remains down.

Sterling got a modest lift from the CPI release. We’ve recently leaned bearish on EUR/GBP, and a cautious BoE cutting path should maintain rate differentials that support further downside in the pair. A break below 0.840 is still a live possibility in the coming weeks.