Greenback Wobbles as Market Doubts Linger.
USD Bearish Pressure Returns: Soft CPI data and concerns over tariff damage reignite strategic short positioning against the dollar.
Fed Caution Persists: Despite dovish data, rate expectations are unchanged as April figures don’t yet capture full tariff effects.
EUR/USD Range-Bound: Euro gains are limited despite USD weakness; ECB easing and tepid eurozone data cap upside.
GBP Resilient: UK wage growth is slowing, not collapsing—supporting a gradual easing narrative from the BoE.
Risk-On Shift: Investors favour commodity and high-beta currencies as improved trade sentiment bolsters market risk appetite.
USD: Strategic Dollar Shorts Return Amid Dovish Tilt
The US dollar swiftly relinquished the gains it made following the US-China trade breakthrough, as bearish sentiment quickly returned. Softer-than-expected core CPI data (0.2% MoM) gave traders the green light to resume short positions. Concerns remain that any positive trade headlines could soon be overshadowed by clear signs of economic slowdown, especially as the effects of tariffs start to materialise. Markets are hesitant to chase dollar rallies until there’s more certainty around these impacts. Meanwhile, the 10-year USD swap spread holding above 50bp suggests persistent worries about US debt sustainability—another factor likely encouraging dollar bearishness.
Interestingly, despite the soft CPI data, market expectations for Fed rate cuts didn’t shift much, probably because April figures haven’t fully reflected the inflationary drag of tariffs. However, with inflation subdued, risks to growth tilted to the downside, and limited enthusiasm around the dollar’s prospects, the overall bias appears to remain dovish, keeping a lid on any meaningful greenback recovery.
There’s not much on the US data docket today, but eyes will be on Chair Powell’s appearance at a Fed policy review conference. Still, he may avoid discussing the tariff rollback or its monetary implications just yet. FOMC members are likely to withhold judgment until they see more data.
For now, we expect the dollar to find some footing after two choppy sessions. Risk appetite looks to be returning, which could favour high-beta, commodity-linked currencies over traditional safe havens.
EUR: Struggling to Ride the USD Wave
EUR/USD is hovering near the 1.120 mark, largely reacting to dollar fluctuations driven by trade optimism and inflation data. We maintain a neutral one-month outlook at 1.12, expecting that while USD shorts may remain popular, the euro itself isn’t ideally placed to benefit. The ECB remains in easing mode, and with stronger risk sentiment globally, investors may prefer currencies with more upside potential.
On the eurozone front, the ZEW expectations index rose in May, reflecting optimism around global trade, but the assessment of current conditions remained muted. Today’s focus is on final CPI prints and remarks from ECB members Escriva, Nagel, Villeroy, and Holzmann. We expect EUR/USD to stabilise around current levels in the near term.
GBP: Aiming for the Upside
The UK labour market continues to show signs of gradual cooling rather than outright weakness. Despite an April tax hike, there’s been no major deterioration, though wage growth is slowly moderating. This trend is crucial for the Bank of England, which is likely to wait for further confirmation before accelerating rate cuts.
The upcoming UK services inflation data, reflecting annual price increases in April, could be pivotal. A softer reading than expected would bolster the case for an August rate cut.
EUR/GBP is now nearing the 0.840 level. With EU-UK trade talks set for Monday, we reaffirm our view that the pair is likely to break lower.