Month: May 2025

Markets at a Crossroads: Currencies React to Political Pressure and Economic Surprises

The currency markets are navigating a web of uncertainty, with political risks, inflation surprises, and shifting central bank tones steering sentiment in unpredictable directions. As we near key economic and political milestones, investors are questioning whether recent trends have further to run, or whether the tide is about to turn.

GBP: Strength Built on Unsteady Foundations?

Sterling has surged to levels against the dollar not seen since February 2022, powered by a cocktail of stronger-than-expected UK retail sales, stubborn inflation now sitting at 3.5%, and comments from a hawkish Bank of England economist that hinted at further tightening. This resilience has added weight to market expectations of sustained monetary policy divergence between the UK and the US.

Yet, the question remains; will this momentum last? Much will hinge on the tone adopted by Bank of England Deputy Governor Lombardelli in the coming days. If she echoes last week’s hawkish rhetoric, markets could be forced to reprice the BoE’s rate path once again. But any signal of hesitation could leave GBP vulnerable to a sharp correction, especially as we approach month-end portfolio rebalancing flows. For now, GBP bulls are enjoying the ride, but the road ahead remains fraught with uncertainty.

EUR: Political Crosswinds vs Economic Surprises

The euro is quietly holding firm, supported by a broadly constructive tone from European Central Bank officials and stronger-than-expected German Q1 GDP data. The economic beat is thought to reflect a wave of advance orders placed before new US tariffs on April 2nd, momentum that may not last into Q2.

At the same time, trade tensions with the US are bubbling once more. EU negotiators admit that progress has stalled, while former US President Donald Trump, now an active force in markets again, has floated the idea of a punitive 50% tariff on EU imports, possibly from June 1st. As political risks rise, the euro’s recent strength may be tested. Will it continue to benefit from ECB support, or will renewed US-EU friction dampen investor appetite for the single currency?

USD: Fractures Emerging in the Foundation?

The US dollar faces a storm of headwinds, both fiscal and political. President Trump’s tax bill has cleared the House of Representatives, but with Moody’s downgrading US debt and bond yields climbing, especially the 30-year Treasury yield nearing levels last seen ahead of the 2007 crisis, investors are growing wary of long-term stability.

The July 8th expiry of the US-EU reciprocal tariff pause adds yet another layer of geopolitical risk, raising questions over the dollar’s safe-haven status. Meanwhile, President Trump is pushing to enshrine his tax reforms into law by Independence Day, an ambition that could inject further volatility into the bond market. With confidence wobbling and inflationary pressures simmering, the greenback is under pressure. Can it find its footing again, or is this the beginning of a longer-term slide?

Conclusion: Trend or Turning Point?

With monetary policy signals diverging, political tensions rising, and macro data surprising on both sides of the Atlantic, the major currencies are at an inflection point. GBP’s strength is grounded in firm, but perhaps fleeting, data. The euro faces external pressure despite internal support. And the dollar is looking vulnerable amid growing fiscal concerns and weakening global confidence.

As we move into the next phase of the economic cycle, the question isn’t just which currency will strengthen, but whether any of them can do so on solid footing. Investors should prepare for turbulence ahead. What looks like momentum today may turn out to be a mirage tomorrow.

As global trade relationships come under increasing strain, this week offers a revealing snapshot of how major economies are coping with the ripple effects, from inflation pressures to political manoeuvring. With pivotal UK, EU, and US data and developments on the calendar, investors will be watching closely for signs of stability… or further volatility. Here’s what to watch.

GBP: Can the UK Turn Trade Talk into Market Confidence?

Sterling starts the week with an eye on diplomacy. Monday’s UK-EU summit could offer a rare glimmer of clarity, especially if it results in concrete cooperation or progress on post-Brexit trade issues. But sterling is still vulnerable to sentiment-driven swings — and markets will want substance over symbolism.

Last week’s cooler-than-expected US inflation data has reignited debate over whether the UK will follow suit. All eyes now turn to Wednesday’s CPI figures. If price growth slows, markets could begin pricing in less urgency for further rate hikes, but it may also spark concern over underlying demand.

Meanwhile, Friday brings a barometer of consumer sentiment: retail sales. With the UK public increasingly aware of the potential impacts of new tariffs and ongoing trade deal discussions, this data may reveal if consumers are tightening their belts, or spending in spite of the noise.

EUR: Tariff Talk and Economic Telltales in Focus

The eurozone finds itself navigating two fronts this week: diplomatic sparring over trade, and critical data that could reveal the real-world economic impact.

European Trade Commissioner Maroš Šefčovič met with US Commerce Secretary Howard Lutnick last week, pledging to deepen engagement. But cooperation seems strained, especially after the EU reiterated its refusal to accept ‘reciprocal’ tariffs and prepared a €95 billion retaliation list in case negotiations fail.

Investors hoping to read between the lines will have their chance on Thursday, when Flash Manufacturing and Services PMI figures are released. These indicators will provide insight into how European businesses are coping with rising trade tensions and whether momentum is holding up under pressure.

USD: Uncertainty Reigns as Policy Shifts Take Shape

President Trump’s tariff bombshell on Friday that trading partners will soon receive individual letters outlining their new tariff rates has markets bracing for impact. With current rates hovering around 18% and little transparency on what’s coming next, the only constant is uncertainty, and markets historically don’t respond well to that.

On the monetary side, US CPI data showed a softening trend last week, but Fed Board Member Michael Barr’s warnings of potential tariff-induced stagflation paint a more complicated picture. Slowing inflation may give the Fed breathing room, but not if tariffs start choking off growth while keeping prices elevated.

Meanwhile, reports suggest that behind-the-scenes discussions are ongoing between the US and South Korea around foreign exchange policy, adding another layer of intrigue and speculation over the direction of the dollar.

In Summary: The Calm Before the Storm, or the Eye of It?

With markets already skittish, this week could set the tone for how currencies move in the near term. Investors are looking for direction, whether from CPI data, political summits, or the next volley in the global tariff battle. Will clarity emerge, or will further uncertainty push currencies into defensive mode?

Either way, one thing is clear: this isn’t a week to tune out. The signals emerging now could shape central bank decisions, business confidence, and currency performance for months to come.

This week, global currency markets remain sharply focused on geopolitical developments, particularly surrounding ongoing trade negotiations and economic data releases. The US-China trade talks continue to dominate sentiment, influencing USD performance, while key domestic data from the UK and Eurozone could steer their respective currencies depending on the tone and strength of the results. Below, we provide an overview of the key currency movements and potential market drivers in the coming days.

GBP
The British Pound was under pressure despite the Bank of England’s ‘hawkish cut’ last Thursday, where the central bank lowered rates but signaled a cautious stance toward future easing. The move was largely overshadowed by positive sentiment toward the US dollar, following news of a fresh trade agreement between the UK and the US.

This renewed trade alignment has supported the USD, limiting GBP gains. Domestically, traders are eyeing UK employment data due on Tuesday and GDP figures set for release on Thursday. However, market attention continues to gravitate toward broader international dynamics, particularly the developments in the US-China trade relationship, which could influence global risk sentiment and, by extension, Sterling performance.

EUR
In the Eurozone, political developments have taken center stage with the election of Chancellor Friedrich Merz at the second attempt. His ascent to leadership has prompted investors to reassess the strength and unity of the governing coalition, a factor that could potentially lend some support to the euro if political stability is perceived to improve.

Looking forward, speculation is rising about whether the Eurozone could become the next focus of US trade negotiations. However, it remains uncertain if it ranks high on the current US administration’s agenda. Meanwhile, Thursday’s Eurozone GDP release will be closely watched, as investors seek fresh indicators of the bloc’s economic resilience and potential implications for ECB policy.

USD
The US dollar has enjoyed strong support as markets responded positively to significant developments in US-China trade relations. Over the weekend, President Trump acknowledged that tariffs set at 145% would be reduced. Following talks in Geneva, both sides agreed to temporary tariff cuts: the US reducing rates to 30% and China to 10% for a 90-day period, during which a broader trade agreement will be pursued.

These developments are seen as a potential catalyst for continued USD strength, especially if further trade progress is made. On the economic front, US CPI data due on Tuesday could also play a critical role. Should inflation show signs of rising, it may reinforce expectations for steady interest rates, further supporting the greenback’s outlook.

While local data releases from the UK and Eurozone offer some potential for currency movement, the broader narrative remains heavily driven by US-China trade dynamics. With tariff reductions in place and further negotiations ahead, the market’s appetite for risk and optimism toward global trade recovery could determine currency flows in the near term. The USD stands to benefit from any favorable progress, while the GBP and EUR will likely remain reactive to both domestic data and the evolving international landscape.

Last week saw some notable moves in the major currency pairs as market participants responded to economic data, geopolitical developments, and upcoming central bank decisions. Here’s a closer look at the key events and movements impacting GBP, EUR, and USD.

GBP – Sterling Strengthens
Sterling had a strong performance last week. GBP/USD reached new highs not seen since 2022, reflecting growing market confidence in the UK economy and a generally softer US dollar. Meanwhile, GBP/EUR began to recover from its April low, suggesting renewed interest in the pound against the euro. The UK is expected to sign a cooperation agreement with the EU on May 19th, potentially improving post-Brexit relations and boosting investor sentiment. In addition, a long-discussed UK-US trade deal could finally materialize by July 8th, further supporting the currency.
Bloomberg analysts forecast a 0.25% rate cut by the Bank of England, bringing the base rate down to 4.25%. However, Morgan Stanley projects a more dovish path, suggesting the Bank may implement a 0.25% cut at each of its next five meetings. If this materializes, it could gradually erode some of the pound’s recent gains. Could this outlook dampen the currency’s momentum?

EUR – Euro Softens
The euro weakened slightly last week, with EUR/USD trending lower. One possible factor was optimism surrounding potential tariff relief between China and the US, which helped bolster the dollar. Eurozone Flash Core CPI surprised to the upside at 2.7%, reigniting concerns over persistent inflation. This development may prompt the European Central Bank to reconsider the pace of its planned rate cuts. Will inflationary pressure delay their easing cycle? Looking ahead, EU negotiators are expected to present fresh trade proposals to the US this week. An agreement in principle could help the euro regain ground, especially if it successfully averts the imposition of new US tariffs on European exports.

USD – Dollar Driven by Data and Policy Expectations
The US dollar remained relatively firm, buoyed by resilient economic data. Job numbers continued to show strength, although it’s worth noting that these figures pre-date any potential fallout from recent tariff measures. On the geopolitical front, Chinese state media signaled openness to renewed trade talks with the Trump administration, which could ease tensions and support broader risk appetite. All eyes now turn to the Federal Reserve’s interest rate decision this Wednesday. While no immediate rate change is expected by most analysts, any dovish commentary could shift expectations. If the Fed holds rates steady, how will President Trump react – and could that create volatility in the markets?

In summary, sterling has gained ground on optimism around trade and cooperation deals, though the Bank of England’s potential rate path may limit further upside. The euro is facing headwinds from both trade uncertainty and rising inflation, which could slow ECB policy easing. Meanwhile, the US dollar remains data-dependent as the Fed prepares its next move in a politically sensitive environment. With key meetings and decisions looming, the coming week may offer more clarity – or more volatility. Markets will be watching closely.