Global currency markets are grappling with heightened uncertainty amid rising protectionist rhetoric, diverging monetary policy expectations, and slowing economic momentum. Investors are now weighing the risk of US tariffs on global growth, while also pricing in potential rate cuts from major central banks. This week’s data releases and central bank commentary will be pivotal in shaping short-term market direction across major currencies.

GBP – Rate Cut Expectations Mount
Bank of England Governor Andrew Bailey has warned that policymakers must “take seriously” the potential damage to UK economic growth from US tariffs, indicating a more cautious stance from the BoE as external threats mount.
Traders have responded decisively, with Bloomberg analysts now fully pricing in a 25-basis-point rate cut at the BoE’s May 8th meeting. This dovish outlook was reinforced by weaker domestic data — UK PMI figures revealed the sharpest contraction in activity in two years, suggesting that momentum in the UK economy is waning more quickly than expected.
With interest rate cuts seemingly imminent and economic indicators flashing red, pressure on the pound is likely to persist — unless broader US Dollar weakness offsets it.

EUR – Tariffs Seen as Disinflationary, Not Stimulative
European Central Bank President Christine Lagarde stated this week that tariffs are likely to have a disinflationary effect on the Eurozone, rather than stoke inflation — a comment that reinforces the ECB’s cautious policy stance in the face of global uncertainty.

Meanwhile, the IMF downgraded its 2025 growth outlook for the Eurozone to 0.8%, down from the previous forecast of 1.0%. This paints a bleak picture for the region’s recovery, as persistent structural weaknesses and external shocks continue to weigh on growth.

All eyes will now turn to the Eurozone Flash CPI data due on Friday. A softer-than-expected print could increase speculation of a later ECB rate cut, while an upside surprise might offer the euro some near-term support.

USD – Tariff Confusion and Recession Risk Cloud Outlook
Tariff headlines continue to dominate the US policy landscape, with The Wall Street Journal reporting a potential 50% reduction in tariffs on Chinese goods — bringing the rate down to 65%. However, this was quickly walked back by US Treasury Secretary Bessent, who clarified that there was no formal offer to reduce tariffs from President Trump, adding to the market’s sense of confusion over trade policy.

In monetary policy, Federal Reserve Governor Christopher Waller hinted at the possibility of supporting rate cuts if unemployment were to rise significantly, further fueling speculation of a dovish Fed pivot later this year.

Adding to the bearish tone, Goldman Sachs released a stark forecast suggesting a potential 25% to 30% drop in the US Dollar if reciprocal tariffs escalate, a recession unfolds, or more aggressive, goods-specific tariffs are introduced.

The upcoming US employment report on Friday is now crucial. A weak jobs number could deepen recession fears and weigh heavily on the Dollar. Conversely, a strong labor print could temporarily lift the currency, as it would indicate economic resilience despite escalating trade tensions.

Rate Cut Bets vs. Recession Fears – Which Currency Weakens Most?

Markets now face a complex tug-of-war: on one side, aggressive rate cut expectations are weakening the British pound; on the other, growing fears of a tariff-fueled US recession and monetary easing are threatening the Dollar. The euro, meanwhile, sits uncomfortably in the middle — hampered by weak growth, but somewhat shielded by the ECB’s slower pace of policy adjustment.

With key economic data on the horizon, including Eurozone CPI and US payrolls, the next directional move could be determined by which central bank blinks first — or whether tariffs prove to be a more potent threat to global economic stability.