Written by the Market Insights Team
Dollar’s rebound lacks conviction, retail sales eyed
George Vessey – Lead FX & Macro Strategist
The S&P 500 has jumped 4% this week, erasing its year-to-date losses as the US-China trade truce brings relief. The 90-day tariff rollback signals an end to the worst phase of the trade war, fuelling risk appetite and driving Treasury yields higher as traders exit safe-haven assets. But the US dollar’s rebound has already lost steam, further hindered by fresh speculation that President Donald Trump favours a weaker buck.
Despite the initial dollar rebound, its gains have proved short-lived. Investors remain wary of lingering trade-related economic damage, and without clear evidence of recovery, the incentive to chase the dollar higher remains weak. This is despite short-end yields rising as traders steadily dial back expectations for Federal Reserve rate cuts this year, with less than 50 basis points of easing now priced in. Long-end Treasuries remain vulnerable too as Washington’s fiscal policy shifts toward tax cuts without deficit reduction, adding upward pressure on yields and downward pressure on the dollar.
Meanwhile, following US-South Korea trade talks, speculation is once again mounting that President Trump favours a weaker dollar, potentially pressuring other governments to allow their currencies to appreciate in trade negotiations. Asian currency weakness against the dollar has long been seen as an advantage for regional exporters, a stance the administration has sought to challenge.
The key takeaway for now is while the short-term dollar relief from trade de-escalation is clear, the longer-term risks remain. Markets will closely watch economic data in the coming weeks to gauge whether the damage from prior tensions starts surfacing. Indeed, in the FX options market, 1-year dollar sentiment is now the most bearish in five years, highlighting persistent uncertainty. As investors look ahead, US retail sales data today may provide fresh signals for the medium-term trajectory of the dollar and broader markets.
External forces keep euro in check
George Vessey – Lead FX & Macro Strategist
Euro price action remains driven by external factors in the short term. The common currency reclaimed $1.12 yesterday, buoyed by a weaker dollar following an unexpected drop in US inflation and caution over US-China trade talks, despite a 90-day tariff truce. However, EUR/USD remains about four cents from its 2025 peak and a retest of fresh highs isn’t on the cards unless the pair closes back above its 21-day moving average at $1.1314.
In Eurozone macro news, the ZEW expectations survey rebounded in May, signalling growing optimism around economic stability, government formation, and trade progress. However, the current situation gauge failed to show any recovery, highlighting ongoing economic uncertainty. Today’s industrial production data will be a key focus, offering insight into whether momentum is building or if fragile conditions persist. Investors will watch closely for confirmation of stabilization or signs that growth risks remain elevated.
On the monetary policy front, markets have revised ECB rate expectations, now pricing the deposit facility rate at 1.71% by year-end, up from 1.67% on Friday but below April’s 1.55% levels. At the same time, traders almost fully expect a June rate cut, with odds at 85%, as policymakers seek to counter US tariff pressures on growth. ECB officials have weighed in on policy direction, François Villeroy de Galhau signaled room for another cut by summer, while Joachim Nagel struck an optimistic tone, citing a good probability that inflation will approach the 2% target.
Beyond short-term price fluctuations, the upside bias on euro longer term remains intact. Call options on the euro versus the dollar are near their most expensive levels in nearly five years, signaling heightened demand for upside exposure. This aligns with positive non-commercial futures positioning, reinforcing a broader bullish bias in the currency. Fund managers see this as more than just a tactical trade, suggesting that the euro’s upward trajectory stems from a structural shift rather than short-term volatility.
UK GDP beat; sterling pound sentiment
George Vessey – Lead FX & Macro Strategist
The British pound edged higher after UK GDP data showed stronger-than-expected growth in the first quarter. The economy expanded 0.7%, surpassing forecasts of 0.6% and well above the 0.1% increase in Q4 2024. March’s 0.2% growth, beating flat expectations, highlights momentum, with exports reaching their best levels in over two years—though the data was compiled before “Liberation Day” tariffs.
Alongside sticky wage growth seen in the labour report this week, the solid GDP print suggests the Bank of England (BoE) may hold off on rate cuts in June, a stance already reflected in market pricing. However, current indications point to an August policy move, keeping traders focused on evolving BoE guidance.
Traders have reinforced bullish positions on the British pound, pushing sentiment to its strongest level in over five years, according to options pricing data. One-month GBP/USD risk reversals climbed for the third time in four days, further in favour of calls. Simply put, the premium on call options – which bet on a higher sterling – continues to widen, reflecting growing confidence in the pound’s upside potential. Equally, the repricing of sterling’s volatility skew extends as speculation mounts that President Trump favors a weaker dollar. This is reflected by one-year GBP/USD risk reversals, rising to a level not seen since 2009, suggesting traders are recalibrating long-term positioning.
Further supporting this more optimistic shift in GBP sentiment some idiosyncratic sterling strength driven by the notion of strengthening UK-EU ties ahead of a summit next week. It is expected to help unpack a wide-ranging package of economic reforms to boost the UK economy, which may in turn prompt some more hawkish repricing of BoE expectations.
Dollar erases gains whilst British pound shines
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 12-16
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.