Written by the Market Insights Team
The British pound is in the spotlight this morning after jumping to a fresh 3-year high against the US dollar. The upside surprise in UK inflation has prompted money markets to trim expectations of Bank of England rate cuts for 2025, causing a sharp spike higher in UK gilt yields and sterling. Meanwhile, the US dollar remains under pressure as the “sell America” trade resumes in the wake of fresh fiscal concerns this week.
A case for Trumponomics?
Kevin Ford – FX & Macro Strategist
Trumponomics operates on three key pillars: trade, tax, and deregulation. Each is designed to work in tandem rather than independently, creating a cohesive strategy rather than isolated policy shifts. According to Scott Bessent’s latest remarks at the Milken Conference, the US administration aims to shrink the fiscal deficit by roughly 100 basis points annually, acknowledging that cutting a trillion dollars in a single year would trigger a severe 3% shock to GDP. The approach balances fiscal discipline with targeted tax cuts, striving for a 3.5% fiscal deficit relative to nominal GDP to maintain economic growth near 3% within a year.
A significant part of this strategy involves re-privatizing the economy. Bessent has advocated for reducing government spending and streamlining the public sector by shedding excess labor, arguing that deregulation, particularly in banking, will empower small community lenders to drive local economic growth. By scaling back restrictions, these institutions could ramp up lending, fostering entrepreneurship and strengthening regional economies.
On the trade front, the administration is pursuing a dual approach: expanding global market access while reshoring critical manufacturing sectors. The emphasis is on strategic industries such as pharma, semiconductor production, and steel, sectors deemed vital for national security and long-term economic stability. By bringing production back to US soil, policymakers hope to rebalance the economy and reinforce domestic supply chains. Speaking at the Milken Conference, the Treasury chief asserted that reducing the deficit could eliminate credit risk from US Treasury debt, ultimately allowing interest rates to “naturally come down.” While that premise is attractive, execution remains a challenge. Fiscal tightening may dampen near-term growth, and if markets lose confidence in the administration’s ability to navigate the trade-offs effectively, volatility could rise.
Although US financial markets have weathered past crises, including the Great Financial Crisis and pandemic-driven inflation, there is no guarantee that the current approach will provide a smooth path forward. Investors are closely monitoring trade policies, recognizing that tariffs and supply chain restructuring could introduce short-term disruptions before yielding long-term benefits. Stagflation, weaking economy, housing market, lots of worries mounting, lots at play. The stakes are high, and the interplay between fiscal discipline, deregulation, and trade strategy will ultimately determine whether Trumponomics delivers lasting economic resilience.
Euro’s technical break out
George Vessey – Lead FX & Macro Strategist
The euro has climbed back above its 21-day moving average, a level we’ve been calling out for several days, in a sign that the uptrend in EUR/USD is about to resume following a month-long correction/consolidation phase that saw the pair slide from $1.16 to $1.11. Renewed US dollar weakness explains much of the strength in the euro versus the dollar given the euro’s historical beta of 0.88 to the broad dollar.
However, the domestic backdrop is also telling. Yesterday we had data revealing the current account surplus in the Euro Area widened to a record high of €60.1 billion in March from €37.7 billion a year earlier. The goods surplus rose to €51.9 billion from €36.3 billion, the services surplus increased to €12 billion from €9.3 billion. The strong export of goods might be yet another sign of front-running US tariffs. Meanwhile, consumer morale in the Euro Area also improved more than expected in May, though remains markedly below its long-term average. Despite FX traders expecting more easing by the European Central bank compared to the Fed this year, it isn’t dissuading euro bulls. In fact, many hedge funds are eyeing gains past $1.20 as they re-initiate short-dollar positions.
With the structural headwinds facing the dollar, coupled with Europe’s more promising cyclical outlook thanks to fiscal stimulus, the longer-term outlook for EUR/USD remains positive in our view. But the path higher is likely to be more measured than the sharp rally we saw earlier this year, which has already seen EUR/USD gain around 10% year-to-date.
A tricky spot for the BoC
Kevin Ford – FX & Macro Strategist
Canada’s annual inflation rate eased to 1.7% in April, down from 2.3% in March but slightly above market expectations of 1.6%. However, underlying price pressures are proving sticky, CPI median, which reflects the midpoint of inflation across components, climbed to 3.2%, its highest level since March 2024. CPI trim, which filters out extreme price movements, also ticked up to a 13-month high of 3.1%.
This puts the Bank of Canada in a tricky spot, while signs of economic softening persist, stronger core inflation suggests rate cuts might not be imminent. April’s slowdown largely stemmed from falling energy prices (-1.7% vs. -0.3% in March), as the removal of the consumer carbon tax amplified the effects of OPEC’s output hikes. Gasoline prices plunged (-18.1% vs. -1.6%), natural gas prices followed suit (-14.1% vs. 6.4%), and transportation costs eased (-1.9% vs. 1.2%).
Meanwhile, uncertainty surrounding U.S. tariffs remains a key risk. The Bank of Canada, set to announce its next rate decision on June 4, has acknowledged the difficulty in assessing their full impact but notes they are already weighing on the Canadian economy.
These inflation figures are one of two major releases this week before the central bank’s decision, with the final first-quarter GDP data due on May 30. For now, the odds of a rate cut for the June cut have plunged to 35%.
Pound spikes to 3-year high
George Vessey – Lead FX & Macro Strategist
Sterling rose to its highest level since February 2022 against the US dollar today, supported mostly by the weaker US dollar as the “sell America” trade resumed in the wake of Moody’s US credit downgrade. Like the euro, the pound appears to have exited a period of consolidation, but this morning’s hotter-than-expected UK inflation data has helped.
UK inflation jumped to 3.5% in April, the highest in over a year and up from 2.6% in March – driven by higher energy and transport costs. Core inflation rose to 3.8% y/y, exceeding expectations of 3.6%, while services inflation, the Bank of England’s (BoE) key metric, surged to 5.4%, far above the 4.8% forecast. This has caused a hawkish repricing of BoE easing expectations, knocking off around 10bps of cuts in total for the rest of 2025.
The BoE now faces a dilemma, as its chief economist Huw Pill warned that rate cuts may be happening too quickly, with inflation’s downward momentum “stuttering”. The BoE had anticipated April’s inflation spike, citing Ofgem’s energy price cap increase, higher water bills, and rising employer national insurance contributions. However, it’s the sharp rise in services inflation that has shifted market expectations, pushing front-end gilt yields higher and strengthening sterling. Investors will now closely watch BoE policy signals, as the central bank weighs inflation risks against economic growth concerns.
GBP/USD is trading in the top half of the $1.34-$1.35 range for the first time in three years. The pair is back above its key daily moving averages and is now circa 11% higher than it was back in January this year. And in fact, for the first time since the global financial crisis, options traders are no longer bearish on the pound over the long term. Meanwhile, due to the uplift in EUR/USD, sterling’s gains against the euro have been muted, or rather non-existent this week.
Broad based dollar weakness
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 19-23
All times are in ET
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*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 quothave 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.
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