From stronghold to struggle: USD’s new reality – United States
Written by the Market Insights Team
Can the dollar hold its ground?
Kevin Ford – FX & Macro Strategist
Maybe you recall back in March, when markets were rattled by the Atlanta Fed’s GDPNow model, which predicted a sharp 2.8% contraction in Q1 GDP. We know now that the actual contraction was far more modest at -0.2%. So, what was wrong with the model? One key reason for the discrepancy is how the GDPNow model processes import data; it includes gold inflows linked to arbitrage, which the U.S. Bureau of Economic Analysis (BEA) excludes in its own calculations. But perhaps more importantly, the GDPNow model didn’t fully account for how swings in imports are often offset by inventory investment. When imports fluctuate dramatically, businesses typically adjust their inventories in response. The GDPNow model underestimated inventory contributions, skewing its overall forecast. For the same reasons, given how businesses and governments have adjusted to U.S. trade policy, the current Q2 forecast may not be the most reliable indicator.
Between March and April, recession fears surged. Based on Polymarket odds, the probability of a U.S. recession jumped from 30% to 65% following the news of reciprocal tariffs. However, as of today, that probability has dropped to 24%. The base case for the U.S. economy still favors a soft landing. Tariffs may cause inflation to rise temporarily, but markets are hopeful that the broader economic slowdown will counterbalance those effects, keeping inflation in check. Today’s May CPI report should offer insights into how recent tariffs are affecting goods prices.
As recession fears fade and market volatility settles, U.S. equities are nearing all-time highs. However, one of the most surprising trends this year has been the underperformance of U.S. stocks compared to global equities. While the S&P 500 Index is up around 2% year-to-date, the MSCI ACWI ex USA Index, which tracks large and mid-cap stocks across developed and emerging markets and covers approximately 85% of the global equity opportunity set outside the U.S., has surged to a new all-time high, surpassing previous peaks from 2007 and 2022. Year-to-date, the index is up 14%. A similar trend in FX majors has unfolded, where the DXY US dollar Index has lagged, down 8.5% year-to-date.
Could the shift from U.S. assets to international markets accelerate and drive the dollar into another leg down? What’s worrying is that despite U.S. interest rates remaining well above those in other developed economies, the dollar is still hovering near recent lows. Also, the rally in U.S. equities has been largely fueled by retail investors, with only 52% of S&P 500 members trading above their 200-day moving average.
If the dollar is to weaken further, the catalyst would likely come from rising trade tensions, weak demand in Treasury auctions, or the long-awaited downturn in the U.S. economy that investors have been expecting for the past three years. But with no clear signs of economic deterioration, bearish sentiment remains the dominant force in USD trading among G10 currencies. And with nothing on the June calendar pointing to a major macro shift, in calm waters, this trend looks set to continue.
Euro Resilience Tested as Macro Forces Shift
Antonio Ruggiero – FX & Macro Strategist
That bullish push on the euro from last week’s press conference was reinvigorated this week, as ECB’s Olli Rehn and Francoise de Villeroy reinforced the bank’s recent hawkish stance, helping EUR/USD reach intraday high of $1.1446. The Sentix Investors’ Confidence Index for the eurozone, which jumped to positive levels for the first time in one year, also supported the euro’s rise.
Euro, however, continues to struggle to break decisively above $1.14, with the pair gently dipping in the $1.13 area so far this week. The euro is likely to remain range-bound until a trade or macroeconomic catalyst emerges.
For the remainder of the week, we believe that the net impact of macro forces on price action could remain slightly more bearish than bullish, with the pair likely to finish below $1.14 by week-end. The key potential bullish driver for the euro remains the uncertainty surrounding the US-China trade deal, which could revive the Sell America trade. While the two parties have agreed on a preliminary plan, no further meetings are scheduled, and approval is still pending from both Trump and Xi, leaving markets in wait-and-see mode.
On the data front, had NFP disappointed last week, a hotter-than-expected US inflation print today would have been more constructive for the euro. However, a stronger print may now be viewed as a sign of economic resilience, rather than triggering stagflation fears. Meanwhile, inflation data for Spain, France, and Germany—set to be released on Friday—could come in softer than expected, reinforcing deflationary concerns, ECB rate cut expectations, and broader sluggish economic activity.
Overall, EUR/USD is up just over 2% month-over-month, compared to a year-to-date gain of over 10%. The fading momentum suggests that US sentiment remains the primary driver of euro strength, rather than organic euro demand. Meanwhile, US economic data remains mixed, failing to paint a unified picture of weakness, and continued trade tensions have kept bearish dollar sentiment in check.
Paring positive punts on pound
George Vessey – Lead FX & Macro Strategist
After falling in the wake of the dovish UK jobs data yesterday, GBP/USD bounced modestly off its 21-day moving average in a sign that uptrend in the short term still holds for now, but FX options traders are turning less optimistic on the pound’s outlook. Having hit a 3-year high of $1.3616 last week, the currency pair has been in retreat, but the mid-$1.34 region, which has offered decent support of late, could be a key pivot point.
The pound was on track for its steepest selloff against the dollar in nearly a month, as UK employment figures showed their biggest drop in five years and wage growth slowed more than expected. The data cements the probability of an August rate reduction and increased traders’ conviction a further second quarter-point cut is on the cards for Q4. UK gilt yields fell, dragging sterling lower across the board.
The prospect of lower interest rates and falling gilt yields has dampened sterling’s appeal, pushing GBP to its lowest level against the euro in nearly four weeks, with eyes on the 50-day moving average support just under €1.18. However, downside may be limited given sterling remains one of the highest-yielding G-10 currencies, as demand for carry trades increases, bolstered by rising risk appetite and particularly as market volatility eases amid improving trade conditions.
Nevertheless, the pound’s outlook has turned more uncertain according to options markets One-week risk reversals, which measure the imbalance between bullish and bearish bets, are hovering near parity, reflecting indecision. But as traders continue to pare their bullish sterling outlook, they now expect almost no gains in the British currency over the next 1 to 3 months and a depreciating pound over a longer horizon.
Today’s focus will on US inflation data mainly, but it’s worth keeping one eye on UK Chancellor Rachel Reeves’ Spending Review. While this is not a budget, and tax changes are off the table, it remains an important test of government credibility. Any policy missteps or signs of weakened fiscal discipline could be punished swiftly, leaving sterling vulnerable to an extended pullback.
Euro gains against safe-haven currencies
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 9-13
All times are in BST
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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 quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
