Written by the Market Insights Team
Trump shifts to softer stance on Powell
George Vessey – Lead FX & Macro Strategist
The US dollar’s recent selloff has taken a breather as President Trump ratcheted down his rhetoric toward Federal Reserve (Fed) Chair Powell, saying he doesn’t plan to try to remove the head of the nation’s central bank despite his frustration over interest rates. A potential de-escalation in the US-China trade war also boosted demand for US assets. But is this market-friendly news just a temporary reprieve?
Tumbling stock markets and the dollar falling to 3-year lows on Monday was blamed on concerns about an erosion of the Fed’s independence and a growing unease over the blurred boundaries between monetary policy and political influence. Thus, Trump’s softer tone towards Powell has injected some positive life into risky assets – the S&P500 for example rose over 2.5%, whilst the US dollar index rebounded from 98.00, erasing Monday’s losses. Trump also sounded upbeat about making a trade deal with China, which faces a Trump 2.0 tariff of 145%. This came after US Treasury Secretary Scott Bessent had predicted a de-escalation between the two nations. However, the relief rally across markets may prove short-lived. The latest U-turn from Trump is just another example of the volatile decision making of the US administration, which is keeping policy uncertainty elevated at record levels and investors hesitant to hold US assets.
While erratic conditions are expected to persist in the short term, the long-term outlook suggests sustained pressure on US equities, bonds, and the dollar. As these uncertainties linger, the dollar’s structural weakness could become more pronounced.
Behind the U.S. Treasuries sell-off
Kevin Ford – FX & Macro Strategist
There’s been no shortage of speculation about who’s behind the sell-off in U.S. Treasuries. Is it China? Japan? Hedge funds? Or simply portfolios making tactical adjustments? Could this even hint at the dawn of de-dollarization? While the answers remain uncertain, at the heart of it all lies a fundamental force; Powell isn’t bringing the “Fed put.”
Take China, for instance. As America’s second-largest foreign creditor after Japan, it holds around $780 billion in Treasury securities. While their market moves are closely watched, a massive sell-off seems unlikely, as it would strengthen the Yuan due to repatriation effects, while Beijing is currently leveraging its currency to counter tariff impacts. However, there’s gold. With prices soaring to a new all-time high today, speculation is running wild about a shift from Treasuries to gold by central banks, pension funds, and institutional investors. Could this mark the next phase of de-dollarization? The allure of gold as a safe haven has never been stronger, especially as confidence in U.S. assets wavers.
Hedge funds, on the other hand, might have added fuel to the fire. As the bond sell-off gained momentum, margin calls could have forced funds to liquidate Treasuries to raise cash, especially those employing bond-basis trades.
Meanwhile, institutional investors are facing a triple whammy: equities down, dollar losing ground, and yields climbing. Gold and other metals have emerged as safe havens, but asset managers are struggling to reallocate tactically, and strategically as correlations break down. The message from the market is clear—there’s growing interest in exiting U.S. assets, particularly among foreign investors. Some might even be swapping long-dated Treasuries for European fixed income.
Finally, and perhaps even more significant, are the underlying fundamentals. Federal Reserve Chair Jerome Powell seems intent on shaping his legacy as a “Volcker” rather than a “Burns.” Arthur Burns, infamous for prematurely cutting rates in the 1970s, earned him lasting criticism, stands as a cautionary example. Powell, by contrast, appears steadfast in his fight against inflation, even as weaker growth looms. And the market has taken note: Powell is signaling he won’t cut rates, channeling Volcker’s resolve despite a slowing economy and mounting pressure from President Trump. This determination aligns with the broader trend of rising yields, which began when the market braced for tariff-driven inflation concerns. With recession fears mounting, the Fed has made one thing clear: a “Fed put” isn’t on the horizon.
Relief rally tempers euro’s momentum
George Vessey – Lead FX & Macro Strategist
EUR/USD appears to be in a brief consolidation phase after its strong rally from February’s lows near parity. After its 13% rally to above $1.15 in just a few months, the pair is trading back under $1.14 today amidst broad-based US dollar demand thanks to Trump’s softer rhetoric on tariffs and Powell. The $1.20 handle could still be a topside target for bullish traders this year, but the pace of the recent rally has fizzled out for the time being.
Momentum indicators remain bullish but overbought for EUR/USD, so we think the euro’s slight weakness is likely a temporary pause in its upward trajectory following its impressive recovery. On the data front, consumer confidence in the Eurozone took a notable hit in April 2025, declining to -16.7, its lowest level since November 2023. This marks a 2.2-point drop from March and fell short of market forecasts of -15, signalling growing concerns among households. Today, we have PMI data, with investors bracing for signs of the potential fallout from Trump’s tariffs. European Central Bank (ECB) President Christine Lagarde yesterday reinforced the ECB’s reliance on economic data, emphasizing its “extreme” importance in the current climate.
A rate cut for the ECB’s June meeting is fully priced in, but for July markets are still undecided. Such dovish ECB expectations will eventually keep a lid on euro strength, despite the break down in correlation between short-term rates and FX over the past month or so.
UK outlook downbeat
George Vessey – Lead FX & Macro Strategist
With the US dollar rebounding amidst Trump’s optimistic trade talk and softer stance on Powell, GBP/USD has recoiled from 7-month highs above $1.34 to trade nearer $1.33 this morning. GBP/EUR is creeping towards €1.17, with sterling benefiting more from improved global risk sentiment. UK flash PMIs today will be the next test as they’ll provide the first tangible indication of sentiment in the private sector in the wake of Trump’s tariffs.
Both services and manufacturing PMI are expected to come in lower than the previous month, though the composite figure is forecast to remain in expansion territory. On a gloomier note, the International Monetary Fund (IMF) has warned the UK economy will be among the hardest hit by the global trade war and inflation is set to climb. The IMF revised its UK growth forecasts downward, citing the impact of Trump’s tariffs. The fund now projects growth of 1.1% in 2025, down from 1.6% previously, and 1.4% in 2026, slightly below the earlier 1.5% estimate. These adjustments reflect the disruptive effects of heightened global trade barriers, weaker private consumption due to elevated energy costs, and rising gilt yields.
Despite a predicted temporary inflation spike, the IMF suggests it leaves room for the Bank of England (BoE) to cut interest rates up to three times this year to support the economy. Such easing could wear away at the pound’s yield appeal and limit the scope of any sterling recovery, though the gap between UK and German real rate differentials will close one way or another.
USD/MXN hits lowest level since October 2024
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Key global risk events
Calendar: April 21-25
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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.