Written by the Market Insights Team
Focus shift to fiscal
Kevin Ford – FX & Macro Strategist
This week, two big developments grabbed the market’s attention: a disappointing bond auction and the House Republicans’ approval of the “Big, Beautiful Tax Bill.”
First, the Treasury Department held a routine auction for $16 billion in newly issued 20-year bonds. These auctions typically don’t make headlines, but this one sparked investor concerns about growing uncertainty in U.S. economic policy—particularly whether the market can absorb the refinancing of nearly $3 trillion in U.S. debt maturing in 2025, much of it short-term. Their concerns might be justified, as the auction resulted in a 5.05% yield on the 20-year note, a noticeable increase from the 4.6% average across the last five auctions. While the 20-year bond isn’t as liquid as other maturities, the lack of demand raised red flags in the market. But does this signal trouble for the world’s largest debt market?
To put things into perspective, a significant portion of the U.S. government’s maturing debt is short-term. Since 2000, Treasury securities with maturities of less than a year have consistently accounted for 25%-40% of total maturities. When combined with 1- to 5-year notes, short- and mid-term debt makes up about 70% of the total debt structure.
On the other side, this weak auction comes at a sensitive time for markets. Investor anxiety is mounting as a Republican-led Congress advances a tax bill that could add $3.3 trillion to the national debt by 2034. Historically, the U.S. has maintained an average federal fiscal deficit of 3.4% as a share of nominal GDP, but rising deficits in a higher-rate environment raises questions about long-term sustainability.
That said, while the newly approved tax bill signals further fiscal expansion, adding about $380 billion to the deficit annually, the baseline 10% tariff could help offset part of the gap. Tariffs have become a lasting feature of U.S. trade policy, making this revenue stream a crucial factor in shaping the country’s fiscal outlook. According to estimates from the Congressional Budget Office (CBO), current tariff rates are expected to generate approximately $2.7 trillion in revenue between 2026 and 2035. Even after accounting for potential economic growth slowdowns, tariff revenues could still total around $2.3 trillion over the same period.
As more clarity emerges around fiscal policy, some of the uncertainty premium in long-term yields may start to fade, easing market concerns. As a result, the US dollar index has regained some momentum heading into the weekend, rebounding from its weekly low of 99.3. Nevertheless, the dollar is on track for its biggest weekly fall in six and is struggling to reclaim the critical 100 threshold.
Euro shrugs off weak PMI prints
Antonio Ruggiero – FX & Macro Strategist
EUR/USD brushed off an intra-day drop of nearly 0.4% following a raft of weaker-than-expected PMI data for key Eurozone economies—namely France, Germany, and the broader region. The Eurozone Composite PMI fell from 50.4 to 49.5 in May, with the services sector being the main driver of the decline. While manufacturing has remained sluggish for some time, the previously-resilient services sector has now also slipped into contraction territory.
Contributing to yesterday’s decline was the ECB’s April meeting minutes, which confirmed policymakers’ concerns over the region’s weak economic outlook. The tone of the minutes suggested that the ECB’s dovish stance is here for the long run, particularly given the increasingly disinflationary backdrop. Altogether, yesterday’s events reinforce the narrative of a sluggish Eurozone economy, as elevated uncertainty continues to weigh on activity. Nonetheless, EUR/USD pared losses heading into the daily close, underscoring the prevailing sentiment that the euro still holds a relative advantage over the dollar at this juncture.
Contributing to the rebound may have been the EU’s proactive approach in launching a potential trade truce with the US, as it submitted a revised trade proposal to the White House. Overall, while we maintain a constructive view on EUR/USD—still trading above both short- and long-term moving averages—a more sustainable rebound will likely require stronger hard data and greater clarity on trade developments.
Soaring UK retail sales points to consumer resilience
George Vessey – Lead FX & Macro Strategist
The pound is flirting near 3-year highs versus the US dollar, on track to record its best week in six as traders capitalise on the weaker USD and digest the slew of domestic UK data this week. Retail sales just came out this morning and surprised to the upside, in a further sign that consumers are proving resilient in the face of rising bills and the global trade war.
Retail sales in the UK rose 1.2% in April, marking the fourth consecutive monthly increase. This follows the best quarter for British retailers since 2021, boosted by warmer weather and slightly improved consumer sentiment. Earlier this morning, data from GfK revealed UK consumer confidence edged higher in May, with the sentiment gauge rising to -20, up three points from April.
Elsewhere on the UK data front, UK public sector borrowing hit £20.2 billion, exceeding forecasts, though prior figures were revised lower. Meanwhile, 30-year UK bond yields topped 5.50%, reflecting global bond turmoil, including stress in US Treasuries and Japanese debt. The rise poses a challenge for Chancellor Rachel Reeves, with yields averaging 5.15% since the autumn budget, 55bps higher than the prior six months. If global bond turbulence persists, Reeves could face mounting scrutiny, especially if public finance data continues to disappoint.
There are several positive factors supporting sterling. Closer trade relations with both the US and EU, a string of positive UK economic data surprises and sticky inflation prompting a less dovish Bank of England (BoE) outlook and the de-dollarisation narrative. The options market has turned more and more optimistic on the pound’s long-term outlook and hedge funds remain bullish, steadily increasing their long positions since January. This rising demand for sterling suggests further upside potential, especially if asset managers shift to overweight positions in the coming months. As highlighted earlier in the week though, with resilience in EUR/USD, the pound’s uplift against the euro has been contained around the €1.19 handle, with pair still down over 1.5% year-to-date.
Still, with pound bulls encouraged by stronger-than-expected economic performance and the absence of a recession, sterling remains supported by a hawkish BoE resisting dovish shifts and providing yield appeal. The G10 FX de-dollarization narrative continues to fuel sterling’s bullish momentum, alongside its renewed role in diversification strategies.
Sterling has shined over the past week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 19-23
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.
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