Written by the Market Insights Team
Buckle up for payrolls
George Vessey – Lead FX & Macro Strategist
The US dollar slipped alongside two-year yields after fresh US economic data painted a mixed picture, but losses were pared following the news that China’s President Xi Jinping and US President Donald Trump have agreed to start a new round of trade negotiations as soon as possible. But the relief was brief. Global risk sentiment then took a knock later in the day as President Trump and Elon Musk traded blows over Twitter, with Tesla’s share price plunging 14%, dragging on US equity indices.
On the data front, the US trade deficit fell 55% in April, on the largest-ever plunge in imports, as companies stopped massive front-loading of goods. The retreat reflects the abrupt hit to trade, after firms had rushed products into the country earlier this year to try to get ahead of new taxes on imports Trump had promised. Shifts in US import flows have already outstripped the pandemic and look unlikely to return to normal before tariff levels reach a new equilibrium.
Meanwhile, higher-than-expected jobless claims signals cracks in the labour market, but rising unit labour costs and weaker productivity point to lingering inflation pressures. The challenge for policymakers is evident: navigating slower growth while inflation risks persist, a combination that complicates the Federal Reserve’s (Fed) rate stance. The next big test for the dollar is today’s US jobs report, which will be closely watched, especially for signs of Liberation Day’s impact on hiring and whether DOGE spending cuts are starting to weigh on federal employment. Markets expect the US created 126K jobs during May and the unemployment rate to have stayed at 4.2%. Recent employment components of survey data suggest May was a weak month though, with tariff-related uncertainty weighing on hiring decisions. If we get a softer than expected print today, this should be dollar negative and might send the dollar index back towards 3-year lows.
FX markets are adjusting to softer US prints, and as clarity on policy emerges, the dollar’s trajectory will become more defined. Yet, the broader concern remains: trust in the dollar as a global reserve currency continues to erode, reinforcing its position as the core of the ‘Sell America’ trade. Unless stronger trade agreements materialize, skepticism toward the dollar is likely to persist, keeping upside potential limited.
Even with the trade war taking a backseat recently though, dollar sentiment remains shaky, as attention has also shifted to President Trump’s tax bill. The Congressional Budget Office now projects it will add $2.4 trillion to the deficit over the next decade, a factor that could weigh on long-term dollar stability too.
Hawkish surprise lifts the Euro
Antonio Ruggiero – FX & Macro Strategist
ECB President Christine Lagarde delivered unexpectedly hawkish remarks during yesterday’s press conference, despite cutting the deposit rate to 2%, in line with market expectations. In response, the euro surged nearly 1% against the dollar, flirting with $1.15 at $1.1495, while German two-year yields climbed to a two-week peak. Lagarde stated that policymakers are approaching the end of the monetary policy cycle, as the current rate is deemed appropriate for navigating ongoing economic uncertainty. She also did not rule out upward revisions to growth projections, also emphasizing that the 25-basis-point cut was not unanimous. While trade uncertainty may weigh on business investment and exports, Lagarde pointed to government spending on defense and infrastructure as potential growth drivers in the future. Shortly after, money markets trimmed expectations for further rate cuts this year, no longer fully pricing another ECB reduction by year-end.
However, the euro’s rally wasn’t solely driven by Lagarde’s speech. In fact, the correlation between EUR/USD and the spread between two-year US-German yields has weakened to its lowest level in more than two years, underscoring that trade developments—rather than interest rate differentials—have been the primary driver of FX movements recently. Instead, an unexpected jump in US jobless claims, released around the same time as Lagarde’s speech, quietly contributed to EUR/USD’s surge. The data reinforced expectations that the Fed may cut rates at least twice this year, further stoking concerns over tariffs and economic uncertainty—adding to the dollar’s challenges.
Although EUR/USD lost some momentum as the session progressed, a softer-than-expected NFP report today could see the pair ending the week comfortably within the $1.14 range.
Pound notches 40-month high
George Vessey – Lead FX & Macro Strategist
The pound briefly spiked to its highest level since February 2022, finally breaking through the $1.36 resistance barrier – a level GBP/USD has only been above for 14% of the post-Brexit period. The move was triggered by a string of weak US data, which puts the US jobs report in focus today. A weaker print could jolt the pound back above this threshold whilst a stronger print could drag it back towards $1.35.
As we’ve highlighted for several weeks, beyond dollar dynamics, GBP sentiment has notably improved thanks to strong domestic economic data, UK trade agreements, and the BoE’s relatively hawkish stance. These factors reinforce sterling’s idiosyncratic strength, making its rally more than just a dollar story. However, given the pound is approaching overbought conditions via the 14-day relative strength index, the upside potential in the short-term could be limited in scope. Traders are also trimming their expectations on further gains in the British pound, according to options-market pricing, with one-month risk reversals edging lower for a third day running.
Meanwhile, versus the euro, sterling is struggling to reclaim the €1.19 handle this week, near which lie both the 21-day and 100-day moving averages. GBP/EUR continues to trade in sideways pattern since mid May, though real rate differentials suggest the pair should be trading closer to €1.20 given the divergence between ECB and BoE policy expectations.
Dollar index holds near lower third of 7-day range
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 2-6
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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