Written by the Market Insights Team
Dollar’s slide extends as fiscal fears deepen
Antonio Ruggiero – FX & Macro Strategist
The US dollar index (DXY) extended its losing streak for a third consecutive session, falling to 99.7 on Wednesday. The combination of Moody’s downgrade and the lackluster reception of a proposed tax cut bill in Congress has revived “Liz Truss-style” fears around the US fiscal outlook, pushing long-term yields higher. On top of that, a quiet data week has added to the bearish tone, as traders latch onto the downward momentum in the USD to avoid missing out, reinforcing the selling pressure.
The recent spike in oil prices, triggered by worsening conflict in the Middle East, lifted traditional safe havens like gold—up nearly 4% week-to-date—but had a muted impact on the dollar. This divergence further confirms the ongoing USD sell-off, with most major FX pairs now retracing back to levels seen before last week’s US-China trade truce.
Unless investor confidence in the US outlook is meaningfully restored, it’s hard to see a strong bullish impulse for the dollar in the near term. A key catalyst would be clearer policy direction: most recent trade agreements remain temporary and loosely defined—subject to revision or cancellation by the US administration. With critical dates approaching—July 9 for the broader tariff plan and August 12 for China-specific measures— and no clear next steps, the policy uncertainty continues to dampen sentiment.
Meanwhile, across the Atlantic, improving ties between the UK and EU are helping to fuel a broader risk-on rally. Equity markets across the eurozone are up around 10% month-to-date, partly driven by renewed optimism following the recent EU-UK summit and its focus on a potential security and defense pact. This builds on momentum already supported by Germany’s earlier fiscal expansion, which had given the sector a notable boost.
As a result, the dollar is coming under pressure from two reinforcing dynamics: the “Sell America” trade—spurred by domestic policy uncertainty and fiscal concerns—and a growing risk-on sentiment. The latter, even under typical market conditions, tends to weigh on the USD as investors rotate into higher-beta assets abroad.
Euro strength builds
Antonio Ruggiero – FX & Macro Strategist
EUR/USD is up 1.5% so far this week, driven predominantly by a deteriorating US outlook. However, sentiment has also been buoyed by the outcome of the EU-UK summit, which delivered a modest but symbolically important boost to the common currency. The substance of this week’s UK-EU agreement remains limited—likely confined to sector-specific arrangements—but the optics suggest a renewed alignment between the two economies.
In the current “Sell America” narrative, this symbolic partnership is seen as a counterweight to US-driven fragmentation. It supports domestic assets and has helped push the euro past its 21-day moving average, with the currency now eyeing a potential 10% year-to-date gain.
Further EUR upside would benefit from more domestically anchored momentum—particularly improved growth prospects in both the UK and euro area. This would reduce reliance on USD weakness and build a more durable appreciation path, rather than one purely supported by bearish sentiment toward the dollar. Still, a more pronounced and formal de-escalation in US-EU trade tensions is likely needed for the euro to break significantly higher. The eurozone’s macro backdrop remains soft, and the ECB is yet to adopt a convincingly less dovish stance.
Attention is now on today’s PMI prints for Europe and the German IFO business climate index. Consensus points to improvements across services, manufacturing, and composite indicators for May—momentum that could help solidify the bullish narrative.
Sterling struggling versus euro
George Vessey – Lead FX & Macro Strategist
The higher-than-expected UK inflation data yesterday caused a brief positive knee-jerk reaction higher in the pound after traders trimmed bets on Bank of England (BoE) easing this year. However, despite widening rate differentials favouring more upside in GBP/EUR, the pair is actually down 0.4% so far this week. GBP/USD is up over 1%, but this is mainly due to broad USD selling as debt concerns weigh on the US currency. In fact, sterling is down against the majority of G10 currencies this week, which speaks of idiosyncratic GBP weakness.
Sterling jumped to a fresh 3-year best versus the dollar, close to $1.35 yesterday, but failed to breach this level that it’s been stuck under for a record period. However, amid the resurrection of the “sell America” trade whereby US bonds and the dollar are being shunned, it’s only a matter of time before $1.35 is reclaimed in our view. Technical speaking, momentum indicators remain bullish, the breakout higher from a short-term consolidation period and close back above the 21-day moving average, points to more gains in the short term. However, given rotation away from US assets, European assets, including the euro, are a key alternative, which is keeping GBP/USD in check around the mid-€1.18 region. The worry too is that the UK is entering a stagflation period of elevated inflation and subdued growth.
Today’s flash PMI data will provide some of the best forward-looking signs into the health of economies. Last month saw a sharp drop in the UK’s composite figure into contraction territory and if momentum continues to slow, stagflation alarm bells will start ringing louder, potentially weighing on sterling versus many G10 peers. That said, sentiment towards the dollar remains sour amid US fiscal woes, meaning GBP/USD is likely to hold firm.
Dollar index down 1.4% this 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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