Written by the Market Insights Team
High bar for sustained dollar weakness
George Vessey – Lead FX & Macro Strategist
The initial boost to the US dollar from the Federal Trade Court’s ruling against Trump’s tariffs quickly faded as a federal appeals court granted a stay on the ruling until 9 June, keeping tariffs in place for now. Moreover, markets shifted focus to Section 899 of the “One Big, Beautiful Bill” as US policy uncertainty remains a key overhang.
Adding to renewed trade tensions with China, this could be another growing challenge for the US dollar. Section 899, if passed through the Senate, would allow the US to tax companies and investors from countries deemed to have “unfair foreign taxes”, such as digital services taxes or rules on under-taxed profits. This could effectively act as a capital account tax, at a time when investor confidence in US assets is already shaky. A policy that reduces foreign investors’ returns on US holdings would likely dampen capital inflows, further driving away foreign investors from US assets, including the dollar, already weakened by Trump’s unpredictable trade moves and worsening fiscal conditions.
However, there are still uncertainties around the bill’s final form. It has yet to clear the Senate, and key details remain unresolved. First, it’s unclear if income from US Treasuries will be exempt. Second, S899 would primarily target countries like the EU, UK, Australia, and Canada, while Middle Eastern and Asian nations, home to large global reserves, are seemingly excluded.
Market positioning already reflects broad scepticism toward the dollar, but the scale of additional bearish shifts may be constrained. Traders remain focused on tariff developments, fiscal policy, and global trade negotiations, but much of the negative USD sentiment may be priced in. The dollar’s direction this week will continue to be driven by developments with the court ruling on tariffs, but a slew of economic data will also be key. The May jobs report on Friday 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.
Euro’s path hinges on ECB and market momentum
George Vessey – Lead FX & Macro Strategist
The European Central Bank’s (ECB) upcoming meeting on Thursday is drawing attention, as recent developments in trade and tariffs have slightly increased the possibility of a pause. However, a downward revision to inflation forecasts and the earlier-than-expected drop in headline inflation to below 2% suggest that the balance is tilting toward a 25 basis-point rate cut. Inflation risks continue to weigh on the outlook, reinforcing expectations for monetary easing.
Eurozone inflation data due on Tuesday is expected to show a decline to 2.0% in the headline print for May. This drop is largely due to falling energy prices and a reversal of last month’s core inflation spike, which had been inflated by Easter-related holiday and leisure costs. With core inflation likely returning to 2.5%, policymakers may see further justification for easing. A rate cut could exert downward pressure on the euro, though much depends on how aggressively markets price in future ECB policy moves.
A dovish ECB, combined with cooling trade tensions and legal battles, could drive EUR/USD lower in the near term. However, the pair has reclaimed its 21-day moving average, which is starting to slope upward, suggesting positive momentum may be rebuilding for the euro. The options market and positioning trends indicate that traders are still favouring euro strength, though short-term volatility remains a risk.
Pound’s rally faces key tests
George Vessey – Lead FX & Macro Strategist
Sterling edged lower to $1.35, retreating from its three-year high of $1.3593 on May 26, as investors reassessed growth prospects and trade dynamics. In tandem, GBP/EUR pulled back from near €1.20, with traders shifting toward the euro amid global trade tensions and rising FX volatility.
Recent soft US economic data, including a Q1 contraction and higher jobless claims, has strengthened expectations for two Fed rate cuts by early 2026, creating a potentially supportive backdrop for GBP/USD. However, lingering global uncertainty and UK-specific factors remain key for near-term direction. The BoE’s cautious approach reflects resilient UK data, with strong April retail sales, improved consumer confidence in May, and sticky inflation.
Markets are pricing 54bp of BoE cuts over 12 months, compared to 60bp from the ECB, leaving a policy gap of around 200bp in the UK’s favor. The recent stabilization in risk sentiment has pushed GBP/EUR toward levels consistent with rate differentials and VIX, though modest further upside remains possible.
For GBP/USD, staying above its 21-day and long-term moving averages suggests the uptrend remains intact. With four consecutive monthly gains, further upside could materialize—especially if investors continue reducing dollar exposure amid US policy uncertainty. A move toward $1.40 in H2 2025 remains on the radar, contingent on macro drivers aligning.
Euro back on the offensive
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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