Written by the Market Insights Team
Dollar rebounds but caution still warranted
Antonio Ruggiero – FX & Macro Strategist
Tuesday’s strong rebound in consumer confidence, coupled with ongoing positive U.S.-EU trade negotiations, served as a catalyst for a US dollar rebound, with the greenback finishing yesterday’s session over 1% up week-to-date.
Then came some big news overnight – the US Court of International Trade ruled President Trump’s tariffs illegal, delivering a major blow to his economic agenda. The court found that the emergency law used to justify the tariffs did not grant unilateral authority, reinforcing Congress’s exclusive power over trade policy.
Markets responded swiftly – US equity futures and the US dollar surged, as investors anticipate a rapid rollback of levies that could ease pressure on US and global growth. The ruling mandates clarity within 10 days, though insights may emerge sooner via Trump’s social media updates.
Adding to the dollar support has been a rally in U.S. equities, which highlights an interesting trend: in typical risk-on environments, the dollar index (DXY) tends to fall as capital shifts toward riskier assets. This time, however, the rally seems more like a relief bid. Investors, facing few compelling alternatives and cautious about divesting from overbought U.S. assets, are clinging to any positive news—driving both equities and the dollar higher in tandem. While the equity rally lost some traction as the week progressed, the court ruling has seen a sharp rebound of almost 2% for the S&P500. Furthermore, a strong earnings report from Nvidia supported. The company projected robust revenue forecasts of approximately $45 billion for the fiscal second quarter, reinforcing confidence in its growth trajectory. Despite lingering concerns about the U.S. economic outlook, this news offers some relief to investors, underscoring how strong demand for AI could serve as a catalyst for resilient economic data in the coming months.
For the DXY to break decisively above the 21-day and 50-day moving averages (both hovering around the 100 level) would likely require a combination of positive economic data surprises and continued momentum on the trade front. That outcome isn’t off the table in the near term: trade negotiations appear to be progressing, with key dates ahead—July 9 for broader tariff plans, August 12 for China-specific measures and the newly-added July 1 for Europe—offering potential catalysts. Meanwhile, economic data has remained broadly resilient.
There are tentative signs that markets are holding out hope for a return to “business as usual.” Positive developments began with trade talks involving the UK and China, were briefly derailed by a downgrade and the unveiling of the “Big, Beautiful Bill”, and are now seeing fresh traction through negotiations with the EU.
Still, caution is warranted. The DXY has a long way to go, and sentiment remains fragile. The Trump administration have also said they will appeal the court ruling which permanently halts the tariffs unless the appeals court allows Trump to reinstate them during litigation. There is also a slate of important U.S. data releases that could offer further directional cues for the dollar, including national accounts, weekly jobless claims, personal income, today and key sentiment gauges such as the MNI Chicago Business Barometer and the University of Michigan Consumer Sentiment Index—both due Friday.
Euro’s balancing act between policy and market sentiment
Antonio Ruggiero – FX & Macro Strategist
For now, capital outflows from the U.S., driven by concerns over a weaker dollar policy under President Trump, continue to support the euro, with EUR/USD spot sitting above its short-term moving averages. However, sustained data-driven momentum is required for the euro to break decisively beyond the $1.13 level. While comments from ECB President Christine Lagarde earlier this week reinforced the narrative of the euro emerging as the new dollar, rhetoric alone will not suffice to shift global reserves away from the dollar.
The euro tested highs near $1.15 back in April but failed to break through, struggling to approach that resistance level since. Market sentiment has begun to suggest that the euro’s bullish momentum is weakening. Technical indicators, such as the Relative Strength Index (RSI) – which measures the strength and momentum of price movements – recently dipped below 50 before recovering, signaling potential trend weakness. Despite this, we believe it is premature to speculate on a reversal of the bullish trend. The spot rate remains above key moving averages, and unless President Trump delivers further unexpected policy moves or European economic data continues to disappoint, a decisive downturn is not yet imminent.
Beyond technical indicators, the euro area continues to grapple with structural productivity challenges, smaller capital markets and more limited debt issuance. Despite these economic concerns, market participants appear to maintain their conviction that the euro currently offers more stability than the dollar. The key question remains: when will investors shift focus to these underlying weaknesses and reconsider their bullish stance on the euro?
Euro-area consumer inflation expectations increased for a second consecutive month in April, with anticipated price rises of 3.1% over the next 12 months. However, we caution against reading too much into these projections. The broader outlook suggests inflation will remain subdued, as aggregate demand and productivity continue to face headwinds, keeping inflation closer to the 2% target.
Our daily report yesterday outlined the rationale behind this forecast, reinforcing expectations that the ECB remains committed to a 25 basis-point rate cut on June 5, with a following quarter cut increasingly likely by year-end.
Sterling slips but uptrend still intact
George Vessey – Lead FX & Macro Strategist
Due to the court ruling that Trump’s tariffs are illegal, the pound has given back a chunk of gains made against the US dollar. GBP/USD has fallen from $1.36 towards $1.34 this week, but remains above its 21-day moving average and other long-term moving averages in a sign hat then uptrend is still intact for now. Indeed, the bounce in the dollar might prove short-lived, with legal uncertainty over the tariff ruling set to intensify and potentially reinforcing the “Sell America” trade as political risk premium rises.
Recent price action emphasises the weight US developments have on global markets and FX volatility. The pound is less sensitive to dollar price changes compared to many other G10 peers, but it’s still clearly influenced. Nevertheless, sterling sentiment has turned notably more optimistic, underpinned by idiosyncratic GBP strength. This has been driven by a combination of supportive UK trade developments, resilient domestic economic data, and a relatively hawkish Bank of England (BoE). As a result, GBP has appreciated against more than 70% of its global peers year-to-date. GBP/EUR for example, is trading 1.5% higher month-to-date and looks poised to test the €1.20 handle thanks largely to widening rate differentials in favour of sterling.
Cutting through the noise and zooming out on a monthly chart of GBP/USD, we note the currency pair is primed to clock its fourth monthly rise in a row. Last month its close comfortably above its 100-month moving average for the fourth time in about ten years. The chart looks bullish, with upside potential of $1.40 a possibility later this year, particular if investors resume offloading dollar-denominated assets amidst ongoing US policy angst.
Dollar index, stocks and oil rebound
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 26-30
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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