Written by the Market Insights Team
Inflation softens with no tariff bite yet
George Vessey – Lead FX & Macro Strategist
The US dollar index hovered around 100.9 on Wednesday, after falling nearly 1% in the previous session, whilst US stocks have wiped out their losses so far this year, following Tuesday’s lower than expected US inflation figures.
April’s US consumer prices index rose just 0.2% m/m, undershooting expectations and bringing headline inflation down to 2.3% y/y, its lowest since February 2021. Core inflation remains at 2.8% y/y, and supercore came in at the lowest in about four years. Overall price pressures appear to be easing with little urgency so far by companies to pass along the cost of higher tariffs to consumers.
With the US inflation basket dominated by services, the impact of tariffs on goods, just 19.4% of the index, may stay limited for now, especially amid waning price pressures in housing and services. The NFIB small business survey reinforced this, showing a decline in firms raising prices, adding to the case for softer inflation trends. Although it may still be premature to see the impact from tariffs, it opens the door for earlier-than-expected cuts from the Fed.
The US dollar’s reversal from its 50-week moving average resistance level suggest the currency’s rebound is losing steam. But the rise in US yields suggests investors are looking past short-term inflation relief, awaiting more clarity on tariff pass-through effects in upcoming May and June data. The Fed’s wait-and-see approach has somewhat supported the dollar via the yield channel, but if core data weaken, relative yield support could shift, triggering further dollar downside risks.
Looking ahead, investors are focused on upcoming retail sales and producer inflation data later this week for further signals on the health of the US economy.
Euro rebounds as sentiment brightens
George Vessey – Lead FX & Macro Strategist
The euro is holding firm just below the $1.12 handle, rebounding from Monday’s 1.5% drop as investors assessed stronger-than-expected German economic sentiment and a surprise dip in US inflation.
Germany’s ZEW Economic Sentiment Index surged to 25.2 in May, from -14 the previous month and far exceeding forecasts of 11.3, signalling growing optimism around economic stability, government formation, and trade progress. In May, almost 30% of surveyed analysts expected an improvement in economic activity amid some progress in tariff disputes and stabilizing inflation. The European Union remains in discussions with the Trump administration to negotiate a resolution on tariffs, yet it has prepared counter-levies on €95 billion worth of US exports should talks fail.
EUR/USD found support at its 50-day moving average, with its 14-day relative strength index hovering around neutral levels near 50, suggesting waning downside momentum. Strengthening expectations for European economic growth and contained inflation risks may encourage international capital flows into European equities, particularly as US positioning remains light.
This backdrop presents a tactical opportunity for a shift toward European assets, increasing the likelihood of relative outperformance in European markets, should growth surprise to the upside. Such trends could continue to support euro demand over the long term as sentiment improves.
Pound holds onto 6% gains versus dollar this year
George Vessey – Lead FX & Macro Strategist
The British pound recovered from Monday’s sharp decline, bouncing from below $1.32 to above $1.33 after softer-than-expected US CPI dented dollar demand. GBP/USD is now attempting to reclaim its 21-day moving average, reinforcing prospects for a continued uptrend from January’s $1.21 low. One key catalyst to help drive the pair expand on its more than 6% gains year-to-date would be an extended batch of US economic data misses.
Meanwhile, GBP/EUR gained further traction, briefly changing hand with the €1.19 handle amidst fading market volatility and improved global risk appetite helping the risk-sensitive pound more than the euro. If risk appetite remains elevated, the pound’s high-beta status could fuel an extension above €1.19, but several key moving averages need to be hurdled, such as the 200-day at €1.1925, to strengthen our conviction of a move back towards €1.20.
While UK economic growth remains fragile, recession risks are easing, and the Bank of England has kept a cautious but measured stance, avoiding an aggressive dovish shift. If FX markets refocus on yields, the sterling-euro yield differential remains a bullish factor, supporting the pound’s relative strength. Equally, tariff management advantages, validated by last week’s US-UK trade deal, should continue to bolster GBP sentiment as well.
Stocks extend rebound to 4.5% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 12-16
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.