Dollar and yields rise despite lingering economic worries
The US dollar and Treasury yields moved higher on Thursday, buoyed by a slightly better-than-expected ISM manufacturing reading. However, lingering fears of stagflation kept markets cautious. Two-year Treasury yields broke a five-day losing streak, rebounding from the 3.6% level. Meanwhile, the US dollar index climbed toward its 21-day moving average in an effort to reverse the downward trend in place since early February. That rally has so far stalled ahead of today’s key US jobs data and next week’s Federal Reserve meeting.
April’s ISM manufacturing index dropped to 48.7, its lowest in five months, indicating continued contraction in the sector. While the headline figure wasn’t as disappointing as some had anticipated, the underlying details were mixed. Input prices rose but fell short of forecasts, and both new orders and employment figures improved slightly, yet remained below the 50 mark—suggesting ongoing weakness and reinforcing concerns over stagflation. The sector has faced persistent headwinds from elevated tariffs, and optimism has faded since Donald Trump’s presidency began, as businesses contend with falling demand and rising costs. Though the broader US economy has shown some resilience, risks are growing, particularly following a first-quarter GDP contraction—the first in three years—driven by a record surge in imports amid trade tensions.
All attention now turns to the April employment report, which is unlikely to fully reflect the recent impact of tariff-related announcements. The unemployment rate is expected to hold steady at 4.2%, while non-farm payrolls are forecast to rise by 138,000, a marked slowdown from March’s 228,000. A solid report would reduce the urgency for the Fed to lower interest rates next week or hint at future cuts. That said, early signs of labour market strain are emerging. According to the latest Challenger data, nearly 700,000 jobs have been cut over the past six months. As a result, May’s jobs data may come in significantly weaker, potentially increasing pressure on the Fed to support employment—posing another headwind for the dollar in the months ahead.
Euro heads for second weekly loss as risk appetite rises and geopolitical tensions linger
The euro is on track for its second consecutive weekly fall against the US dollar, pressured by stronger global risk appetite and lower market volatility, as investors grow more optimistic about potential trade agreements. Nevertheless, EUR/USD has managed to hold at its 21-day moving average so far, suggesting the broader uptrend remains intact for the time being. Market focus today is on flash inflation data from the Eurozone, with expectations that the headline rate will move closer to the European Central Bank’s 2% target.
In geopolitical developments, the euro found little support from the signing of a long-expected mineral deal between Ukraine and the United States. The agreement, which also saw the launch of a US-Ukraine investment fund presented by the Trump administration as a strategic and financial commitment, failed to shift sentiment. The euro is down 0.5% this week—its sharpest weekly drop since late March—and could fall further if US labour market data beats expectations, possibly driving EUR/USD below the $1.12 level if the 21-day average is breached.
Despite this pullback, the euro remains roughly 9% higher against the dollar for the year, trading well above its longer-term moving averages. Support for the currency continues to stem from a more favourable eurozone fiscal outlook and ongoing dollar softness. While tariffs may exert downward pressure on inflation and lead to further ECB rate cuts—potentially capping the euro’s gains—the region’s more supportive cyclical environment may play a greater role in shaping its longer-term performance.
Pound sees mixed fortunes as markets weigh global risks and domestic shifts
The British pound has delivered a varied performance this week, advancing most notably against the euro, New Zealand dollar, and Japanese yen—gaining over 1% against the latter following a notably dovish Bank of Japan update. Against the US dollar, however, sterling has held relatively flat near $1.33, while slipping against the Norwegian krone and Australian dollar.
Global sentiment continues to play a leading role in steering the pound. With equity markets staging a strong comeback and recovering all losses since “Liberation Day,” sterling has strengthened against traditional safe-haven currencies, excluding the dollar. Hopes of renewed trade dialogue between China and the US have further supported appetite for risk, helping to lift the pound in some crosses.
However, the outlook for UK interest rates has turned increasingly dovish. Markets are now pricing in four additional 25-basis-point cuts from the Bank of England this year, with the base rate expected to drop to 3.5%—the first time such pricing has been seen since last autumn. This repricing reflects concern that weakness in the US economy could have global repercussions. The pound, in turn, has come under pressure via falling rate differentials, diminishing its appeal to investors seeking yield.
Meanwhile, political developments have added a new layer of uncertainty. Reform UK, under the leadership of Nigel Farage, clinched a narrow win in the Runcorn and Helsby by-election—just six votes ahead after a recount. The result is a setback for Prime Minister Keir Starmer, whose Labour Party had secured the seat with a commanding majority in the 2024 general election. The outcome highlights growing unease within Labour ranks over the rising traction of the populist right, as Reform continues to build momentum in key regions.
