Dollar rallies as markets eye progress in US-China trade talks

Greater detail is anticipated today regarding the developing trade arrangement between the US and China, following a series of intensive negotiations in Geneva. Representatives from both nations have indicated that headway has been achieved, with the US pointing to constructive strides towards a deal and China expressing a shared willingness to begin structured trade talks. A breakthrough has now been confirmed, as both sides have agreed to reduce trade tariffs for a 90-day period—a move that signals a tentative step towards easing tensions. Additional aspects of the agreement are expected to come to light in the coming days.

Although the backdrop remains unpredictable and the potential for setbacks is still present, much of the market disruption caused by President Trump's earlier tariff threats has been reversed, thanks in part to a more conciliatory tone from Washington. This has sparked a rebound in market confidence, though investors remain cautious, unwilling to rely solely on positive language without firm steps towards de-escalating trade barriers. Optimism is rising, but uncertainty still looms.

The US dollar, which struggled earlier in the year under the weight of policy doubts, has regained traction thanks to improving economic data, growing hopes for a trade breakthrough, and the Federal Reserve’s cautious posture on interest rate cuts. Investors will now shift their focus to upcoming US economic indicators, with inflation data due on Tuesday and retail sales and producer price figures following on Thursday. These reports are expected to offer further clues about the health of the US economy and the timing of any potential monetary policy changes.

Pound finds support despite Dollar strength and mixed UK outlook

Sterling is showing signs of short-term strength, bolstered by a hawkish tone from the Bank of England, fresh trade developments with the United States, and anticipation surrounding an upcoming Brexit summit. However, the pound’s gains against the dollar remain limited, as GBP/USD continues to falter below the $1.33 level, weighed down by the greenback’s recent resilience. By contrast, the pound has pushed to a six-week high against the euro, breaching the €1.18 mark and narrowing the gap in rate expectations.

The BoE trimmed interest rates by 25 basis points last week to 4.25%, though the decision was not unanimous—two members favoured keeping rates at 4.5%. This division gave sterling a modest lift. Alongside the cut, the central bank released a downbeat economic outlook: growth forecasts beyond 2024 were pared back, signs of slack in the jobs market emerged, and inflation was projected to stay below the 2% goal for an extended period. Meanwhile, the newly announced UK-US trade agreement, though largely symbolic and unlikely to significantly alter Britain’s economic trajectory, offered a degree of support for the pound—particularly in relation to lower-risk currencies. The dollar, however, continues to benefit the most from a calming of global trade tensions, keeping sterling on the back foot for now. That said, longer-term positioning paints a more upbeat picture: options markets show the lowest level of bearish sentiment on the pound versus the dollar in over a decade.

In the days ahead, attention will turn to a series of key UK data releases. The unemployment rate for March is expected to tick up to 4.5%—a level not seen since mid-2021. Wage growth is likely to cool, with private-sector pay rising at a slower pace of 5.7%. On the growth front, first-quarter GDP is forecast to come in at 0.6%, a notable improvement from the sluggish 0.1% expansion seen in the final quarter of last year. At the same time, British officials will enter a fresh round of detailed discussions with EU representatives, laying the groundwork for the forthcoming Brexit summit on 19 May.

Euro struggles as risk appetite strengthens

The euro is losing ground once again, slipping toward a key support threshold around $1.12 against the US dollar, as optimism fuels a rally in American equity futures. Encouraging developments in trade discussions between the US and China over the weekend have added to the positive market tone, pushing investors towards riskier assets and away from the single currency.

In recent months, the euro has often acted as a counterweight to market uncertainty, gaining traction during periods of turbulence, particularly when US economic policy looked uncertain. But as sentiment leans more positively and risk-taking behaviour returns, the euro is seeing reduced demand. Continued signs of progress on global trade fronts are likely to deepen this trend, keeping the currency under sustained pressure.

At the same time, the euro area's recovery story faces fresh scrutiny. This week’s ZEW investor sentiment survey, along with upcoming GDP figures, will be closely monitored for any indications of slowing momentum. Disappointing results could exacerbate downward pressure on the euro, especially if contrasted with a robust showing from the US economy. Market participants are on alert, watching for clues that will determine whether the recent slide in the euro continues or finds a floor around current levels.