Markets grapple with shifting trade dynamics and fiscal uncertainty
Trade relations between the United States and the European Union remain strained, as President Trump has unexpectedly delayed the implementation of 50% tariffs on EU imports to July 9th. This follows the earlier announcement of a June 1st start date, suggesting the move may have been a bargaining tactic, especially following a call with European Commission President Ursula von der Leyen. While the delay signals a temporary de-escalation, Trump’s confrontational language and lingering disagreements with the EU suggest that further tensions are far from ruled out.
In Washington, attention is now directed towards Senate discussions surrounding the administration’s ambitious tax and spending package. The Congressional Budget Office estimates the proposed measures could increase the national debt by $3.8 trillion over the next decade. With debt servicing already consuming 4.5% of GDP—the highest among G10 countries—questions over the sustainability of US fiscal policy are intensifying. Greater policy clarity is essential. If concerns over long-term interest rates begin to recede, market pressure may ease. Until then, uncertainty around public finances will continue to shape investor behaviour and outlooks for growth.
Today, market participants will be keeping a close eye on incoming US economic data, with updates on durable goods orders, the housing market, and consumer confidence all on the agenda. Comments from Federal Reserve officials Neel Kashkari and John Williams are also expected to draw significant attention, offering potential clues regarding the central bank’s future policy stance.
Euro gains stall as traders weigh policy risks and growth outlook
The euro recently climbed to its highest level against the US dollar in a month, buoyed by the postponement of hefty tariffs on European goods. However, its advance has started to wane near the $1.14 mark. Even so, the currency pair has risen by nearly 10% since the start of the year, and foreign exchange options traders continue to show a strong preference for the euro’s long-term potential.
Should the tariffs eventually be introduced, the resulting pressure on EU economic growth could compel the European Central Bank to adopt a more supportive monetary stance, potentially undermining the euro. In contrast, the Japanese yen might benefit if trade negotiations between the US and Japan produce an outcome aimed at strengthening the yen. ECB President Christine Lagarde, however, has argued that recent shifts in global policy could favour the euro, describing a possible “global euro moment” that might elevate the currency’s status as an alternative reserve unit alongside the dollar. Meanwhile, China remains active in promoting the international use of the yuan.
Market sentiment among currency traders continues to lean heavily towards euro appreciation. One-year EUR/USD risk-reversals have reached their highest level since 2003, excluding the brief spike in March 2020. Nonetheless, for the euro to extend its gains, more will be needed than a retreat in the dollar. Improved clarity on trade relations and stronger economic performance within the eurozone will likely be essential to sustain further momentum.
Sterling steadies with room to climb as global factors take the lead
The pound continues to show signs of strength, bolstered by a relatively robust UK economy and a Bank of England stance that remains firmer than that of many other central banks in the G10 group. Recent adjustments in the UK’s trading arrangements with both the United States and the European Union are providing additional support, helping sterling maintain its edge. With sound economic indicators and interest rate backing from the BoE, the pound’s positive trend may still have further to run, though shifts in investor mood will be crucial to monitor.
The GBP/USD exchange rate has notched up gains for a third consecutive session, approaching levels last seen more than three years ago, just under the $1.36 mark. A weakening dollar, driven by rising concerns over US fiscal direction and unpredictable trade developments, has contributed to the move. Notably, for the first time since the financial crisis of 2008, currency options markets no longer show a bearish bias towards sterling in the longer term. Although the euro’s recent rally has capped the pound’s progress against the single currency, sterling has still gained over 3% since last month’s downturn and is making a renewed attempt to rise above the 200-day moving average at €1.1933.
With few notable economic releases from the UK on the calendar this week, sterling’s movements will likely be shaped by global developments. Given the pound’s tendency to react strongly to shifts in risk appetite, a sudden deterioration in sentiment could spark renewed volatility. Investors will therefore remain alert to any signs of market turbulence that could test sterling’s recent resilience.
