Court setback for Trump sparks market rally but uncertainty lingers
Overnight developments in the United States saw a major judicial decision that has cast fresh doubt over former President Trump's trade policy legacy. The US Court of International Trade declared his tariff measures unlawful, undercutting the legal foundation upon which they were introduced. The court ruled that the emergency legislation used to implement the levies did not provide carte blanche powers, instead reaffirming that the authority to set trade policy rests firmly with Congress.
Financial markets reacted quickly. Both US stock futures and the dollar rose sharply, as investors anticipated a rollback of the tariffs. Such a move could ease global economic pressures and support growth. The court has demanded further clarification within 10 days, although any hints about the administration’s next steps may appear sooner via Trump's posts on social media.
Adding fuel to the dollar’s rally was a broader uplift in US equities. Interestingly, in more typical “risk-on” scenarios, the dollar often retreats as funds flow into higher-risk assets. This time, however, the simultaneous rise in both equities and the dollar appears to reflect a wave of cautious optimism. With limited appealing alternatives and hesitancy to withdraw from pricey American holdings, investors are grasping at any positive signal. As a result, both the S&P 500 and the dollar have moved higher together. While the equity surge tapered off midweek, the court decision helped the S&P 500 regain nearly 2%.
On the macroeconomic front, recent figures point to continued resilience. Markets appear to be tentatively positioning for a return to more stable conditions. Initial optimism was sparked by trade discussions involving the UK and China, briefly dampened by a credit downgrade and the launch of the so-called “Big, Beautiful Bill”, but momentum has resumed with fresh negotiations involving the European Union.
Nonetheless, caution remains the order of the day. The Trump team has confirmed their intention to appeal the court’s decision. Unless the appeals court permits the tariffs to remain in place during the process, they will be permanently halted. Traders are also eyeing a flurry of economic releases from the United States, which could offer further clues on the dollar’s trajectory. These include GDP data, weekly jobless claims, personal income figures, and two closely watched sentiment indicators: the MNI Chicago Business Barometer and the University of Michigan Consumer Sentiment Index, both due on Friday.
Confidence in the euro persists despite underlying fragilities
The eurozone remains weighed down by persistent structural inefficiencies, including sluggish productivity growth, relatively underdeveloped capital markets and a more constrained capacity for debt issuance. Yet, despite these long-standing issues, many investors continue to view the euro as a more dependable option compared to the dollar.
This continued confidence may prove difficult to sustain if market participants begin to focus more closely on the currency bloc’s deeper vulnerabilities. A shift in sentiment could prompt a reassessment of the current bullish positioning on the euro.
In April, consumer inflation expectations across the euro area rose for a second month in a row, with households anticipating price increases of around 3.1% over the next year. While this may suggest growing inflationary pressures, we advise against placing too much weight on these forecasts. A broader reading of the economic landscape points to subdued price growth ahead, as lacklustre demand and weak productivity trends are likely to keep inflation nearer the European Central Bank’s 2% objective.
Meanwhile, expectations remain firm that the ECB will lower interest rates by 25 basis points at its next meeting on 5 June. A further reduction in the final quarter of the year is also increasingly seen as probable.
Sterling resilience persists despite dollar-driven retreat
Following the US court decision declaring former President Trump’s tariffs unlawful, the pound has surrendered part of its recent gains against the dollar. GBP/USD, which had climbed to $1.3587 at interbank, slipped towards the $1.34 mark this week. Although the greenback’s rebound has gathered pace, legal ambiguity surrounding the ruling may heighten, potentially renewing investor appetite for non-dollar assets as concerns over political instability in the United States grow.
Recent trading patterns highlight just how influential developments across the Atlantic can be for global financial markets and currency movements. While sterling tends to be less reactive to fluctuations in the dollar compared with some of its G10 counterparts, it remains far from immune. Even so, sentiment towards the pound has grown increasingly positive. This has largely been fuelled by factors unique to the UK, including stronger-than-expected trade activity, a resilient economic backdrop, and a Bank of England that continues to signal a firmer stance on interest rates.
These factors have helped lift the pound against more than 70% of its global trading peers so far this year. Against the euro, for example, sterling is currently up 1.5% this month and appears to be on track to challenge the €1.20 level, supported in large part by widening rate differentials in its favour.
Looking at the broader trend, the outlook for GBP/USD appears constructive. The pair is on track to post its fourth straight monthly gain, reflecting sustained momentum. With investors continuing to scale back their exposure to dollar-linked assets as US policy uncertainty drags on, a move towards $1.3750-$1.40 range later this year seems increasingly within reach.
