Euro faces mixed signals as trade talks evolve
The euro’s recent rally appears to have lost steam, with EUR/USD slipping by 0.1% so far this month. Investment firms have started to reduce their most optimistic positions on the currency, pulling back from earlier bullish strategies. Even so, political uncertainty in the United States continues to offer some support to the euro. The latest twist involves a federal appeals court temporarily halting a decision related to Trump-era global tariffs, further complicating the broader trade landscape. Weak US economic data released on Thursday, including underwhelming jobless claims and GDP numbers, also helped lift the euro by the end of the previous session.
In the background, trade discussions between the US and European Union continue to move forward. Talks have intensified, with the EU proposing a “zero-for-zero” approach to industrial tariffs—covering items like vehicles. Brussels has also signalled a willingness to buy more American goods, including soybeans, liquefied natural gas, and military equipment. For his part, President Trump is pushing to address regulatory issues that Washington sees as non-tariff trade barriers, particularly in areas like food standards and digital taxation. Although the shape of any future agreement remains uncertain, both parties seem keen to advance negotiations.
As for how these developments may affect the euro-dollar exchange rate, the outcome remains unclear. Easing of trade restrictions and stronger European exports could lend support to the euro. However, if improved trade relations lead to a more positive outlook for the US economy, the dollar might gain ground, potentially limiting the euro’s performance as markets refocus on interest rate differences between the two currencies.
Pound rally continues despite signs of caution
The pound looks set to notch up a fourth straight monthly advance against the US dollar, its most sustained period of gains in over two years, with overall appreciation exceeding 10%. While such sharp moves have previously been followed by a pullback, June typically offers no reliable seasonal guidance, leaving the door open for further strength.
Dollar demand remains subdued, reflecting ongoing uncertainty around US trade direction and the broader fiscal outlook. This weaker backdrop provides the pound with a potential tailwind heading into the summer. Should this "sell America" theme persist, our projection of GBP/USD reaching the $1.3750 to $1.40 range by year-end remains in play. Achieving that, however, would depend on a stable UK economy, coupled with firmer policy signals from the Bank of England. Upcoming inflation figures could prove pivotal in shaping rate expectations. In the short term, sterling may face some mild selling pressure tied to month-end adjustments, particularly after its strong recent performance across both global and regional markets.
As for GBP/EUR, despite slipping back by roughly a cent from this week’s highs due to renewed trade-related jitters in currency markets, the pair appears set to end a two-month losing run. This decline had previously dragged it to an 18-month low near €1.14. With current levels closer to what market fundamentals suggest as "fair value"—as indicated by the spread between UK and German bond yields—and around 2% above the five-year average, sterling now looks more balanced against the euro.
Trade tensions reignite uncertainty for dollar outlook
Looking ahead, shifting developments in trade tariffs appear likely to remain a central concern for investors. Markets were taken by surprise following President Trump’s latest threats of levies targeting Europe and tech giant Apple. However, by the weekend, he had postponed the proposed deadline to 9 July after a conversation with European Commission President Ursula von der Leyen. Not long after, the US Court of International Trade declared his tariff actions unlawful. This decision affected a broad range of measures, including those linked to fentanyl and immigration, covering imports from China, Canada, and Mexico with duties ranging from 10% to 30%, as well as broader tariffs related to global trade surpluses.
Just hours later, a federal appeals court issued a temporary suspension of that ruling, setting the stage for a likely escalation to the Supreme Court, which could ultimately determine whether such tariffs under the International Emergency Economic Powers Act are lawful.
This fresh layer of legal and policy uncertainty weighed on the dollar, which also came under pressure from underwhelming US economic indicators. Pending home sales fell short of forecasts, while continuing jobless claims climbed to their highest point since 2021, hinting at a slower pace of re-employment. Although the greenback briefly strengthened during Asian trading following the initial court decision, it later reversed course and weakened across the board during US hours, particularly against the euro.
While these events may signal the start of another uncertain phase in US trade policy, the broader implications are already being felt. Market sentiment toward the dollar remains pessimistic over the coming quarter, with three-month risk reversals continuing to point towards a preference for downside protection. The turbulence is steadily eroding confidence in the durability of the US economic outlook.
