Dollar edges higher ahead of key data releases
The US dollar staged a modest rebound on Tuesday, as investors digested a mixed batch of economic data, offering fresh clues on the Federal Reserve’s (Fed) monetary policy trajectory. While the bounce lifted the greenback from a six-week low, persistent concerns over economic growth and ongoing trade tensions continued to cap gains—particularly as President Trump announced a doubling of tariffs on steel and aluminium, from 25% to 50%.
On the labour front, job openings in April—as measured by the JOLTs survey—unexpectedly rose to 7.39 million, beating forecasts and March’s revised figure of 7.2 million, reaffirming resilience in the jobs market. However, factory orders posted a steep decline of 3.7%, pointing to weakness in the manufacturing sector and raising fresh questions about the broader economic outlook. All eyes now turn to today’s ADP employment report and ISM services PMI, which will set the tone ahead of Friday’s pivotal non-farm payrolls release—critical in shaping expectations for Fed policy and, in turn, the dollar’s direction.
In the near term, dollar movements remain closely tied to shifting Fed expectations. Despite mounting calls for rate cuts, policymakers have so far indicated a preference to hold steady. Trade tensions further muddy the waters, with the OECD cutting its US growth forecast to 1.6% for 2025 and 1.5% for 2026, citing heightened global uncertainty.
Beyond these short-term drivers, there is a growing focus on the longer-term challenges facing the dollar. De-dollarisation concerns are mounting, not least due to Trump’s proposed “revenge tax”—Section 899—which introduces yet another deterrent for foreign investors, undermining confidence in US assets, including Treasuries.
Volatile trade policies and deteriorating fiscal conditions have already raised questions over the sustainability of dollar-denominated holdings, prompting international institutions to reassess their exposure. Should foreign investors view US assets as increasingly risky, capital flows may continue to shift away from the dollar, exacerbating its longer-term structural headwinds.
Euro pressured by soft inflation ahead of ECB meeting
The euro came under pressure on Tuesday, weighed down by weaker-than-expected inflation figures and stronger US data, both of which highlighted near-term headwinds for the single currency. A downgraded global growth outlook from the OECD, coupled with growing political uncertainty in the Netherlands, also contributed to cautious sentiment. Meanwhile, trade tensions remained front and centre, with the US pushing for final offers in negotiations by Wednesday—mere days after floating fresh tariff threats.
Ahead of Thursday’s European Central Bank (ECB) meeting, inflation data from the euro area lent further support to the case for an imminent rate cut. Services inflation dropped to 3.2% from 4%, while core inflation fell sharply to 2.3% and headline inflation eased to 1.9% in May—all suggesting that price pressures are now likely to undershoot the ECB’s target. This has cemented market expectations for a 25 basis point cut in the deposit rate, bringing it down to 2%. While this weighed on the euro in the short term, the impact could prove temporary.
So far, trade-related uncertainties have had only a limited effect on Eurozone growth. Declining global commodity prices and recent euro strength against the dollar have helped to temper inflation. With price pressures easing, the ECB’s focus is increasingly shifting toward bolstering growth—potentially creating a more supportive environment for the euro in the medium term.
Furthermore, in an environment of rising FX volatility, the euro remains well-positioned as a viable alternative to the dollar. Over recent months, it has benefited from this status, and that trend may continue. In the short term, holding above $1.1285 will be crucial to enable a possible retest of the $1.16 level this summer. But many investors are already looking past near-term noise, positioning for a longer-term appreciation in the euro, with $1.20 seen as a credible target by year-end.
Pound slips following dovish rhetoric from the BoE
Sterling slipped against major currencies on Tuesday, erasing early-week gains. Even against the US dollar—recently one of the weaker performers among the majors—the pound faltered, with GBP/USD briefly dipping below the $1.35 threshold before staging a modest recovery.
With few fresh developments on the trade front—a factor that has recently weighed on the dollar—strong US labour data and an equity market rally supported renewed demand for the greenback, leaving sterling on the back foot.
The pound’s decline was further exacerbated by dovish signals from the Bank of England. In testimony before the Treasury Committee, Governor Andrew Bailey, Deputy Governor Sarah Breeden, and policymakers Catherine Mann and Swati Dhingra offered cautious assessments of the outlook. Their comments reinforced expectations of further rate cuts, though with an increasing degree of uncertainty driven by global market volatility—much of it stemming from US trade policy unpredictability. Markets are now pricing in a 62% chance of a second rate cut by the end of the year.
Bearish sentiment was compounded by the resurfacing of Mann’s previous remarks on quantitative tightening. She warned that continued bond sales could hamper growth by keeping long-dated yields elevated, potentially conflicting with any attempt to loosen monetary policy through rate cuts. The market interpreted the messaging as firmly dovish—yields fell, and the pound followed suit.
