Dollar lifts as China–US trade pact gains traction

The US Dollar has emerged as the strongest performer among G10 currencies so far this week, driven by renewed optimism over trade discussions between Washington and Beijing.

Officials from both nations have settled on a plan to implement the agreement reached in Geneva this past May. The arrangement is intended to restart the exchange of sensitive goods that had been largely stalled.

Under the terms of the new plan, China will accelerate deliveries of rare earth elements, while the United States is expected to ease certain export restrictions on advanced technologies. Final approval of the framework still hinges on the endorsement of Presidents Donald Trump and Xi Jinping.

“We can now start working towards productive trade and growth,” commented US Commerce Secretary Howard Lutnick, following meetings with Chinese representatives in London.

The Geneva deal was initially seen as a clear sign that the worst of the trade tensions had passed, offering support to the Dollar. However, momentum faded when both countries hesitated to commit to essential elements of the accord.

Despite those earlier setbacks, the current signs of progress have boosted the Dollar, with GBP/USD easing back to 1.3473 after touching 1.3616 the previous week.

Investors are likely to welcome the London developments, potentially easing some of the heavily negative sentiment that has built up around the US currency in recent months.

Still, markets are expected to remain wary, given the number of prior breakdowns in negotiations. While the immediate outlook may appear more stable, the longer-term trajectory for the Dollar remains uncertain, with sterling potentially regaining ground as underlying weakness in the Greenback persists.

Euro drifts as momentum fades and uncertainty lingers

The euro has found it difficult to gain meaningful ground above the $1.14 mark, with the currency pair slipping back into the $1.13 range over the course of the week. Without a fresh driver from either trade developments or economic data, the euro looks set to stay confined within a narrow range for now.

Looking ahead to the end of the week, the balance of macroeconomic influences appears slightly tilted towards the downside, and the euro may well end the week still trading below $1.14. One factor that could help shift momentum in the euro’s favour is the ongoing uncertainty surrounding the US-China trade deal. Although both sides have outlined a provisional framework, no follow-up meetings are on the calendar, and the plan still requires approval from Presidents Trump and Xi. As a result, markets remain hesitant to commit in either direction.

On the economic data side, had last week’s US employment figures fallen short of expectations, today’s stronger-than-anticipated inflation data might have provided a clearer boost for the euro. Instead, the inflation surprise may now be interpreted as a signal of resilience in the US economy, rather than evidence of stagflationary pressures.

Attention will soon shift to inflation readings from Spain, France and Germany, due on Friday. If those numbers disappoint, it could further reinforce concerns about weak price growth in the eurozone, adding to speculation about future interest rate cuts by the European Central Bank.

So far this month, the euro has risen a little over 2% against the dollar, but the pace of gains has slowed sharply compared to the double-digit increase seen over the year to date. This suggests that recent strength has been largely driven by shifting sentiment towards the US, rather than strong independent demand for the euro itself. With US data still offering a mixed picture and no major deterioration in sight, appetite for betting against the dollar may remain subdued.

Sterling loses ground as rate cut bets gain traction

After dipping on the back of disappointing UK employment figures, the pound managed a modest rebound from its 21-day moving average, suggesting that the broader short-term upward trend is still intact for now. Even so, currency options markets show traders growing more cautious about sterling’s prospects. Following last week’s peak near $1.3616 — the highest in three years — GBP/USD has been on the back foot, with the mid-$1.34 range once again acting as a critical level of support.

Sterling appeared set for its sharpest daily decline against the dollar in nearly a month after the latest jobs report revealed the largest drop in employment since 2019. Alongside a slowdown in wage growth, the data has strengthened expectations of a rate cut in August, with markets increasingly factoring in a second reduction before year-end. This has pulled UK government bond yields lower, putting renewed pressure on the pound across major currency pairs.

Weaker rate expectations and sliding gilt yields have taken some of the shine off the pound, which also fell to its lowest level against the euro in nearly a month. Traders are now watching support near the 50-day moving average, just below €1.18.

Still, sterling’s downside may be cushioned by its relatively high yield compared to other major currencies. With demand for carry trades on the rise — especially as global risk appetite improves and volatility subsides amid tentative progress in trade talks — the pound could remain supported even as interest rate expectations shift.