Market shifts weigh on euro while sterling clings to modest gains

After a short-lived lift driven by speculation about a potential change in leadership at the US Federal Reserve, the euro-dollar exchange rate has stabilised in the low $1.16 range. A steady stream of stronger-than-anticipated economic indicators from the United States has eroded the eurozone’s relative performance advantage. With US data continuing to outperform, expectations for Federal Reserve interest rate cuts this year have diminished, prompting a rise in US yields and renewed strength in the dollar. This has contributed to a 2.3% decline in EUR/USD from its recent high.

Limited eurozone influence on FX movements

At present, domestic eurozone developments are having only a muted effect on currency movements. While tensions in France may re-emerge later this year and cause short-term volatility, they have not yet had any meaningful impact on the foreign exchange landscape. Broader EU matters remain similarly subdued. For example, the European Commission’s push to raise the EU budget by €2 trillion has already encountered stiff resistance from Germany, setting the stage for a lengthy and difficult negotiation process. President Ursula von der Leyen aims to achieve unanimous approval by 2027, but the road ahead is expected to be slow-moving and contentious.

Although deeper fiscal unification could carry long-term consequences for the euro’s valuation, those effects remain distant. The currency continues to face structural challenges, most notably a persistent gap in productivity growth compared to the United States. These factors have kept EUR/USD’s medium-term fair value capped over the past decade.

Focus shifts to incoming US data

Looking ahead, the trajectory of EUR/USD will remain closely tied to forthcoming US economic releases. The European Central Bank’s timing on its next rate cut has become less important for the exchange rate, as the link between policy decisions and FX markets has weakened. With little momentum coming from the eurozone and the outlook for the Fed still fluid, risks for EUR/USD are tilted to the downside. A dip towards $1.15 appears more likely than a rebound to $1.17 in the near term, particularly if US inflation data surprises to the upside or policymakers take on a more hawkish tone.

Trade tensions and tariff risks add to uncertainty

Global markets are also facing a potential jolt from proposed tariff increases targeting key US trade partners such as the EU, Canada, and Japan. Although the market currently views the likelihood of implementation as low, any shift in policy could trigger a bout of risk aversion and weigh on the dollar. The possibility of retaliatory steps, particularly from the EU and Canada, has already been flagged by these partners. Such an escalation would unsettle global trade relationships and heighten investor anxiety in a market already sensitive to adverse developments.

The clustering of economic and political risks as the quarter draws to a close may pose a significant test for both the dollar and broader asset markets. While a controlled economic slowdown remains the most likely outcome in the US, a more abrupt downturn cannot be ruled out entirely. Recent data—such as strong retail spending and falling jobless claims—supports the softer narrative, but unexpected shocks could still shift sentiment.

With no major news expected from the Federal Reserve next week and a quiet European Central Bank meeting anticipated on Thursday, attention will turn to PMI figures and a packed second-quarter earnings season. Results from global giants like Google, Tesla, and Coca-Cola will be closely monitored, particularly for insights into how companies are responding to ongoing trade friction and cost pressures.

Sterling holds ground but outlook remains fragile

Turning to the UK, sterling found some relief following an upward revision to May’s payroll data, which was initially reported at a sharp loss of 109,000 jobs but has now been adjusted to a more modest decline of 25,000. While the labour market still appears soft, continued robust wage growth has eased concerns over the Bank of England taking more dovish action in the short term. This has helped lift GBP/EUR by 0.4% in the most recent session.

Nonetheless, the currency pair remains roughly 2.5% below its peak in May, with both short- and long-term moving averages signalling a downward trend. This week’s modest rise in the pound has largely been a result of the euro coming under pressure from trade headlines, rather than any sterling-specific strength. With expectations for two full 25 basis point cuts from the BoE already priced in, weak data no longer exerts the same downward pull on sterling as improvements do. Positive surprises instead prompt reappraisal of interest rate expectations, giving the pound some resilience.

However, with no major UK economic data due over the coming days, and investor sentiment still leaning dovish, the current gains in GBP/EUR may struggle to extend. The pair’s performance this week, up just 0.3% so far, could easily be unwound as new trade developments emerge, particularly those involving the euro. Without fresh catalysts to drive momentum, and with the market's rate cut outlook already saturated, GBP/EUR is likely to remain constrained below the resistance level of €1.1600.