USD: Sell-America unease resurfaces

Trade frictions linked to the US push over Greenland have reached an intensity rarely seen, with neither Washington nor Brussels signalling a willingness to compromise. Europe’s response has been notably more confrontational, closer to a hard-line trade stance, unsettling risk appetite. Equities have pulled back, high-beta currencies have underperformed and volatility has re-entered the conversation.

For the dollar, the backdrop has turned less comfortable. A cluster of US-specific risks has unsettled sentiment, including an upcoming Supreme Court ruling that could challenge the legality of existing tariffs, expectations that the next Fed chair will lean dovish, and renewed political pressure on the Federal Reserve via the Department of Justice. The dollar index has slipped back through the 98 area, breaking a previously constructive technical setup and reviving broader de-dollarisation concerns.

Rates dynamics briefly added to the pressure. A sell-off in Japanese government bonds, triggered by calls for a snap election and worries over fiscal loosening, pushed long-end yields to multi-decade highs and spilled into Treasuries. That impulse has since faded, with bonds stabilising overnight, removing a near-term headwind for the dollar. While sell-America narratives have returned, positioning is far cleaner than in 2025, making a disorderly USD unwind less likely at this stage.

GBP: Caught between euro strength and bond volatility

Sterling has traded on relative terms, weakening against the euro while gaining ground versus the dollar. Heightened trade risks between the US and Europe have weighed most heavily on GBP/EUR, where the recent decline was large by recent standards and leaves the cross sensitive to either mean reversion or a broader volatility upswing.

On the rates side, gilt yields at the long end have climbed to their highest levels in almost a month. While Japan-led global moves have played a role, heavy bond supply and sticky inflation pressures are also in focus. UK inflation data offered little surprise. Headline CPI rose to 3.4%, slightly above consensus, while core and services measures softened marginally. Market pricing for Bank of England easing remains broadly unchanged, with just over 45 basis points expected by year-end.

Sterling’s reaction has been restrained. GBP/USD has held above 1.34, while the euro-sterling move appears to be stabilising. With calmer conditions returning to rates markets, some near-term downside pressure on EUR/GBP looks plausible.

EUR: Firmer political stance lifts sentiment

The euro has emerged as a clear beneficiary of recent dollar softness, driven more by sentiment than fundamentals. The catalyst has been Europe’s assertive response to US tariff threats, including plans for sizeable countermeasures and unusually forceful rhetoric from EU leaders. In the near term, this has supported the common currency as the most liquid alternative to the dollar.

That said, the move sits uneasily with the underlying macro picture. Higher tariffs would ultimately weigh on euro area competitiveness, and markets were leaning bearish on EUR/USD prior to the latest escalation, with positioning turning negative and the pair approaching its 200-day moving average. A poorly balanced diplomatic outcome on Greenland could quickly revive those pressures.

For now, the familiar 1.15 to 1.18 range remains the reference point. Without a clearer shift towards a more accommodative Fed, sentiment-driven dollar selling alone looks insufficient to sustain a break above the top of that band.

Looking ahead

• Headlines on Greenland and any EU or US tariff announcements will remain the primary catalyst for risk sentiment and FX.

• Watch for any guidance on the Supreme Court tariff ruling timeline, with USD sensitivity likely to rise into the decision window.

• Focus on Fed chair nomination signals and any further political pressure on the Fed, given the market’s renewed reaction function.

• Monitor Japan’s long-end yields and JGB demand, with spillover into Treasuries and broader duration pricing still a key risk.

• EUR/USD is likely to stay range-bound unless the Fed turns more dovish, while GBP remains vulnerable to renewed gilt volatility and EUR-led moves in the crosses.