Dollar outlook murky as trade policies and legislative risks loom

The US dollar's brief rally following the Federal Trade Court’s decision to strike down Trump-era tariffs quickly lost steam after a federal appeals court suspended the ruling until 9 June, leaving the tariffs in place for now. Investors then shifted their attention to Section 899 of the so-called “One Big, Beautiful Bill,” a reminder that US policy uncertainty continues to cloud the economic landscape.

Alongside rising tensions with China, this legislative proposal could present fresh challenges for the dollar. If approved by the Senate, Section 899 would allow Washington to impose taxes on investors and firms from countries that apply what the US deems to be discriminatory tax measures – for instance, digital services taxes or frameworks aimed at curbing low-taxed profits. In practice, this could act as a form of capital restriction, at a time when overseas appetite for US assets is already fragile. If enacted, the policy could erode foreign investors’ returns, potentially accelerating the retreat from US markets – further straining the dollar, already vulnerable due to unpredictable trade manoeuvres and deteriorating public finances.

Nevertheless, the final version of the bill remains uncertain. It has yet to pass the Senate, and crucial questions are still unresolved. It’s unclear, for example, whether income from US government bonds would be excluded. Moreover, the measure appears focused on Western allies like the UK, Canada, Australia, and the EU, while notably leaving out key reserve-holding nations in the Middle East and Asia.

Market sentiment towards the dollar is already cautious, and further downside may be limited in the near term. While traders continue to track developments in trade policy, fiscal direction, and international negotiations, much of the pessimism appears to be accounted for. The dollar’s near-term trajectory will likely hinge on upcoming tariff-related court decisions and a series of key economic releases. Of particular interest is Friday’s May employment report, which will be scrutinised for any signs of how Liberation Day may have influenced job creation, and whether spending cutbacks linked to the DOGE programme are beginning to affect federal hiring.

ECB expected to ease rates as inflation cools

Attention is turning to the European Central Bank’s (ECB) meeting on Thursday, with recent shifts in trade dynamics and tariff-related developments slightly raising the chances of the ECB holding rates steady. Nonetheless, a notable downward revision in inflation forecasts and a faster-than-anticipated drop in headline inflation below the 2% threshold are strengthening the case for a 25 basis-point rate reduction. Ongoing inflation concerns continue to cast a shadow over the economic outlook, further supporting the argument for monetary loosening.

Inflation figures for the euro area, due on Tuesday, are anticipated to show a fall in headline inflation to 2.0% for May. This decline is being attributed to softer energy prices and a reversal of the core inflation spike observed last month, which had been distorted by seasonal holiday and travel expenses linked to Easter. With core inflation likely settling back to around 2.5%, ECB policymakers may see this as an additional reason to lower rates. Such a move could weaken the euro, although the overall effect will depend on how decisively investors anticipate further changes to ECB policy.

A more dovish stance from the ECB, when coupled with easing tensions in global trade and the resolution of recent legal uncertainties, could weigh on the euro against the dollar in the short run. Even so, EUR/USD has climbed back above its 21-day moving average, which has begun to turn upward, hinting that bullish momentum might be returning. Option markets and trader positioning continue to show a preference for euro strength, though near-term fluctuations remain a significant consideration.

Sterling softens as investors weigh outlook and global risks

The pound slipped to $1.35, pulling back from its recent peak of $1.3593 reached on 26 May, as markets reconsidered the UK’s growth prospects and shifting trade conditions. Similarly, GBP/EUR retreated from just below €1.20, with some investors rotating back into the euro in response to heightened global trade tensions and increased currency market swings.

A series of weaker-than-expected US economic indicators, including a first-quarter contraction and rising jobless claims, has led to growing expectations of two interest rate reductions by the Federal Reserve before early 2026. This has created a potentially supportive environment for sterling against the dollar. Still, wider global uncertainty and specific challenges facing the UK economy continue to shape near-term currency movements. The Bank of England remains cautious, guided by solid April retail figures, a rebound in consumer sentiment in May, and persistently high inflation.

Markets currently expect around 54 basis points of rate reductions from the Bank of England over the next year, slightly less than the 60 basis points projected for the European Central Bank. This maintains a roughly 200 basis point advantage in favour of UK rates. With risk appetite stabilising, GBP/EUR has settled at levels in line with interest rate differentials and market volatility indicators, though there may still be room for further gains.

Having posted gains for four straight months, the pound could push higher, especially if investors keep reducing their exposure to the dollar in response to ongoing policy uncertainty in the US. A rise toward $1.3750-$1.40 in the second half of 2025 remains a possibility, provided economic conditions move in the right direction.

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.

Court setback for Trump sparks market rally but uncertainty lingers

Overnight developments in the United States saw a major judicial decision that has cast fresh doubt over former President Trump's trade policy legacy. The US Court of International Trade declared his tariff measures unlawful, undercutting the legal foundation upon which they were introduced. The court ruled that the emergency legislation used to implement the levies did not provide carte blanche powers, instead reaffirming that the authority to set trade policy rests firmly with Congress.

Financial markets reacted quickly. Both US stock futures and the dollar rose sharply, as investors anticipated a rollback of the tariffs. Such a move could ease global economic pressures and support growth. The court has demanded further clarification within 10 days, although any hints about the administration’s next steps may appear sooner via Trump's posts on social media.

Adding fuel to the dollar’s rally was a broader uplift in US equities. Interestingly, in more typical “risk-on” scenarios, the dollar often retreats as funds flow into higher-risk assets. This time, however, the simultaneous rise in both equities and the dollar appears to reflect a wave of cautious optimism. With limited appealing alternatives and hesitancy to withdraw from pricey American holdings, investors are grasping at any positive signal. As a result, both the S&P 500 and the dollar have moved higher together. While the equity surge tapered off midweek, the court decision helped the S&P 500 regain nearly 2%.

On the macroeconomic front, recent figures point to continued resilience. Markets appear to be tentatively positioning for a return to more stable conditions. Initial optimism was sparked by trade discussions involving the UK and China, briefly dampened by a credit downgrade and the launch of the so-called “Big, Beautiful Bill”, but momentum has resumed with fresh negotiations involving the European Union.

Nonetheless, caution remains the order of the day. The Trump team has confirmed their intention to appeal the court’s decision. Unless the appeals court permits the tariffs to remain in place during the process, they will be permanently halted. Traders are also eyeing a flurry of economic releases from the United States, which could offer further clues on the dollar’s trajectory. These include GDP data, weekly jobless claims, personal income figures, and two closely watched sentiment indicators: the MNI Chicago Business Barometer and the University of Michigan Consumer Sentiment Index, both due on Friday.

Confidence in the euro persists despite underlying fragilities

The eurozone remains weighed down by persistent structural inefficiencies, including sluggish productivity growth, relatively underdeveloped capital markets and a more constrained capacity for debt issuance. Yet, despite these long-standing issues, many investors continue to view the euro as a more dependable option compared to the dollar.

This continued confidence may prove difficult to sustain if market participants begin to focus more closely on the currency bloc’s deeper vulnerabilities. A shift in sentiment could prompt a reassessment of the current bullish positioning on the euro.

In April, consumer inflation expectations across the euro area rose for a second month in a row, with households anticipating price increases of around 3.1% over the next year. While this may suggest growing inflationary pressures, we advise against placing too much weight on these forecasts. A broader reading of the economic landscape points to subdued price growth ahead, as lacklustre demand and weak productivity trends are likely to keep inflation nearer the European Central Bank’s 2% objective.

Meanwhile, expectations remain firm that the ECB will lower interest rates by 25 basis points at its next meeting on 5 June. A further reduction in the final quarter of the year is also increasingly seen as probable.

Sterling resilience persists despite dollar-driven retreat

Following the US court decision declaring former President Trump’s tariffs unlawful, the pound has surrendered part of its recent gains against the dollar. GBP/USD, which had climbed to $1.3587 at interbank, slipped towards the $1.34 mark this week. Although the greenback’s rebound has gathered pace, legal ambiguity surrounding the ruling may heighten, potentially renewing investor appetite for non-dollar assets as concerns over political instability in the United States grow.

Recent trading patterns highlight just how influential developments across the Atlantic can be for global financial markets and currency movements. While sterling tends to be less reactive to fluctuations in the dollar compared with some of its G10 counterparts, it remains far from immune. Even so, sentiment towards the pound has grown increasingly positive. This has largely been fuelled by factors unique to the UK, including stronger-than-expected trade activity, a resilient economic backdrop, and a Bank of England that continues to signal a firmer stance on interest rates.

These factors have helped lift the pound against more than 70% of its global trading peers so far this year. Against the euro, for example, sterling is currently up 1.5% this month and appears to be on track to challenge the €1.20 level, supported in large part by widening rate differentials in its favour.

Looking at the broader trend, the outlook for GBP/USD appears constructive. The pair is on track to post its fourth straight monthly gain, reflecting sustained momentum. With investors continuing to scale back their exposure to dollar-linked assets as US policy uncertainty drags on, a move towards $1.3750-$1.40 range later this year seems increasingly within reach.

Sterling’s rise driven by more than dollar weakness

Sterling’s nearly 8% rally against the US dollar this year is not simply the result of a weaker greenback. Compared to other major currencies, the pound has shown less sensitivity to dollar movements, suggesting a more independent and resilient path.

Optimism around the pound has grown, underpinned by strong UK data, trade progress, and the Bank of England’s firm approach to rates. April’s solid retail figures, improved consumer confidence in May, and stubbornly high inflation have supported sterling, particularly as the Eurozone moves in the opposite direction. As a result, the BoE is expected to cut rates slightly less than the ECB in the year ahead.

Global trends, such as reduced reliance on the dollar, have also helped lift the pound. But domestic momentum has been key, with the UK Economic Surprise Index at its highest in almost a year.

In contrast, the US outlook is darkening. Fed officials continue to strike a cautious tone, awaiting more clarity on tariffs and inflation. Business confidence is weakening, as seen in falling durable goods orders—especially in aircraft.

Meanwhile, President Trump’s on-again, off-again tariff actions are adding to market uncertainty. While the pattern is becoming more predictable, it does little to reassure investors already uneasy about US fiscal sustainability and the dollar’s role as the world’s primary reserve currency.

Euro gains ground as dollar loses momentum

The euro has been climbing steadily, with EUR/USD up nearly 10% since the beginning of the year. This strength largely reflects growing concerns over the US economic outlook. Notably, the euro is rising despite geopolitical uncertainty—particularly the erratic nature of US tariff policy—that would have previously dragged it lower.

Instead of acting as a risk-off casualty, the euro is increasingly viewed as a safe alternative when confidence in the dollar wanes. Even when tariff developments offer little direct benefit to Europe, they continue to push investors towards the single currency.

Focus now shifts to eurozone inflation data due on Friday. Deflation risks persist across the bloc, with most analysts pointing to subdued demand as the main driver. Falling oil prices and the euro’s recent strength are adding to the downward pressure on prices. France’s modest 0.7% annual inflation reading for May may offer an early glimpse of the broader regional trend.