UK Retail Sales Surge Highlights Consumer Resilience

Sterling has broken through a three-year high against the US dollar, on track for its strongest weekly performance in six, buoyed by a softer dollar and a raft of upbeat UK data. Retail sales, released this morning, exceeded expectations—another indication that British consumers remain resilient despite higher living costs and ongoing global trade tensions.

UK retail sales rose by 1.2% in April, marking the fourth consecutive monthly gain and capping the strongest quarter for the retail sector since 2021. The improvement has been driven by warmer weather and a modest uptick in consumer sentiment. Indeed, GfK’s latest figures show consumer confidence edged up in May, with its index rising three points to -20.

Elsewhere, UK public sector borrowing reached £20.2 billion, surpassing forecasts, although earlier months were revised down. At the same time, 30-year gilt yields breached 5.50%, reflecting broader turbulence in global bond markets, notably in the US and Japan. The rise in yields presents a growing challenge for Chancellor Rachel Reeves, with average borrowing costs since the Autumn Statement now at 5.15%—55 basis points higher than in the previous six months. Should volatility in bond markets persist, Reeves could come under increasing pressure, particularly if fiscal data continues to disappoint.

Nonetheless, several factors continue to support sterling: improving trade ties with the US and EU, a run of positive economic surprises, stubbornly high inflation that is keeping the Bank of England on a less dovish path, and a broader de-dollarisation trend. The options market reflects growing optimism over sterling’s longer-term prospects, with hedge funds steadily increasing their long positions since January. Rising demand from institutional investors suggests further upside potential—especially if asset managers begin to overweight the pound in the months ahead.

That said, sterling’s gains against the euro remain constrained, with EUR/GBP hovering around the €1.19 mark and still down over 1.5% year-to-date. However, with the UK economy showing resilience and avoiding recession, and with the BoE maintaining a comparatively hawkish stance, sterling remains well-supported. Its renewed role in diversification strategies and the ongoing G10 de-dollarisation theme continue to underpin bullish sentiment toward the pound.

Focus Shifts to Fiscal Policy

This week, two major developments drew market attention: a disappointing US bond auction and the House Republicans' approval of what they have dubbed the “Big, Beautiful Tax Bill.”

First, the US Treasury conducted a routine auction of $16 billion in new 20-year bonds. Normally unremarkable, this auction unsettled investors amid concerns about the mounting uncertainty in US economic policy—particularly the market's ability to absorb the refinancing of nearly $3 trillion in debt maturing in 2025, much of it short-dated. Their apprehension may be warranted: the auction produced a yield of 5.05% on the 20-year note, a notable rise from the 4.6% average of the previous five auctions. While 20-year bonds are generally less liquid than other maturities, the subdued demand triggered alarm across financial markets. But does this signal deeper trouble for the world’s largest debt market?

To contextualise, a significant share of the US government’s maturing debt is short-term. Since 2000, securities with less than one year to maturity have consistently accounted for 25% to 40% of the total. When combined with 1- to 5-year notes, short- and medium-term debt represents approximately 70% of the total structure.

Compounding matters, the weak auction coincides with rising investor anxiety over a Republican-led Congress advancing a tax package that could add an estimated $3.3 trillion to the national debt by 2034. Historically, the US federal deficit has averaged 3.4% of nominal GDP. However, widening deficits in a high-interest-rate environment prompt legitimate concerns about long-term fiscal sustainability.

Despite this, the newly passed tax bill, which is expected to contribute around $380 billion annually to the deficit, includes a baseline 10% tariff that could partially offset the fiscal gap. Tariffs have become a durable fixture of US trade policy, and their associated revenues are increasingly integral to the country’s fiscal outlook. According to the Congressional Budget Office (CBO), current tariff regimes are projected to generate approximately $2.7 trillion between 2026 and 2035. Even allowing for potential economic headwinds, tariff income could still reach around $2.3 trillion over that period.

As fiscal policy becomes clearer, the uncertainty premium embedded in long-term yields may begin to diminish, potentially calming markets. Indeed, the US dollar index regained some momentum ahead of the weekend, rebounding from a weekly low of 99.3. Still, the dollar is set for its largest weekly drop in six and continues to struggle to reclaim the key 100 threshold.

Euro Shrugs Off Weak PMI Figures

EUR/USD largely shrugged off an intraday decline of nearly 0.4% following a series of underwhelming PMI releases across key Eurozone economies, including France, Germany, and the broader bloc. The Eurozone Composite PMI slipped from 50.4 to 49.5 in May, driven primarily by a downturn in the services sector. While manufacturing has remained sluggish, the once-resilient services industry has now also entered contractionary territory.

Adding to the bearish mood were minutes from the ECB’s April meeting, which highlighted policymakers’ growing concerns over the region’s subdued economic outlook. The tone indicated that a dovish policy stance is likely to persist, especially against a backdrop of easing inflation. Taken together, these developments reinforce the narrative of a faltering Eurozone economy weighed down by uncertainty. Nevertheless, EUR/USD clawed back some losses by the day’s end, reflecting ongoing market belief that the euro retains a relative advantage over the dollar for now.

Supporting the euro’s rebound may have been the European Union’s proactive move to de-escalate trade tensions with the US, as it submitted a revised trade proposal to the White House. While we maintain a constructive outlook on EUR/USD—still trading above both short- and long-term moving averages—any sustained recovery will likely depend on stronger hard data and greater clarity on trade relations.

Dollar’s Slide Deepens Amid Mounting Fiscal Concerns

The US dollar index (DXY) extended its losing streak for a third consecutive session on Wednesday, falling to 99.7. A combination of Moody’s downgrade and the lukewarm reception to a proposed tax cut bill in Congress has reignited “Liz Truss-style” fears surrounding the US fiscal outlook, pushing long-term yields higher. In addition, a relatively quiet week for economic data has only amplified the bearish tone, with traders jumping on the downward momentum to avoid being left behind—further reinforcing selling pressure.

While a recent surge in oil prices—driven by escalating conflict in the Middle East—boosted traditional safe-haven assets such as gold (up nearly 4% week-to-date), the US dollar failed to benefit. This divergence underlines the current trend of sustained dollar weakness, with most major currency pairs now retracing to levels seen prior to last week’s US-China trade détente.

Without a meaningful restoration of investor confidence in the US outlook, a strong rebound in the dollar appears unlikely in the near term. A key catalyst would be clearer policy direction; recent trade agreements remain temporary and loosely defined, and are vulnerable to reversal by the US administration. With critical dates looming—9 July for the broader tariff package and 12 August for China-specific measures—continued policy uncertainty is weighing heavily on market sentiment.

Meanwhile, across the Atlantic, improving relations between the UK and EU are contributing to a broader risk-on rally. Eurozone equities are up around 10% so far this month, buoyed by renewed optimism following the recent EU-UK summit, which focused on the potential for a security and defence pact. This builds on earlier momentum fuelled by Germany’s fiscal stimulus, which has notably supported the region’s markets.

As a result, the dollar faces a dual pressure: the “Sell America” trend—driven by domestic policy and fiscal instability—and a growing global risk appetite. Even under normal market conditions, the latter tends to weigh on the dollar as investors rotate into higher-beta assets abroad.

Euro Gains Momentum

The euro has risen 1.5% against the dollar this week, fuelled primarily by a deteriorating US economic outlook. However, sentiment has also been buoyed by the outcome of the EU-UK summit, which, while limited in substance, delivered a symbolically significant boost to the common currency. This week’s agreement likely centres on sector-specific arrangements, but the optics suggest a renewed alignment between the two economies.

Within the broader “Sell America” narrative, this transatlantic cooperation is seen as a counterbalance to US-driven fragmentation. It has supported euro-area assets and helped propel the euro beyond its 21-day moving average, with the currency now eyeing a potential 10% gain year-to-date.

Further upside for the euro would benefit from stronger domestic momentum—particularly improved growth prospects in both the eurozone and the UK. This would help reduce reliance on dollar weakness and provide a more durable appreciation trajectory. However, a more significant and formal de-escalation of US-EU trade tensions may be required for the euro to break substantially higher. The region’s macroeconomic backdrop remains soft, and the European Central Bank has yet to adopt a convincingly less dovish stance.

Market attention is now turning to today’s PMI releases for Europe, along with the German IFO business climate index. Consensus expectations point to gains across services, manufacturing, and composite indicators in May—momentum that could further underpin the bullish narrative.

Sterling Struggles Against Euro Despite Dollar Weakness

UK inflation data surprised to the upside yesterday, prompting a brief spike in sterling as markets pared back expectations of Bank of England rate cuts this year. However, despite rate differentials that would typically favour sterling, GBP/EUR is down 0.4% this week. GBP/USD has climbed more than 1%, but this is largely a function of broader dollar weakness amid deepening US fiscal concerns.

Indeed, sterling has lost ground against most G10 currencies this week, reflecting idiosyncratic weakness in the pound. It briefly hit a new three-year high against the dollar near $1.35 yesterday but failed to break through—a level it has struggled to surpass for a record stretch. Nevertheless, with the “Sell America” trade back in focus, characterised by widespread aversion to US bonds and the dollar, a break above $1.35 may be only a matter of time.

From a technical standpoint, momentum indicators remain positive. A breakout from a short-term consolidation phase and a close back above the 21-day moving average suggest scope for further gains. However, as investors pivot away from US assets, European alternatives—including the euro—are becoming increasingly attractive, capping sterling’s upside around the €1.18 mark.

A growing concern is that the UK may be slipping into a stagflationary environment, with inflation remaining elevated while growth slows. Today’s flash PMI data will offer valuable forward-looking insight into economic health. Last month’s sharp drop in the UK composite PMI into contraction territory raised alarms, and a continuation of that trend would further weigh on sterling across the board.

That said, with sentiment towards the dollar still firmly negative due to US fiscal woes, GBP/USD is expected to remain well-supported in the short term.

Sterling Surges to Three-Year High Amid Repricing of BoE Outlook

The British pound is firmly in the spotlight this morning, having surged to a fresh three-year high against the US dollar. A stronger-than-expected UK inflation print has led money markets to pare back expectations for Bank of England rate cuts in 2025, fuelling a sharp rise in UK gilt yields and lifting sterling.

Meanwhile, the US dollar remains under pressure as renewed fiscal concerns prompt a revival of the “sell America” trade.

A Case for Trumponomics?

Trumponomics is built on three core pillars: trade, taxation, and deregulation. Rather than acting in isolation, these elements are intended to operate synergistically, forming a cohesive policy framework.

Speaking at the Milken Conference, Scott Bessent suggested that the US administration is targeting a reduction in the fiscal deficit of around 100 basis points annually. Recognising that slashing $1 trillion in a single year could shock GDP by as much as 3%, policymakers are pursuing a more gradual path—aiming for a fiscal deficit of 3.5% of nominal GDP, while maintaining growth close to 3% within a year.

A key tenet of the strategy is to re-privatise the economy. Bessent advocates cutting government expenditure and reducing the public-sector headcount, arguing that deregulation—particularly within the banking sector—could empower community lenders, thereby stimulating local economic growth. By relaxing constraints, these smaller institutions would be better positioned to extend credit, fostering entrepreneurship and bolstering regional resilience.

On the trade front, the administration is taking a dual approach: broadening global market access while simultaneously reshoring critical manufacturing. Sectors such as pharmaceuticals, semiconductors, and steel—considered vital for national security—are at the heart of this strategy. By bringing production back to US soil, policymakers hope to enhance supply chain resilience and rebalance the economy.

At the same conference, the US Treasury Secretary argued that reducing the deficit could, in time, eliminate credit risk in US Treasuries—allowing interest rates to fall naturally. While this vision is attractive, the execution presents clear challenges. Fiscal tightening could temper short-term growth, and any misstep could erode market confidence, increasing volatility.

Despite having weathered major disruptions in recent decades—from the global financial crisis to pandemic-driven inflation—there is no guarantee that the current path will be smooth. Investors remain focused on trade policy, aware that tariffs and supply chain realignments could prove disruptive in the near term, even if beneficial over the long run. Concerns over stagflation, a weakening economy, and housing market vulnerabilities continue to mount. Ultimately, the success of Trumponomics hinges on the careful calibration of fiscal restraint, deregulation, and strategic trade policy.

Euro Breaks Higher on Renewed Dollar Weakness

The euro has reclaimed ground, climbing back above its 21-day moving average—an indicator we’ve been watching for several sessions—as the EUR/USD uptrend appears set to resume following a month-long consolidation that saw the pair retreat from $1.16 to $1.11.

Much of the euro’s strength stems from renewed US dollar weakness, with the EUR/USD historically exhibiting a beta of 0.88 to broad dollar moves. However, domestic factors in the Eurozone are also playing a role.

Data released yesterday showed the Euro Area’s current account surplus widened significantly to a record €60.1 billion in March, up from €37.7 billion a year earlier. Goods exports contributed the most, with the surplus rising to €51.9 billion, potentially reflecting efforts to front-run anticipated US tariffs. The services surplus also increased, reaching €12 billion.

Meanwhile, Euro Area consumer sentiment improved more than expected in May, though it remains well below historical norms. Despite market pricing for more aggressive easing by the European Central Bank relative to the Federal Reserve, euro bulls remain undeterred. Several hedge funds are now targeting a move beyond $1.20 as they re-establish short-dollar positions.

Structural headwinds for the dollar, combined with Europe’s relatively stronger cyclical outlook underpinned by fiscal stimulus, support a constructive medium-term view on EUR/USD. That said, the pace of gains is likely to be more measured than the earlier surge that lifted the pair by roughly 10% year-to-date.

Pound Rallies as Inflation Shocks to the Upside

Sterling has climbed to its highest level against the US dollar since February 2022, buoyed in part by dollar weakness following Moody’s downgrade of US credit. However, the move has also been driven by hotter-than-expected UK inflation data.

Headline inflation rose to 3.5% in April, up from 2.6% in March, primarily due to higher energy and transport costs. Core inflation accelerated to 3.8% year-on-year, above expectations of 3.6%, while services inflation—a key metric for the Bank of England—surged to 5.4%, well above the 4.8% forecast.

This unexpected jump has prompted markets to scale back their expectations for BoE rate cuts in 2025 by around 10 basis points. BoE Chief Economist Huw Pill recently cautioned that monetary easing may be proceeding too quickly, noting signs that inflation’s downward momentum is “stuttering”. The April spike had been anticipated, with contributing factors including Ofgem’s energy price cap hike, increased water bills, and rising employer national insurance contributions.

Yet it is the persistent strength in services inflation that has most significantly shifted market sentiment, pushing front-end gilt yields higher and further supporting sterling.

GBP/USD is now trading in the upper half of the $1.34–$1.35 range for the first time in three years. The pair has moved back above key daily moving averages and is now roughly 11% higher year-to-date. Notably, for the first time since the global financial crisis, options markets no longer exhibit a long-term bearish bias towards the pound.

However, given the concurrent rally in EUR/USD, sterling’s performance against the euro has been subdued—flat on the week, with no meaningful gains.

The ‘Sell America’ Undercurrent

Following Moody’s downgrade of US sovereign debt from AAA to AA1 late on Friday, long-term Treasury yields surged towards the symbolic 5% level—a clear signal that investors are now demanding a higher risk premium for holding US government bonds. Despite the rise in yields, the US dollar weakened broadly, underscoring growing concerns over fiscal sustainability and confidence in US assets.

This episode contrasts sharply with the 2011 downgrade by S&P during the so-called “fiscal cliff” crisis. Back then, inflation was subdued, and Treasuries remained the world’s ultimate safe haven. Today, the landscape is markedly different: inflation remains stubbornly high, policy direction appears erratic, and even US equity markets are flashing warning signs on valuations.

Indeed, for the first time in nearly a quarter of a century, the earnings yield on equities has fallen below the 10-year Treasury yield. Investors are accepting less compensation for holding riskier assets—an inversion of the typical relationship—suggesting US equities may be overvalued and under-compensating relative to bonds.

However, bonds offer little comfort either. The recent rise in yields has been driven largely by the term premium, the extra return investors demand to hold longer-dated debt in uncertain conditions. This is not a bullish signal; rather, it indicates that Treasuries themselves are being perceived as increasingly risky.

In essence, equities look overpriced, bonds look volatile, and the dollar has taken a hit—dropping nearly 1% since the downgrade, with weakness visible against most major currencies.

The broader message is clear: risk appetite for US assets is deteriorating. This is the essence of the growing “Sell America” narrative. While near-term dollar strength may persist due to interest rate differentials, the medium-term outlook appears softer.

Looking ahead, Moody’s downgrade is likely to dominate market discussions this week. Scheduled US economic data—including jobless claims and PMIs—are unlikely to move the needle materially. However, if trade talks continue to make headway and global openness to trade remains intact, positive surprises in data could quietly support a dollar rebound later this year.

Euro Strengthens as Confidence Builds

The euro edged higher towards $1.13 on Monday, extending its recovery from recent one-month lows, bolstered by broad-based dollar weakness following Moody’s downgrade of US credit. ECB President Christine Lagarde supported this momentum, framing a stronger euro not as a threat but as an “opportunity”, attributing the currency’s rise to shifts in global capital flows and waning confidence in US policy direction.

Her comments struck a chord with investors. Long-dated euro call options are gaining traction, and one-year risk reversals have risen above shorter-dated equivalents—an indication that markets view the euro’s recent rebound as more than a temporary bounce.

Technically, the EUR/USD pair still needs to decisively clear its 21-day moving average to confirm the uptrend. However, its first close above the 55-month moving average since 2021 signals growing conviction in the currency’s outlook. The missing catalyst for a push towards $1.20 may not be headline-driven, but instead lie in steady reserve diversification, policy credibility, and the ECB’s relative stability.

On the data front, attention today turns to Eurozone consumer confidence figures, expected to show the first improvement in three months—potentially adding another tailwind to sentiment.

Sterling Rises, But Political Shift Unlikely to Be a Game-Changer

The pound climbed towards $1.34 on Monday, approaching a seven-month high, buoyed by both encouraging UK data and a modest political breakthrough in UK-EU relations. While the GBP/EUR cross remains broadly unchanged just below the €1.19 level, sterling is still up around 1% for the month and trading above long-term average rates.