Dollar Gains Momentum as Month-End Nears

The US dollar index recorded its strongest daily performance since mid-May on Monday, rising by 1.3 percent against the euro. This surge was driven by easing trade tensions and a continued stream of resilient economic data. With this, the dollar looks poised to end a six-month losing streak. At the same time, equity markets remain buoyant under a “strong data equals good news” narrative, as recession fears fade and risk appetite strengthens. For the time being, the economic damage expected from tariffs has yet to materialise, supporting continued interest in US assets.

The recent trade agreement between the United States and the European Union brought some relief, halving the proposed tariffs to 15 percent and lifting sentiment ahead of important discussions with China. An extension of the current trade truce is widely anticipated. Although the 1 August tariff deadline poses a potential flashpoint, market focus has now shifted more towards economic data and the upcoming Federal Reserve meeting, both of which are expected to set the tone for the remainder of the year.

Inflationary pressures in the US are likely to remain elevated, influenced by tariffs, robust data, and a tight labour market. While the Federal Reserve is not expected to make any policy changes at this stage, signs of weakness in the jobs market could put its delicate balancing act under strain. In this context, today's JOLTs job openings report and Friday’s non-farm payrolls will be watched with particular interest.

Beyond the US, global disinflationary forces are taking hold. Stronger currencies, subdued demand, cheaper energy prices, and an oversupply from China are all contributing to an environment where inflationary pressures are easing. The US’s elevated tariff regime has already significantly reduced Chinese exports to the States. Should these exports be redirected elsewhere, deflationary pressures may intensify in other regions.

As attention shifts from trade negotiations to the underlying implications of tariffs and macroeconomic trends, monetary policy divergence is once again a central theme. Earlier this year, the usual relationship between rising US yields and dollar strength was disrupted by concerns over fiscal policy and inconsistent guidance. However, recent developments suggest that this relationship is reasserting itself, helping to underpin the dollar’s recovery.

In several cases, the yield gap between the US and key trading partners has reached levels not seen since the mid-1990s. If this continues, the dollar’s rebound could have further to run, especially against currencies from countries where central banks are easing policy more aggressively in response to softening inflation.

Euro Faces a Critical Test

As investors look to the second half of the year, the euro finds itself in need of a compelling, data-backed reason to sustain its recent gains. So far, these gains have largely stemmed from developments in the United States, where disappointing surprises have helped boost the common currency. But the rally built on little more than background noise now appears vulnerable. This week could prove pivotal for EUR/USD, as a dense slate of US economic releases provides a clearer picture of how the American economy is faring under steep tariffs. Depending on the outcome, the euro may either find support or risk revisiting mid-July’s lows around $1.1557. Should it fall further, the next significant level lies near the 50-day moving average.

Yesterday’s price action in EUR/USD offered fresh insight. Despite expectations of a neutral response to the EU-US trade deal — which was thought to be broadly beneficial to both sides — the euro plunged by over 1 percent at one stage, making it the weakest performer among the G10 currencies. This reaction highlights two major issues. Firstly, tariffs remain elevated even after the deal, casting a shadow over the European export sector. Secondly, questions are being asked about the EU’s negotiating clout. Unlike Canada or China, the bloc refrained from issuing retaliatory threats, underlining a lack of cohesion that continues to weaken the euro’s global appeal.

In the background, President Trump’s unpredictable policy direction may have gained some legitimacy. So far, rising tariff revenues have not fuelled inflation, and with strong corporate earnings and healthy macroeconomic indicators, confidence in the old “US exceptionalism” narrative is beginning to return. This poses a new challenge for the euro. What was once a currency rally driven by declining confidence in the United States may now falter because of growing concerns over Europe’s perceived lack of resolve. Should this week’s US data surprise to the upside, and the EU fail to secure more favourable terms, a decisive break below the euro’s 50-day moving average could well follow.

Sterling Slides to Two-Month Low

Amid renewed strength in the US dollar, sterling has come under pressure, with GBP/USD falling for the third consecutive session and hitting its weakest level in more than two months. The pair has now dropped out of its 2025 uptrend channel and last week closed below both its 21- and 50-day moving averages. Today, attention turns to the 100-day moving average, which may provide some near-term support.

The dollar’s rally has been driven in part by the recent series of US trade agreements and a growing belief that the Federal Reserve will hold rates steady for now. At the same time, markets are still pricing in a cut by the Bank of England as early as next week. As foreign exchange markets begin to align more closely with rate differentials, this has added further downward pressure on the pound.

Domestically, the latest CBI data revealed that UK retail sales have now fallen for ten consecutive months, a sign of continued strain on consumers from high prices and lingering uncertainty. Although there was a slight improvement from the previous month, the figures missed forecasts, extending a trend of underwhelming economic releases.

Having declined more than 3 percent from its July highs and now entering technically oversold territory, there is potential for the pound to stabilise — especially once the Federal Reserve meeting has passed. Historically, sterling has often found support at moments of peak pessimism, so a short-term bounce would not be out of the ordinary. Over the longer term, even if the downward trajectory resumes, we believe the $1.30 level will offer a firm foundation for the currency.