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Fading trade deal euphoria deals the US dollar a blow

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19 May 2025

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

News last week of the massive Trump climbdown on Chinese tariffs buoyed the dollar, but the bump faded and the greenback ended the week down against nearly all major currencies worldwide.

T
he moves were modest, however, with the exception of the sharp rise in the Japanese yen, the week’s undisputed winner. Risk assets did celebrate the trade news, as well as the apparent muted impact of the tariff scare on the real economy so far. Stocks and credit continued the scorching rally of the last month. News of Moody’s downgrade of the US sovereign credit rating hit after close on Friday, and the reaction thus far during Monday trading has been the send the dollar even lower.

Attention for now may shift away from the trade war and back onto macroeconomic and policy news. This week’s docket is relatively light. The main focus worldwide will be the PMIs of business sentiment for May, published in all major economic areas on Thursday. Given the apparent disconnect between sentiment and hard data, these may be taken with a grain of salt. The April inflation report out of the UK and a slate of second tier post-Liberation Day reports out of the US will round out the week.

GBP

Sterling continues to be supported by a resilient performance in the UK economy. Last week’s employment and first quarter GDP data were generally strong, and confirmed that Britain’s economy is growing at a steady pace, supported by business investment and a robust jobs market with solid real wage gains. While a slowdown in activity appears highly likely in Q2, not least given tariff uncertainty and rising business costs, we still think that market forecasts for the UK economy are overly pessimistic for 2025.

Bank of England hawkishness and improving commercial relations with the EU are further reasons to be bullish on the pound. Details of the ‘reset’ in UK-EU relations post-summit will hit the newswires later today, with Britain set to make concessions that would unlock more favourable trade terms. While many will probably quite rightly slam the deal as a betrayal of the Brexit vote, market participants are unlikely to care and will likely greet the signs of closer UK-EU ties by keeping the pound well bid.

EUR

The euro is consolidating around new levels relative to the US dollar. The common currency remains solidly above the $1.11 level, but the resilience to tariff trouble apparent in US economic data and Trump’s retreat on tariffs are preventing a breakout to higher levels for now, and it is unlikely that the news of Moody’s downgrade of the US rating will be enough to bring that about so in the near term.

In addition to the business activity PMIs for May, which will be released on Thursday, the minutes for the last European Central Bank meeting will be out on the same day. We will also be keeping tabs on speeches from a number of Governing Council members in the coming days, including Cipollone, Lane and Schnabel. Market bets in favour of Euro Area rate cuts have receded since the news of the US-China trade deal, and it will be interesting to see whether easing growth fears are reflected in a slightly less dovish ECB.

USD

US retail sales figures for April were slightly weaker than expected, but do not change the picture of an economy that has proven more resilient to the tariff shock than expected. In particular, weekly jobless claims numbers continue to bounce around near the historical bottom, indicating that no significant layoffs have resulted and that the US economy continues to cruise along at something very close to full employment.

However, the enormous US fiscal deficit, without historical precedent at a time of full employment, and one that is likely to increase even further with the coming Republican tax cuts, may receive more attention in markets. The US government will need to find buyers for a veritable tsunami of fresh debt issuance precisely at a time when the world’s appetite for such assets seems on the wane. The Moody’s downgrade may bring this unbalance into sharp focus.

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