May 07, 2025

“The dollar continues to struggle even as equity markets have bounced back and the tone on US-China trade improves. The Fed decision tonight is the main event this week, and the Bank of England follows tomorrow.”

Sam Cornford – Head of Trading

USD

News of US-China trade talks in Geneva on Saturday triggered only a weak spike in the dollar last night, and the market is back to selling dollars this morning. Treasury Secretary Scott Bessent is set to meet China’s He Lifeng as an icebreaker to talks that might involve the first steps towards de-escalation in the 100+% tariffs that have created a de facto trade embargo between the world’s two largest economies. It is surprising that these positive steps for the US have not helped the dollar – perhaps this was expected eventually anyway, or it is seen as too late to avoid the harsh economic consequences in the US. Or there is an argument that buying the dollar is now fighting against a broader trend of dollar weakness has already been set in motion by the constant uncertainty and unorthodox policy. It is hard to put the genie back in the bottle here.

The Fed makes its decision for May this evening, though most would be surprised if Chair Powell was anything but resistant to the idea of cutting rates in the near future. Trump’s push for cuts ironically will make the Fed want to avoid looking as if they are politically influence, and policymakers are still concerned about weighing up the inflationary impact of tariffs and the disinflationary pressure from potential economic weakness. And that is something they won’t get clarity on for at least a month or two. The market is betting on July for the next rate cut.

GBP

Sterling performed well yesterday as the UK penned a trade deal with India, and speculation grew that one with the US could come together in the next week that would reduce Trump’s car and steel tariffs. The UK was always well placed to make a deal with Trump – UK-US trade is well balanced and dominated by services, and Trump has a fondness for the British. GBP/EUR managed to push to its highest level since the ‘liberation day’ chaos yesterday afternoon, and GBP/USD is back above 1.33. The focus for the UK now is on the Bank of England decision tomorrow, as well as any news on the trade story.

EUR

The euro managed to escape any material damage from Merz’s wobble yesterday. The new German Chancellor failed the initial Bundestag vote – something which has never happened in postwar Germany – and only manage to clinch the role in a second vote later in the afternoon. That is a blow to the authority of the German leader who played a major role in lifting the euro nearly 5% back in March, through his promises to open the fiscal spending taps for defence and infrastructure investments. An unstable coalition might be a downside risk for EUR/USD.

Markets

US stocks have hit a hard ceiling at its pre-‘liberation day’ level, and further progress looks like it will be more difficult. They turned lower yesterday, though futures have turned green this morning on the news of US-China talks. The FTSE 100 extended a record 16 session winning streak yesterday by a tiny margin.

Main Economic Events (All Times CET)

8:00am: Swedish CPIF Inflation
8:00pm: Federal Reserve Rate Decision

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