USD
Investors widely expect the Federal Reserve to keep interest rates unchanged, shifting attention to the latest economic forecasts and Chair Jerome Powell’s press conference. Policymakers have emphasised a data-driven approach, waiting for clearer signs of disinflation and assessing the broader impact of Trump’s policies. Ongoing trade uncertainty has unsettled markets, with investors struggling to factor in the ever-changing landscape of tariffs.
Recent economic indicators have been mixed. A stronger-than-anticipated recovery in single-family housing starts and steady industrial production have eased fears of an imminent US recession. However, unexpectedly high import prices have raised concerns that inflation could become more persistent, complicating the Fed’s next steps.
Despite the cautious market mood, the US dollar has been unable to fully benefit from safe-haven demand, reflecting broader uncertainty over Trump’s economic policies. As Powell prepares to speak later today, traders will be looking for any clues about the future path of interest rates. A signal that rates may remain elevated for longer could offer short-term support to the dollar, while a more dovish outlook might put renewed pressure on the currency.
EUR
A substantial spending package has been agreed upon, yet the German economy's structural constraints and implementation challenges mean its impact may be limited. The Euro faces the risk of "buy the rumour, sell the fact" price action following the German parliament’s approval of a law allowing increased government spending on defence and infrastructure.
The Bundestag has approved a €500 billion infrastructure fund and adjustments to the debt brake, enabling nearly unlimited defence expenditure and allowing state governments to borrow more freely. However, despite the passage of this law, the Euro has struggled to advance against the Pound Sterling, the US Dollar, and other major currencies, suggesting that much of the news had already been priced in by the markets.
The Euro had previously gained momentum after incoming Chancellor Friedrich Merz announced his intention to modify the debt brake to facilitate higher spending. Following this decision, the Pound-to-Euro exchange rate has declined by 2.0%, prompting analysts at Goldman Sachs to revise their forecasts for the pair downward.
Expectations of higher German inflation have driven up German bond yields, as investors demand greater returns for holding German debt. Rising yields, in turn, attract investor capital, supporting the Euro. This raises the question of how much further bond yields can climb—if the trend continues, the Euro’s rally may persist.
Most analysts agree that Germany’s economic reforms will have positive knock-on effects on other sectors and neighbouring European economies. The widely followed ZEW confidence survey reflected improved sentiment in March. “The brighter mood is likely due to positive signals regarding future German fiscal policy, such as the agreement on the multi-billion-euro financial package for the federal budget,” said Achim Wambach, President of ZEW. “Prospects for metal and steel manufacturers, as well as the mechanical engineering sector, have improved. Furthermore, the European Central Bank’s sixth consecutive interest rate cut ensures favourable financing conditions for both households and businesses,” he added.
While the Euro’s recent gains could fade, any setbacks may be relatively shallow, and the currency’s 2025 lows could already be behind us.
GBP
The pound briefly pushed above the $1.30 mark yesterday as the US dollar weakened across the board. However, GBP/USD failed to sustain its position above this key level, signalling potential exhaustion in its upward momentum. Several technical indicators are flashing “overbought” warnings, raising the likelihood of a meaningful pullback in the coming weeks if the currency continues to struggle at these levels.
Traders may also be positioning for a decline ahead of Thursday’s Bank of England (BoE) meeting, as recent trends suggest such events tend to weigh on sterling. While a dovish Federal Reserve could push the dollar lower today, many market participants may opt to take profit on the more than 7% gain in GBP/USD since early February. Looking further ahead, the $1.35 level could emerge as a key upside target, but this would require improved global risk sentiment, a deteriorating US economic outlook, and widening UK-US yield spreads. The pair has remained below $1.35 for over two years—its longest-ever period under this threshold. However, should GBP/USD hold above $1.30, bullish traders are likely to set their sights on $1.35 later this year. That said, from a technical standpoint, the 14-day relative strength index has been hovering near or within overbought territory for most of the month, suggesting a short-term correction may be on the horizon before the broader uptrend resumes.
Conversely, sterling’s prospects against the euro appear less favourable. Following Germany’s decision to increase expenditure—an event seen as pivotal broader European economy growth. If GBP/EUR closes below its 50-week moving average this week, we view €/£0.85 (€1.1764) as a key downside support target.
