Calmer waters for markets as Fed hints at cuts and trade pressures ease
It’s been another unpredictable week in financial markets, though Thursday brought a third straight session of renewed investor confidence. Markets were buoyed by softer rhetoric from Federal Reserve officials and encouraging signs of a thaw in trade relations involving the US.
Movements across asset classes reflected a more measured and potentially enduring uplift in sentiment, in contrast to the sharp, short-lived surges driven by position unwinding earlier in the week.
Cleveland Fed President Beth Hammack set the tone on Wednesday, suggesting interest rate cuts could be on the table as early as June, should clearer economic data emerge. This was later reinforced by Governor Christopher Waller, who stated he’d be inclined to support such measures if unemployment were to rise meaningfully. Meanwhile, in a notable turn of events, Bloomberg reported within the past few hours that China is weighing the suspension of its 125% tariff on select American goods—a possible step towards easing trade frictions.
Demand for the US dollar is on the rise, while classic safe-haven currencies such as the yen, euro, and Swiss franc have lost ground — with the franc alone dropping over 1% this week.
Recent developments have also highlighted just how closely President Trump appears to be watching the bond market. When longer-term yields surged and unsettled investors, he promptly put the bulk of planned tariffs on hold for 90 days. Likewise, after a fresh spike in yields followed his comments about Fed Chair Jerome Powell, Trump moved quickly to clarify he had no intention of dismissing him. These responses suggest that notable moves higher in long-dated yields are likely to trigger efforts to calm financial markets.
UK retail sales beat expectations, but Sterling struggles for direction
UK retail sales climbed by 0.4% in March 2025, bucking forecasts for a decline of the same magnitude. This comes on the back of a revised 0.7% increase in February, marking the third straight month of gains. A spell of unusually bright weather gave shoppers more reason to spend, delivering the strongest stretch of retail growth since early 2021, when the country was emerging from lockdowns. However, fresh tariffs introduced by President Trump in April appear to have knocked consumer confidence, now at its lowest since November 2023.
Despite the positive retail figures, the pound has shown little reaction. Given that the data reflects past activity and considering the scale of global developments in recent weeks, sterling has found limited support. GBP/EUR is still holding just above the €1.17 mark, and a continued rebound in risk appetite could tilt in the pound’s favour—especially with the euro recently hitting a 17-month low. That said, a cautious tone lingers, with GBP/EUR remaining below its 21-day moving average of €1.1743, keeping a downside bias in place.
Against the dollar, sterling has slipped back below $1.33 this morning, leaving it slightly weaker on the week but still up around 3% so far this month. Based on interest rate spreads, the pound may be trading over 1% above its estimated value. Nevertheless, derivatives markets continue to price in strength for GBP against USD over the next three months. Even so, it’s worth remembering that the last time GBP/USD pushed beyond $1.34—in September last year—the pair went on to lose 9% over the following four months.
Euro under pressure in short term, but longer-term outlook still constructive
While the dollar has regained some ground following recent events, the $1.1325 level continues to serve as a key support for EUR/USD in the near term. A clear move below that threshold could signal a deeper correction. That said, even with the risk of further downside, the broader picture appears more favourable—derivatives markets point to growing conviction in a longer-lasting recovery for the euro, suggesting a shift in underlying sentiment.
Turning to the eurozone’s largest economy, Germany’s Ifo business climate index ticked slightly higher in April, rising to 86.9 from 86.7 in March. The improvement stemmed from stronger assessments of current conditions, although expectations for the months ahead softened. Despite the marginally upbeat result, challenges remain. The reintroduction of US tariffs and shifting global political dynamics are likely to complicate the recovery process. While business sentiment hints that the downturn may have bottomed out, progress is expected to be slow, hindered by delays in fiscal policy delivery and ongoing political divisions over government spending. Additional uncertainty around geopolitical tensions, including developments in Ukraine and US-China trade negotiations, continues to cast a shadow over the outlook.
Meanwhile, dovish remarks from European Central Bank officials have prompted traders to increase bets on forthcoming rate cuts. Markets now see roughly a 50% chance of two more cuts across the next two ECB meetings, a factor that’s currently limiting any meaningful appreciation in the euro.
