Sterling stumbles and trade tensions cloud global outlook
The US dollar continues to languish near its weakest level in three years against a basket of major currencies. While foreign exchange volatility has calmed somewhat from recent historic peaks, attention now shifts to the incoming stream of US economic data as traders seek clues on the tangible effects of ongoing trade friction.
Although the recent turbulence over tariffs has receded somewhat, a full-scale breakdown in trade relations has thus far been sidestepped. Nevertheless, global tariff barriers remain sharply elevated compared to the period before so-called 'Liberation Day.' Currently enforced measures include a blanket 10% levy alongside targeted duties on strategic sectors such as steel, aluminium, the automotive industry, and potentially pharmaceuticals. These tariffs, even with a temporary 90-day reprieve, risk dragging global commerce back to protectionist levels last witnessed decades ago.
Equity markets, having enjoyed a brief resurgence, now appear increasingly exposed. Early hopes for a substantial thaw in tensions between Washington and Beijing are beginning to wane. What little optimism there was—fostered by a short-lived easing of hostilities—could quickly unravel should talks falter or geopolitical strain resurface. In such a case, investor appetite for risk may well dry up, placing downward pressure on global markets.
Looking ahead, market participants will be closely scrutinising a raft of high-impact US data releases. Notably, the first estimate of Q1 GDP growth and April’s non-farm payrolls report are on the agenda this week. Consensus for GDP growth stands at an annualised 0.4% on a quarterly basis, though estimates vary considerably, shaped by front-loaded import activity and buoyant corporate investment in early 2025.
Euro finds its footing as market forces tilt the scales
In the short term, EUR/USD is likely to hover between $1.13 and $1.14, with a slip toward $1.1250 possible if upcoming US economic figures come in stronger than forecast. Conversely, a climb towards $1.15 could materialise if this week’s employment data hints that trade-related uncertainty is already taking a toll on the American labour market. The euro remains roughly 10% stronger against the dollar compared to the start of the year, comfortably above its long-term moving averages. Currency option markets are even positioning for a possible push towards $1.20 before year-end.
While the European Central Bank is anticipated to cut interest rates once again, expectations are mounting that the US Federal Reserve may also ease policy at its June meeting. The possibility of rate reductions on both sides of the Atlantic may, paradoxically, offer the euro some resilience over the coming months.
European financial markets could also receive a lift from renewed diplomatic optimism, with Ukrainian President Zelenskiy voicing hope for a lasting peace following conversations with President Trump.
Additionally, shifting dynamics in global energy demand are tilting in Europe’s favour. Concerns over a potential US recession, slowing growth in China, and fractures within OPEC+ are weighing on oil prices. For energy-importing economies like those in Europe, lower crude costs provide a welcome economic cushion—especially for transport and manufacturing sectors. This evolving landscape could offer the euro yet another layer of support as the year progresses.
Sterling rally stalls as market turns cautious
The pound edged up by roughly 1% on Monday, lifting GBP/USD back above the $1.34 threshold and brushing against levels last seen three years ago. However, the upward drive appears to be losing steam, restrained by a modest bounce in the US dollar and a more restrained tone across global markets.
Sterling is also grappling with increased speculation that the Bank of England will reduce its benchmark interest rate by 25 basis points to 4.25% in May. All eyes are on a forthcoming speech from BoE policymaker Dave Ramsden, set for Tuesday. Should his remarks strike a dovish chord, it may weigh further on the pound's short-term trajectory.
Even so, the pound remains well-supported against most of its major counterparts, with the exception of traditional safe havens like the yen, euro, and Swiss franc. Encouragingly, against the euro, sterling has reclaimed its position above the 21-day moving average—potentially signalling the early stages of a bullish shift.
The GBP/EUR cross is likely to find continued backing as long as global risk appetite holds firm, given the pound’s relatively higher sensitivity to shifts in investor sentiment compared to the euro.
