Court setback for Trump sparks market rally but uncertainty lingers

Overnight developments in the United States saw a major judicial decision that has cast fresh doubt over former President Trump's trade policy legacy. The US Court of International Trade declared his tariff measures unlawful, undercutting the legal foundation upon which they were introduced. The court ruled that the emergency legislation used to implement the levies did not provide carte blanche powers, instead reaffirming that the authority to set trade policy rests firmly with Congress.

Financial markets reacted quickly. Both US stock futures and the dollar rose sharply, as investors anticipated a rollback of the tariffs. Such a move could ease global economic pressures and support growth. The court has demanded further clarification within 10 days, although any hints about the administration’s next steps may appear sooner via Trump's posts on social media.

Adding fuel to the dollar’s rally was a broader uplift in US equities. Interestingly, in more typical “risk-on” scenarios, the dollar often retreats as funds flow into higher-risk assets. This time, however, the simultaneous rise in both equities and the dollar appears to reflect a wave of cautious optimism. With limited appealing alternatives and hesitancy to withdraw from pricey American holdings, investors are grasping at any positive signal. As a result, both the S&P 500 and the dollar have moved higher together. While the equity surge tapered off midweek, the court decision helped the S&P 500 regain nearly 2%.

On the macroeconomic front, recent figures point to continued resilience. Markets appear to be tentatively positioning for a return to more stable conditions. Initial optimism was sparked by trade discussions involving the UK and China, briefly dampened by a credit downgrade and the launch of the so-called “Big, Beautiful Bill”, but momentum has resumed with fresh negotiations involving the European Union.

Nonetheless, caution remains the order of the day. The Trump team has confirmed their intention to appeal the court’s decision. Unless the appeals court permits the tariffs to remain in place during the process, they will be permanently halted. Traders are also eyeing a flurry of economic releases from the United States, which could offer further clues on the dollar’s trajectory. These include GDP data, weekly jobless claims, personal income figures, and two closely watched sentiment indicators: the MNI Chicago Business Barometer and the University of Michigan Consumer Sentiment Index, both due on Friday.

Confidence in the euro persists despite underlying fragilities

The eurozone remains weighed down by persistent structural inefficiencies, including sluggish productivity growth, relatively underdeveloped capital markets and a more constrained capacity for debt issuance. Yet, despite these long-standing issues, many investors continue to view the euro as a more dependable option compared to the dollar.

This continued confidence may prove difficult to sustain if market participants begin to focus more closely on the currency bloc’s deeper vulnerabilities. A shift in sentiment could prompt a reassessment of the current bullish positioning on the euro.

In April, consumer inflation expectations across the euro area rose for a second month in a row, with households anticipating price increases of around 3.1% over the next year. While this may suggest growing inflationary pressures, we advise against placing too much weight on these forecasts. A broader reading of the economic landscape points to subdued price growth ahead, as lacklustre demand and weak productivity trends are likely to keep inflation nearer the European Central Bank’s 2% objective.

Meanwhile, expectations remain firm that the ECB will lower interest rates by 25 basis points at its next meeting on 5 June. A further reduction in the final quarter of the year is also increasingly seen as probable.

Sterling resilience persists despite dollar-driven retreat

Following the US court decision declaring former President Trump’s tariffs unlawful, the pound has surrendered part of its recent gains against the dollar. GBP/USD, which had climbed to $1.3587 at interbank, slipped towards the $1.34 mark this week. Although the greenback’s rebound has gathered pace, legal ambiguity surrounding the ruling may heighten, potentially renewing investor appetite for non-dollar assets as concerns over political instability in the United States grow.

Recent trading patterns highlight just how influential developments across the Atlantic can be for global financial markets and currency movements. While sterling tends to be less reactive to fluctuations in the dollar compared with some of its G10 counterparts, it remains far from immune. Even so, sentiment towards the pound has grown increasingly positive. This has largely been fuelled by factors unique to the UK, including stronger-than-expected trade activity, a resilient economic backdrop, and a Bank of England that continues to signal a firmer stance on interest rates.

These factors have helped lift the pound against more than 70% of its global trading peers so far this year. Against the euro, for example, sterling is currently up 1.5% this month and appears to be on track to challenge the €1.20 level, supported in large part by widening rate differentials in its favour.

Looking at the broader trend, the outlook for GBP/USD appears constructive. The pair is on track to post its fourth straight monthly gain, reflecting sustained momentum. With investors continuing to scale back their exposure to dollar-linked assets as US policy uncertainty drags on, a move towards $1.3750-$1.40 range later this year seems increasingly within reach.

Sterling’s rise driven by more than dollar weakness

Sterling’s nearly 8% rally against the US dollar this year is not simply the result of a weaker greenback. Compared to other major currencies, the pound has shown less sensitivity to dollar movements, suggesting a more independent and resilient path.

Optimism around the pound has grown, underpinned by strong UK data, trade progress, and the Bank of England’s firm approach to rates. April’s solid retail figures, improved consumer confidence in May, and stubbornly high inflation have supported sterling, particularly as the Eurozone moves in the opposite direction. As a result, the BoE is expected to cut rates slightly less than the ECB in the year ahead.

Global trends, such as reduced reliance on the dollar, have also helped lift the pound. But domestic momentum has been key, with the UK Economic Surprise Index at its highest in almost a year.

In contrast, the US outlook is darkening. Fed officials continue to strike a cautious tone, awaiting more clarity on tariffs and inflation. Business confidence is weakening, as seen in falling durable goods orders—especially in aircraft.

Meanwhile, President Trump’s on-again, off-again tariff actions are adding to market uncertainty. While the pattern is becoming more predictable, it does little to reassure investors already uneasy about US fiscal sustainability and the dollar’s role as the world’s primary reserve currency.

Euro gains ground as dollar loses momentum

The euro has been climbing steadily, with EUR/USD up nearly 10% since the beginning of the year. This strength largely reflects growing concerns over the US economic outlook. Notably, the euro is rising despite geopolitical uncertainty—particularly the erratic nature of US tariff policy—that would have previously dragged it lower.

Instead of acting as a risk-off casualty, the euro is increasingly viewed as a safe alternative when confidence in the dollar wanes. Even when tariff developments offer little direct benefit to Europe, they continue to push investors towards the single currency.

Focus now shifts to eurozone inflation data due on Friday. Deflation risks persist across the bloc, with most analysts pointing to subdued demand as the main driver. Falling oil prices and the euro’s recent strength are adding to the downward pressure on prices. France’s modest 0.7% annual inflation reading for May may offer an early glimpse of the broader regional trend.

Markets grapple with shifting trade dynamics and fiscal uncertainty

Trade relations between the United States and the European Union remain strained, as President Trump has unexpectedly delayed the implementation of 50% tariffs on EU imports to July 9th. This follows the earlier announcement of a June 1st start date, suggesting the move may have been a bargaining tactic, especially following a call with European Commission President Ursula von der Leyen. While the delay signals a temporary de-escalation, Trump’s confrontational language and lingering disagreements with the EU suggest that further tensions are far from ruled out.

In Washington, attention is now directed towards Senate discussions surrounding the administration’s ambitious tax and spending package. The Congressional Budget Office estimates the proposed measures could increase the national debt by $3.8 trillion over the next decade. With debt servicing already consuming 4.5% of GDP—the highest among G10 countries—questions over the sustainability of US fiscal policy are intensifying. Greater policy clarity is essential. If concerns over long-term interest rates begin to recede, market pressure may ease. Until then, uncertainty around public finances will continue to shape investor behaviour and outlooks for growth.

Today, market participants will be keeping a close eye on incoming US economic data, with updates on durable goods orders, the housing market, and consumer confidence all on the agenda. Comments from Federal Reserve officials Neel Kashkari and John Williams are also expected to draw significant attention, offering potential clues regarding the central bank’s future policy stance.

Euro gains stall as traders weigh policy risks and growth outlook

The euro recently climbed to its highest level against the US dollar in a month, buoyed by the postponement of hefty tariffs on European goods. However, its advance has started to wane near the $1.14 mark. Even so, the currency pair has risen by nearly 10% since the start of the year, and foreign exchange options traders continue to show a strong preference for the euro’s long-term potential.

Should the tariffs eventually be introduced, the resulting pressure on EU economic growth could compel the European Central Bank to adopt a more supportive monetary stance, potentially undermining the euro. In contrast, the Japanese yen might benefit if trade negotiations between the US and Japan produce an outcome aimed at strengthening the yen. ECB President Christine Lagarde, however, has argued that recent shifts in global policy could favour the euro, describing a possible “global euro moment” that might elevate the currency’s status as an alternative reserve unit alongside the dollar. Meanwhile, China remains active in promoting the international use of the yuan.

Market sentiment among currency traders continues to lean heavily towards euro appreciation. One-year EUR/USD risk-reversals have reached their highest level since 2003, excluding the brief spike in March 2020. Nonetheless, for the euro to extend its gains, more will be needed than a retreat in the dollar. Improved clarity on trade relations and stronger economic performance within the eurozone will likely be essential to sustain further momentum.

Sterling steadies with room to climb as global factors take the lead

The pound continues to show signs of strength, bolstered by a relatively robust UK economy and a Bank of England stance that remains firmer than that of many other central banks in the G10 group. Recent adjustments in the UK’s trading arrangements with both the United States and the European Union are providing additional support, helping sterling maintain its edge. With sound economic indicators and interest rate backing from the BoE, the pound’s positive trend may still have further to run, though shifts in investor mood will be crucial to monitor.

The GBP/USD exchange rate has notched up gains for a third consecutive session, approaching levels last seen more than three years ago, just under the $1.36 mark. A weakening dollar, driven by rising concerns over US fiscal direction and unpredictable trade developments, has contributed to the move. Notably, for the first time since the financial crisis of 2008, currency options markets no longer show a bearish bias towards sterling in the longer term. Although the euro’s recent rally has capped the pound’s progress against the single currency, sterling has still gained over 3% since last month’s downturn and is making a renewed attempt to rise above the 200-day moving average at €1.1933.

With few notable economic releases from the UK on the calendar this week, sterling’s movements will likely be shaped by global developments. Given the pound’s tendency to react strongly to shifts in risk appetite, a sudden deterioration in sentiment could spark renewed volatility. Investors will therefore remain alert to any signs of market turbulence that could test sterling’s recent resilience.

UK Retail Sales Surge Highlights Consumer Resilience

Sterling has broken through a three-year high against the US dollar, on track for its strongest weekly performance in six, buoyed by a softer dollar and a raft of upbeat UK data. Retail sales, released this morning, exceeded expectations—another indication that British consumers remain resilient despite higher living costs and ongoing global trade tensions.

UK retail sales rose by 1.2% in April, marking the fourth consecutive monthly gain and capping the strongest quarter for the retail sector since 2021. The improvement has been driven by warmer weather and a modest uptick in consumer sentiment. Indeed, GfK’s latest figures show consumer confidence edged up in May, with its index rising three points to -20.

Elsewhere, UK public sector borrowing reached £20.2 billion, surpassing forecasts, although earlier months were revised down. At the same time, 30-year gilt yields breached 5.50%, reflecting broader turbulence in global bond markets, notably in the US and Japan. The rise in yields presents a growing challenge for Chancellor Rachel Reeves, with average borrowing costs since the Autumn Statement now at 5.15%—55 basis points higher than in the previous six months. Should volatility in bond markets persist, Reeves could come under increasing pressure, particularly if fiscal data continues to disappoint.

Nonetheless, several factors continue to support sterling: improving trade ties with the US and EU, a run of positive economic surprises, stubbornly high inflation that is keeping the Bank of England on a less dovish path, and a broader de-dollarisation trend. The options market reflects growing optimism over sterling’s longer-term prospects, with hedge funds steadily increasing their long positions since January. Rising demand from institutional investors suggests further upside potential—especially if asset managers begin to overweight the pound in the months ahead.

That said, sterling’s gains against the euro remain constrained, with EUR/GBP hovering around the €1.19 mark and still down over 1.5% year-to-date. However, with the UK economy showing resilience and avoiding recession, and with the BoE maintaining a comparatively hawkish stance, sterling remains well-supported. Its renewed role in diversification strategies and the ongoing G10 de-dollarisation theme continue to underpin bullish sentiment toward the pound.

Focus Shifts to Fiscal Policy

This week, two major developments drew market attention: a disappointing US bond auction and the House Republicans' approval of what they have dubbed the “Big, Beautiful Tax Bill.”

First, the US Treasury conducted a routine auction of $16 billion in new 20-year bonds. Normally unremarkable, this auction unsettled investors amid concerns about the mounting uncertainty in US economic policy—particularly the market's ability to absorb the refinancing of nearly $3 trillion in debt maturing in 2025, much of it short-dated. Their apprehension may be warranted: the auction produced a yield of 5.05% on the 20-year note, a notable rise from the 4.6% average of the previous five auctions. While 20-year bonds are generally less liquid than other maturities, the subdued demand triggered alarm across financial markets. But does this signal deeper trouble for the world’s largest debt market?

To contextualise, a significant share of the US government’s maturing debt is short-term. Since 2000, securities with less than one year to maturity have consistently accounted for 25% to 40% of the total. When combined with 1- to 5-year notes, short- and medium-term debt represents approximately 70% of the total structure.

Compounding matters, the weak auction coincides with rising investor anxiety over a Republican-led Congress advancing a tax package that could add an estimated $3.3 trillion to the national debt by 2034. Historically, the US federal deficit has averaged 3.4% of nominal GDP. However, widening deficits in a high-interest-rate environment prompt legitimate concerns about long-term fiscal sustainability.

Despite this, the newly passed tax bill, which is expected to contribute around $380 billion annually to the deficit, includes a baseline 10% tariff that could partially offset the fiscal gap. Tariffs have become a durable fixture of US trade policy, and their associated revenues are increasingly integral to the country’s fiscal outlook. According to the Congressional Budget Office (CBO), current tariff regimes are projected to generate approximately $2.7 trillion between 2026 and 2035. Even allowing for potential economic headwinds, tariff income could still reach around $2.3 trillion over that period.

As fiscal policy becomes clearer, the uncertainty premium embedded in long-term yields may begin to diminish, potentially calming markets. Indeed, the US dollar index regained some momentum ahead of the weekend, rebounding from a weekly low of 99.3. Still, the dollar is set for its largest weekly drop in six and continues to struggle to reclaim the key 100 threshold.

Euro Shrugs Off Weak PMI Figures

EUR/USD largely shrugged off an intraday decline of nearly 0.4% following a series of underwhelming PMI releases across key Eurozone economies, including France, Germany, and the broader bloc. The Eurozone Composite PMI slipped from 50.4 to 49.5 in May, driven primarily by a downturn in the services sector. While manufacturing has remained sluggish, the once-resilient services industry has now also entered contractionary territory.

Adding to the bearish mood were minutes from the ECB’s April meeting, which highlighted policymakers’ growing concerns over the region’s subdued economic outlook. The tone indicated that a dovish policy stance is likely to persist, especially against a backdrop of easing inflation. Taken together, these developments reinforce the narrative of a faltering Eurozone economy weighed down by uncertainty. Nevertheless, EUR/USD clawed back some losses by the day’s end, reflecting ongoing market belief that the euro retains a relative advantage over the dollar for now.

Supporting the euro’s rebound may have been the European Union’s proactive move to de-escalate trade tensions with the US, as it submitted a revised trade proposal to the White House. While we maintain a constructive outlook on EUR/USD—still trading above both short- and long-term moving averages—any sustained recovery will likely depend on stronger hard data and greater clarity on trade relations.