Market Recap:
The dollar weakened sharply last week despite initial gains as market focus shifted to concerns over US fiscal policy, potential Fed rate cuts, and strong economic performance in the UK and EU bolstering the pound and euro.
Geopolitical and economic fears drag dollar to four-year lows:
After briefly surging last Monday following US strikes on Iran, the dollar’s safe-haven status quickly faded as underlying market factors provoked a sell-off.
The dollar reached four-year lows against the euro and pound on Thursday, after Iran’s very limited retaliation served to cool fears of a wider Middle East conflict and market sentiment turned back to fears over US fiscal policy, trade wars and a potential July interest cut.
Markets grew jittery over the prospect of the Federal Reserve cutting interest rates earlier than expected, but this was tempered by news on Monday that the Fed would probably not have enough clarity to cut rates in July.
Pound and euro hold firm amid strong economic signals:
The pound and euro continue to remain strong in global markets. The pound is benefitting from the new UK-US trade taking effect today, which cuts tariffs on British car exports from 27.5% to 10%.
The Bank of England’s reluctance to cut interest rates compared to peers like the European Central Bank, and the UK’s Q1 GDP growth being confirmed by the Office for National Statistics at 0.7%, matching earlier estimates.
Dollar under pressure amid Fed independence concerns:
The dollar remains on the defensive over concerns about the Fed’s independence, after reports that President Trump is considering an early appointment for the next Fed chair.
The president’s proposed tax and spending bill, which could add $3.3 trillion to the national debt has added uncertainty, along with renewed fears of a transatlantic trade war.
Coming Up:
Market volatility could return as we approach the 9 July deadline marking the end of a 90-day pause on President Trump’s tariffs announced in April. Investors will be following the progress of negotiations closely, and exchange rates may begin to fluctuate as investors once again look for better returns or safe havens in a rapidly evolving situation, with the looming threat of reciprocal tariffs of 25% or more between the US and EU.
Markets will also focus on the ECB Central Bank Forum, where top policymakers, including Fed Chair Jerome Powell, are expected to provide insights into the economic and monetary outlook. There is a shortened week for US markets this week due to the Independence Day holiday on Friday.
Market watchers in Europe will be looking at the latest inflation data out of Italy and Germany on Monday, as well as German retail sales, for signs of inflationary pressures and a hit to consumer confidence.
