The US dollar is enjoying some support thanks to a recovery in US market sentiment. At the moment, no other G10 currency has a higher beta than the dollar to US trade news, and Treasury Secretary Scott Bessent’s seemingly conciliatory comments on a US-China trade de-escalation could favour a USD stabilisation
USD: US-China De-Escalation in Sight?
The dollar rebounded alongside US equities yesterday as market fears about tariffs eased partially. We also suspect some positioning rebalancing is behind the dollar recovery.
As we warned in yesterday’s FX Daily, the dollar was facing a new degree of downside risks stemming from Trump’s attack on the Fed’s independence, but the greenback’s position was undeniably oversold and undervalued, meaning that a return to better FX liquidity on Tuesday could have favoured some stabilisation.
Treasury Secretary Scott Bessent threw a lifeline to fragile US sentiment with conciliatory remarks on the US-China trade war. Bessent said the current tariff situation is “unsustainable” and expects a de-escalation in the near term. We could witness a period where the dollar is tossed around by headlines of Fed independence risk and market-friendly news on US tariff policy. What is clear by now is that no other G10 currency has a higher positive beta to trade news than the dollar.
Net-net, we still think the balance of risks remains skewed to the downside for USD in the near term, but we don’t expect a repetition of the one-way traffic in dollar selling we have witnessed of late. Looking a few weeks ahead, our preference is for a stabilisation in the dollar rather than another structural weakening.
Today, the S&P Global PMIs are released across some major countries. Those are not as relevant as the ISM surveys in the US but have good comparability with other major countries. We doubt the implications will be significant for FX, barring big deviations from the consensus view for a moderate decrease.
EUR: Business Sentiment Not Expected to Plummet
The occasions where the dollar gets some boost from improved US risk sentiment lead to large unwinding in the currencies that have emerged as safe-haven alternatives: EUR, CHF, JPY. It appears that the reasoning behind the dollar rally is somewhat secondary for the FX impact.
In theory, the euro should benefit from the news of possible de-escalation between the US and China. Positioning is more relevant at this stage, and the euro, alongside JPY and CHF, is asymmetrically exposed to dollar rebounds compared to other G10 currencies.
The PMIs in the eurozone today are expected to show a measured decline despite tariff news. The surveys were conducted after the 90-day pause announcement, which probably justifies the relatively upbeat consensus view. We know the ECB is looking at tariffs with greater concern from a growth perspective relative to inflation, so a soft read should further endorse the market’s dovish pricing (75bp of additional cuts by year-end).
A break below the 50.0 recessionary line can trigger some euro weakness.
That said, EUR/USD remains almost entirely a function of USD moves. And another leg higher above 1.15 remains possible should fears about the Fed’s independence take centre stage again.
GBP: PMIs Not a Key Input for the BoE
The pound will look at today’s PMIs to gauge the drop in business sentiment due to US tariffs. Similar to the eurozone, the expected decline in the composite PMIs is unlikely to be enough to take the index below the 50.0 level.
Unlike the ECB, these surveys are not particularly regarded by the Bank of England, which remains fundamentally more concerned about inflation. Later this week, we’ll see UK retail sales figures for March, which are expected to drop following March’s strong print.
Any further improvements in risk sentiment should asymmetrically help the pound relative to the euro. The case for a return below 0.850 in EUR/GBP is quite compelling if the Trump administration keeps offering soothing signals for markets. The worst-case scenario for the dollar (an emergency Fed cut due to Trump’s pressure) should also drive EUR/GBP higher as the euro is a more attractive receiver of USD outflows than sterling.
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