Written by the Market Insights Team
Fed stands pat due to tariff uncertainty
George Vessey – Lead FX & Macro Strategist
The Federal Reserve (Fed) opted to keep rates steady again, with the Fed funds target rate range remaining at 4.25-4.50%. The accompanying press release reiterated familiar language – economic growth continues at a “solid pace,” the labour market remains “solid,” and inflation is “somewhat elevated.” The US dollar index strengthened on the news, albeit modestly, still stuck under the 100 level, but opening today above its 21-day moving average for the first time in more than a month.
The FX reaction has been rather muted overall though, with short-term rate spreads having little influence on USD-crosses recently. The dollar has pulled back somewhat, tied to the Fed’s acknowledgment of rising risks for both unemployment and inflation rather than any explicit policy shift. Indeed, despite the Fed hold, it came with a warning about more uncertainty in the economic outlook and higher risks of unemployment and inflation in the new high-tariff US economy. Policymakers acknowledged growing upside risks to both inflation and unemployment, reinforcing the need for more clarity before making a move.
This measured stance suggests rate cuts might be delayed, but when they do arrive, they could be steeper to compensate for lost time, which could weigh heavily on the USD further down the line. Investors will watch upcoming data for cues on the Fed’s next steps, with markets weighing whether softening growth or sticky inflation will force a shift sooner than anticipated.
UK-US trade deal expected
George Vessey – Lead FX & Macro Strategist
The pound strengthened modestly overnight as news broke that US President Trump is set to unveil a new trade agreement with the UK today. If confirmed, Britain would become the first nation to ease trade tensions with Washington since the introduction of sweeping tariffs on April 2. Trump hinted at the upcoming announcement in the Oval Office, scheduled for 3pm UK time, though he did not disclose the country involved or provide any further details about the deal.
The anticipated deal is among 17 agreements the Trump administration has pursued with major trading partners as it looks to row back its broader tariff strategy. While the news is expected to lift market sentiment, investors will focus on how far the administration is willing to walk back tariff measures and whether it opens the flood gates for further deals with other countries. The timing of Trump’s trade announcement adds to the positive momentum ahead of US-China negotiations set for this weekend in Switzerland, which have already bolstered market sentiment.
Meanwhile, Britain signed a major trade deal with India on Tuesday, marking its largest agreement since leaving the EU – a move aimed at strengthening global economic ties amid ongoing trade disruptions amidst the Trump tariff fallout.
BoE rate cut is priced in today
George Vessey – Lead FX & Macro Strategist
The Bank of England’s (BoE) Monetary Policy Committee (MPC) is widely expected to cut the Bank Rate by 25 basis points at its meeting today, bringing it down to 4.25% from 4.5%. We anticipate an 8-1 vote split with arch-dove, Swati Dhingra, potentially voting for a larger 50bp cut. This would mark the fourth rate cut since August, as policymakers respond to economic disruptions, such as a weaker growth and a less inflationary outlook caused by the global trade war triggered by the US.
As the rate cut is priced in, more important will be what the committee signals about the future path of rates and whether they align with the almost four quarter point cuts currently priced in by markets for 2025. The MPC could drop its “gradual” approach to rate cuts (one cut per quarter tempo), though not explicitly pointing to a sequential cut in June to preserve flexibility in their approach given the increasingly uncertain economic and geopolitical landscape since Trump’s tariff announcements.
Data since BoE’s last economic projections in February has seen real GDP growth come in stronger than the MPC had expected with upside revisions to the back-end of 2024 and an upside surprise in Q1 2025. This re-profiling will mean that annual growth for 2025 is likely to be revised up from 0.6% to 1.1%. Growth for 2026 is likely to be revised down though due to tariff risks. Meanwhile, the inflation forecast is likely to be revised lower as CPI data since February has come in below the MPC’s forecast and is expected to cool further amidst the plunge in energy prices. Services inflation is still proving stubborn though bouncing around 5% for some time now.
Risks are skewed to the downside for GBP/USD if the BoE does sound more dovish, as well as easing trade tensions supporting the dollar. The three-month rally in the pound has sent it soaring some 7.5%, but much of that move reflects broad weakness in the dollar rather than intrinsic strength in sterling. Indeed, the Pound Index, which breaks out the performance of sterling based on how it has moved in relation to the UK’s key trading partners, has only risen 2.3% over the same period.
On the seasonality front, after an awesome April, it could be a a more miserable May for GBP/USD with average monthly returns around -0.5%.
Euro stuck in sideways trading pattern
George Vessey – Lead FX & Macro Strategist
The euro continues to trade largely between $1.13 and $1.14 versus the US dollar, lacking a fresh positive catalyst to drive it higher for now. Moreover, the optimism around US trade deals could be a positive driver for the dollar in the short term, suggesting a break towards $1.12 might be feasible.
The dollar continues to carry a significant risk premium beyond its usual macro drivers, with EUR/USD estimated to be around 4% overvalued. However, unwinding this premium won’t be straightforward – while trade de-escalation headlines may help, markets remain focused on tariff-induced damage to the US economy. In the near term, EUR/USD is expected to find solid support in the 1.1250–1.1300 range, as buyers consistently emerge around these levels. The balance of risks remains tilted upward for the pair, suggesting potential for further gains if sentiment shifts.
Elsewhere in Europe, we saw rate cuts from Poland and Czech Republic yesterday, but these were priced in by markets, so both CEE currencies have actually gained ground against the euro thanks to the more positive risk tone relating to easing global trade tensions.
FX markets relatively subdued of late
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 5-9
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
