Written by the Market Insights Team
No pre-emptive cuts in the horizon
Kevin Ford – FX & Macro Strategist
The latest Fed meeting reinforced its commitment to a balanced approach, with monetary policy actions guided by its dual mandate of maximum employment and price stability. While the economy remains in a solid position, inflation continues to run above the 2% target, with PCE rising 2.3% and core PCE at 2.6%. The Fed mentioned that risks of higher inflation and rising unemployment have increased, alongside elevated uncertainty stemming from trade policy concerns among households. Despite an unusual swing in GDP, the labor market remains strong and is not currently a significant driver of inflation pressures. However, during the press conference, questions on hard vs. soft data revived concerns about the lag between indicators and the Fed’s ability to respond in time. Powell acknowledged that while sentiment data hasn’t historically had a strong link to consumer sentiment, the current move is more significant than what has been seen in a while, adding another layer of uncertainty to the outlook.
Policymakers are in no rush to adjust rates, opting instead to let economic conditions evolve before deciding on the next steps. The Fed made clear that its approach today differs from 2019, when it acted pre-emptively. Current conditions do not warrant immediate intervention, and stagflation concerns are not pressing at this time. The Committee also dismissed external pressures, reaffirming that its policy decisions remain independent of political influence. While financial conditions are now less restrictive than last summer, certain economic shifts, such as sentiment data, are being monitored, though the Fed views them as another reason to maintain a wait-and-see approach. Ultimately, the Fed reiterated its goal to ensure inflation expectations remain anchored while limiting tariff impacts to a one-time adjustment for the economy. After yesterday’s meeting, markets are expecting 3 cuts in the second half of the year.
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.
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.
Positive sentiment for the Loonie
Kevin Ford – FX & Macro Strategist
North American FX markets have remained relatively calm this week, with the Loonie holding steady throughout the week. However, today it has lost against the Dollar after President Trump announced a UK-US trade deal is coming soon. Meanwhile, short-term rate differentials between the U.S. and Canada have widened again, reinforcing the current price level as a key support. While volatility remains subdued, the Canadian dollar could be positioned for a medium-term rebound, awaiting potential catalysts. These may come from macro data later in the week, particularly employment figures, or from shifting sentiment, with renewed dollar demand potentially driving broader greenback strength.
The Loonie is seeing a boost in positive sentiment, with 6-month and 1-year risk reversals reaching levels not seen since 2009. Risk reversals measure market positioning by comparing demand for higher-strike options versus lower-strike ones, giving insight into expected price direction.
Meanwhile, asset managers, who typically influence medium-term market trends, have being unwinding their underweight positions in the Loonie from the record lows earlier this year, according to CFTC data. This aligns with the recent rebound in the currency and the broader retreat of the U.S. dollar. Leveraged funds also remain underweight but not as much as they were at the start of the year, further reflecting the ongoing Loonie rebound. Although short positioning is still historically elevated, sentiment toward the Loonie has shifted dramatically.
DXY recovers above the 100 level
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 5 – 9
All times are in ET
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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 quothave 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.
