Dollar’s march into month-end
The US dollar index notched its best day since mid-May on Monday after surging 1.3% against the euro, lifted by easing trade tensions and a run of resilient US data. The buck is on track to snap a 6-month losing streak. Meanwhile, equity markets remain buoyant under a “good data is good news” regime, with recession fears fading and risk appetite firming. Overall, the negative consequences of tariffs on the US economy are yet to show, supporting demand for US assets, for now.
The US-EU trade deal brought relief, halving proposed tariffs to 15% and improving sentiment ahead of key meetings with China with an extension of the current trade truce expected to be announced. Friday’s Aug. 1 tariff deadline adds another potential flashpoint, but the reality is that markets are more focused on this week’s economic data and the Fed meeting, which will likely set the tone for the rest of the year in markets and the economy.
We expect US inflation pressures to remain elevated, driven by tariff effects, a firm data pulse, and tight labour supply. While no policy change by the Fed is expected at this stage, labour market cracks — if they emerge — could test the Fed’s balancing act between inflation control and employment support. JOLTs job openings today and Friday’s payrolls will therefore be watched closely.
Outside the US, disinflationary headwinds dominate. Stronger currencies, weaker demand, cheaper oil, and China’s excess supply create an environment where global price pressures are easing. High US tariff rates on China have already led to a significant decline in exports to the US. If China redirects these exports, the deflation impulse in other countries could deepen.
So, as attention shifts from trade deals to the implications of tariffs and macro fundamentals, monetary policy divergence is back in focus. The usual correlation between higher US yields and a stronger dollar broke down earlier this year amid concerns over fiscal sustainability and erratic policy signals, but recent developments suggest a recoupling is underway which is helping the dollar regain its footing.
In some cases, the yield gap between the US and its major trading partners are the largest since the mid-1990s. If this trend continues, the USD rebound could extend, especially against currencies where central banks are cutting rates more aggressively as disinflation is becoming a solid baseline for the rest of the world. The question remains though; will July mark the bottom for the dollar or just a pause in the longer-term downtrend due to US policy unpredictability?
Euro’s moment of truth
As investors navigate H2, the search for fresh, data-backed catalysts to justify further euro upside has never been more pressing. So far, those catalysts have been largely US-driven: negative surprises from Washington have fueled the rally, but the magic of mere “noise” is fading. This week, EUR/USD faces a moment of reckoning as a dense lineup of US data promises a clearer picture of the economy under steep tariffs. The outcome could either validate euro strength or trigger a retest of mid-July’s $1.1557 lows—or even challenge the 50-day moving average that’s underpinned the rally thus far.
However, yesterday’s EUR/USD price action revealed more: instead of a balanced, directionless response to the EU–US trade deal—as expected, given potential mutual benefit—the pair plunged over 1% at some point, making it the worst-performing G10 currency. That move reflects two key issues: First, despite the deal, tariffs remain elevated, raising fresh concerns about Europe’s export sector. Second, the power dynamics are impossible to ignore—how did the world’s largest trading bloc fail to secure better terms? Unlike Canada and China, the EU avoided retaliatory threats, revealing its deep fragmentation, which continues to weigh on the euro’s global standing.
In the background, Trump’s erratic policy agenda may have gained some degree of credibility, as soaring tariff revenues have so far had muted effects on inflation, while surging profits and solid macro data are helping boost confidence in the dormant US exceptionalism story. This complicates the euro’s case: a rally once fueled by fading faith in the US now risks losing steam due to eroding confidence in the EU—not for unpredictability, but for capitulation. If this week’s US data surprises to the upside and Europe can’t secure better terms, a bearish reversal in EUR/USD below its 50-day MA looks increasingly likely.
Pound drops to 2-month low
Amidst broad dollar strength, GBP/USD fell for a third day running and to its weakest level in more than two months. The currency pair has broken convincingly out of its 2025 uptrend channel and closed below its 21- and 50-day moving averages last week, looking for support at its 100-day moving average today to temper the downward trend.
The dollar’s rebound — bolstered by recent US trade agreements — comes amid growing expectations of a Fed hold, while markets continue to price in a Bank of England rate cut by next week. As FX begins to re-couple with rate differentials, this has added further downward pressure on GBP/USD. Domestically, CBI data showed UK retail sales declined for the tenth month in a row, reflecting persistent consumer strain from elevated prices and uncertainty. Though there was a slight pickup from last month, figures still fell short of forecasts — continuing a familiar pattern of softer UK data.
With GBP/USD down over 3% from its July peak and entering oversold territory, a pause in the sell-off can’t be discounted — particularly after the Fed meeting concludes. Historically, the pound has a habit of bouncing when sentiment is at its weakest, so a rebound wouldn’t be unprecedented. Over the longer-term, even if the downtrend resumes, we think $1.30 offers a strong base to sterling though.
GBP/EUR jumps out of oversold zone
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: July 28-August 01
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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.
