Forex overview. US Dollar Struggles to Rally Ahead of Fed Decision and US-China Trade Talks – ForexNews.PRO
It might have been expected that the announcement of official trade negotiations between the United States and China would have boosted the US dollar. However, the dollar is struggling, managing only a modest 0.5% gain against the Japanese yen and Swiss franc, which were the top performers in April. Today’s FX market is eventful, featuring Scott Bessent’s testimony and a Federal Reserve meeting later. Rate reductions are also expected in Poland and the Czech Republic.
USD: Dollar’s Advance Lacks Strength The news from last night that the United States and China would begin formal trade discussions on May 10-11 to ease trade tensions caused a brief 0.4/0.5% rise in the dollar. In April, the yen and Swiss franc currencies benefited significantly from tariff uncertainty and broad selling in US assets. De-escalation should, in theory, lead to a recovery led by USD/JPY and USD/CHF.
The limited overnight recovery in USD/JPY is particularly noteworthy given the substantial long yen positioning. However, the USD/JPY rally has been relatively weak. The 10-year US swap spread (Treasuries versus swaps) is also trading high at 55bp, indicating ongoing concerns regarding Treasuries. Despite the recovery in US equities, the FX and bond markets seem to be showing lingering apprehension.
Two key US events are shaping the dollar’s trajectory today. First, Treasury Secretary Scott Bessent is testifying before the House on the “State of the International Financial System” starting at 16CET. He will likely argue that US bond markets are stable and reiterate Washington’s commitment to a strong dollar policy.
It will be interesting to see if he is questioned about whether currency agreements are part of the ongoing trade negotiations with 17 other countries. USD/Asia pairs like USD/TWD and USD/KRW have faced pressure due to expectations that their central banks may be asked to strengthen their currencies against the dollar. Bessent is expected to tread carefully on this topic, but this testimony could pose a downside risk to the dollar.
The FOMC meeting and Chair Powell’s press conference this evening are also on the agenda. This is unlikely to be a major market mover as the Fed continues to resist pressure from the president to cut rates. The market seems content to wait for the next Fed rate cut in July and to see the hard data to determine the extent of the Fed’s cuts. Recently, markets have reduced expectations for the Fed’s next easing cycle by about 20bp, raising questions about why the dollar is not performing better.
The DXY stalled last week at a level consistent with a weak bear market correction. It is likely that there are many protective buy stops above 101.00 now. However, DXY price action has been weak, and a fall back to 99.25 in quiet markets would confirm that the dollar is struggling to overcome the risk premium associated with uncertain US policymaking.
EUR: Limited Damage from Weakened Merz The narrative that German fiscal expansion led to a significant rise in the EUR/USD exchange rate in March (from 1.04 to 1.09) suggested that a weakened Friedrich Merz should cause EUR/USD to fall back. His failure in the initial confirmation round in German parliament briefly sent EUR/USD back to 1.1310, but EUR/USD is proving resilient. Also, China’s monetary stimulus announcement overnight could be seen as positive for EUR/USD as it helps global demand trends.
Beyond the US events today, the eurozone focus will be on weak retail sales data for March. Slightly softer Swedish inflation data has already been released this morning, although it is probably insufficient to change the consensus view that the Riksbank will keep the policy rate unchanged at 2.25% at its meeting tomorrow.
EUR/USD held important support at 1.1260 last week. The market remains uneasy about US policy, and dollar price action is weak. There is a slight expectation that it can break through 1.1380 to 1.1420 in quiet markets.
GBP: Trade Deals Offer Support Sterling is trading steadily, and politics should be supportive this month. A new UK-Indian trade deal has already been announced, and speculation is growing that a US-UK trade deal could be reached this week. It is unclear whether London will be able to eliminate the 10% baseline US tariffs, but it might be able to secure reductions in the 25% tariff rate on the car and steel sectors.
Also, the focus remains on the May 19 UK-EU summit, the first since Brexit. Improved relations with the EU typically lead to a rally in sterling.
Tomorrow’s Bank of England rate-setting meeting is also significant. The market may be pricing in too many rate cuts this year.
There is a bias towards GBP/USD trading back to the 1.3445 high in the next couple of days.
