Dollar strength returns as rates retake the spotlight
Market overview
Risk appetite has turned more fragile as investors take profits in some of this year’s most crowded equity trades. Pressure on Apple, alongside reports of a potential delay to OpenAI’s IPO, has cooled enthusiasm around the AI-led rally and prompted a broader reassessment of market leadership.
Asia has borne the brunt of the move, with the MSCI Asia Pacific Index down around 3% and Korea’s Kospi briefly halted after a sharp intraday fall. European shares and US futures are also trading softer, pointing to a more cautious start across global markets.
That said, this is not yet a disorderly risk-off move. The dollar is steady, government bonds are slightly better bid and oil is lower despite renewed tension around the Strait of Hormuz. The more important development is a rotation in the macro narrative. Markets are shifting away from the debasement trade and back towards the traditional drivers of growth, inflation and policy rates.
Higher real yields are again doing the heavy lifting. Resilient US data and persistent inflation have revived the higher-for-longer rates story, making non-yielding assets such as gold and Bitcoin less compelling and reinforcing demand for the dollar.
USD: Rates support remains intact
The dollar continues to benefit from a favourable mix of firm activity, sticky inflation and a more hawkish Federal Reserve outlook. Markets are now placing a high probability on another Fed hike by September, and recent data has done little to challenge that view.
US first-quarter GDP was revised up to an annualised 2.1%, personal income and spending both beat expectations, and core PCE inflation remains elevated at 3.4% year on year. The details were not uniformly strong, with inventories and trade flattering the GDP figure and consumer momentum still modest. Even so, the broader message is clear: the US economy is not slowing enough to force a dovish rethink.
For FX markets, that remains a dollar-positive backdrop. Growth is not accelerating aggressively, but it is holding up well enough to keep inflation concerns alive and real yields sticky.
GBP: Sterling struggles as yield support fades
Sterling remains under pressure against the stronger dollar, with GBP/USD testing the 1.32 area. The pair is down around 0.25% on the week and roughly 2% over the month, although the pound has held up better against several other G10 currencies. That suggests the latest move is still more about dollar strength than a standalone sterling sell-off.
The rates channel has become less supportive for GBP. Earlier this year, lower oil prices and resilient risk sentiment helped the pound. More recently, weaker energy prices have encouraged markets to price a less hawkish Bank of England path, reducing the UK’s relative yield appeal just as investors have become more confident in the US growth and rates story.
UK politics is also moving further into focus. With markets increasingly considering the prospect of an Andy Burnham premiership, attention is shifting from the leadership question itself to the likely make-up of the next government. The Chancellor appointment will matter, with fiscally disciplined candidates likely to be received more positively than those associated with looser spending plans.
Technically, GBP/USD still looks vulnerable. The pair has reached a fresh seven-month low and remains below its key daily moving averages. Oversold momentum indicators may allow for a short-term bounce, but the broader trend remains negative.
EUR: Limited relief for the single currency
EUR/USD has found some support near 13-month lows, with buyers emerging around 1.1350. The recent decline had started to look stretched after the pair fell sharply from 1.16 last Wednesday, following Kevin Warsh’s hawkish tone at his first Fed policy meeting.
A softer-than-expected monthly US PCE print helped prevent a fourth consecutive daily fall in EUR/USD, but the recovery looks more like position-squaring than a genuine change in the macro story. The dollar still enjoys a stronger growth and rates backdrop than the eurozone, while sticky US real yields make a meaningful unwind of Fed hawkishness unlikely for now.
The next major test for the euro comes next week with June CPI. Investors will also be watching the ECB’s annual forum in Sintra for any shift in tone after recent hawkish-leaning meetings, especially following lower oil prices and Christine Lagarde’s unexpectedly dovish remarks earlier this week.
Looking ahead
US data remains the key driver for dollar direction, particularly inflation and consumption releases.
June eurozone CPI will be central to whether EUR/USD can hold recent support levels.
Sintra will be watched closely for any change in ECB messaging.
GBP markets will remain sensitive to UK political developments and Chancellor speculation.
Risk sentiment will depend on whether the AI-led equity correction remains contained or broadens further.