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The dollar is clinging to strength, even as doubts begin to circle the medium-term outlook. Following the latest Fed meeting, traders have scaled back bets on imminent rate cuts. The June FOMC now has barely 5bps priced in, and even July expectations have thinned. Why? Powell and the Fed continue to strike a patient tone, even in the face of growing uncertainties. The official line remains that the economy is still expanding at a “solid” pace despite Q1’s soft GDP—and that the labour market remains resilient.
DXY H1 Chart
But beneath that calm exterior, cracks are forming. The Fed acknowledged heightened risks from both inflation and unemployment. That’s a rare dual warning. Powell dismissed Trump’s criticism over delays in cutting rates, saying the data will drive decisions. That keeps the Fed in a reactive posture. Unless job market data sours materially before June, it’s hard to see the Fed moving quickly. And even July may be too soon, particularly with the “reciprocal tariff” drama set to flare again in July once the 90-day delay expires.
For now, the dollar is supported by delayed easing, but the disconnect with yield spreads is growing. This temporary resilience may not hold once labour market weakness becomes undeniable or tariff-driven uncertainty spills into broader sentiment.
GBP: Trade Deal Buzz Lifts the Pound, but BoE Risks Loom
Sterling caught a mild tailwind from speculation over a UK-US trade breakthrough, sparked by a cryptic Trump post promising news with a “highly respected” nation now widely believed to be the UK. British officials are in Washington, and reports suggest progress on tariff reductions for sectors like autos and steel. This comes hot on the heels of a UK-India deal, underscoring London’s post-Brexit pivot toward bilateral trade.
But the real test for the pound is still the Bank of England. With rate markets already pricing nearly 40bps of cuts by June, the bar is high for a dovish surprise. Still, with volatility having rattled UK assets last month thanks in part to Trump’s tariff salvos the BoE faces pressure. There’s even faint speculation about a 50bps cut, although that’s a long shot.
If the BoE sticks to its current pace of quarterly cuts and trade optimism holds, GBP may have room to recover further. But if markets sniff out a faster easing cycle or if trade talks collapse into noise downside risks will resurface fast, particularly given the UK’s persistent current account deficit and vulnerability to external shocks.
Wider Context: Market Sensitivity to Political Narratives
The FX landscape has become hypersensitive to political theatre. Whether it’s central bank hesitance, tariff threats, or social media-driven trade deal hints, currencies are moving on expectation management as much as data. With the Fed on hold and the BoE potentially softening, any perceived progress in US-UK trade talks could skew GBPUSD higher at least temporarily.
But none of this changes the underlying fragility. In the US, inflation is proving stickier than hoped, while growth is cooling. In the UK, the structural imbalances remain. And across both economies, political noise is likely to intensify as election dynamics pick up.
Markets will digest the BoE’s decision today, along with Governor Bailey’s remarks. On the US side, jobless claims and productivity data could reignite the Fed narrative. And while the Trump-led trade talks may grab headlines, hard details will matter more than rhetoric.
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