EUR / USD
The euro continues to show resilience despite mixed signals from the Eurozone economy. The ECB's recent eighth consecutive rate cut, and signal of a potential pause reflects growing confidence that inflation is under control, having returned to the 2% target.
However, ECB policymakers remain cautious about the impact of Trump's tariff policies on the regional economy. While ECB officials like Nagel suggest monetary policy is now at a neutral level, providing flexibility for future decisions, concerns persist about trade uncertainties affecting growth. The euro's strength is also supported by structural factors, including the ECB's gradual approach to monetary easing and relatively stable economic fundamentals.
Looking ahead, the upcoming US CPI data, which is expected to have accelerated to 2.5% YoY in May, and any progress in trade negotiations between US and Chinese officials in London will be crucial in determining near-term currency movements. The divergence between ECB and Fed policy paths, with markets pricing in Fed rate cuts later this year, could provide additional support for the euro.
USD / JPY
The Japanese yen faces mounting pressure on the back of the recent remarks from Bank of Japan Governor Kazuo Ueda, reflecting growing concerns about the impact of trade tensions on Japan's economic outlook. This is particularly prevalent as the US and China prepare for crucial trade talks in London on June 9th.
Moreover, the Japanese economy's vulnerability is further highlighted by preliminary data showing a 0.2% contraction in Q1 2025, following 0.6% growth in Q4 2024, with weak external demand and private consumption weighing heavily on economic momentum. Market expectations suggest the Bank of Japan will maintain its dovish stance in the near term, especially as producer prices are forecast to show declining inflation trends, with May figures expected to drop to 3.5% year-on-year from 4.0% in April.
The upcoming Japanese GDP data release will be crucial in determining the yen's direction, as weaker numbers could effectively close the door on potential BoJ policy adjustments in 2025. The combination of these factors, alongside the broader implications of US-China trade negotiations, suggests growing pressures on the yen, especially if economic indicators disappoint.
GBP / USD
The pound remains resilient despite growing domestic performance pressures. Recent employment data shows the UK labour market softening, with unemployment edging up to 4.6% - the highest level since 2021, while wage growth continues to moderate.
The US jobs report indicated steady but cooling employment growth, keeping the Federal Reserve on hold at its June meeting. Trump's aggressive trade policies and tariff threats are creating market volatility and weighing on global risk sentiment, which is supporting the pound's position as an alternative to the dollar. The upcoming US CPI data will be crucial, with expectations for core inflation to tick up to 2.9% annually in May from 2.8% previously.
The Bank of England faces a challenging balancing act between supporting growth and containing inflation while markets are pricing in Fed rate cuts by year-end. The UK's exemption from Trump's steel and aluminium tariffs provides some support for sterling, which suggests continued resilience in the pound relative to its European counterpart.
