Forex Market Recovers on Trade Deal Optimism: US Dollar Dips, Euro and Pound Rise

Title: Forex Daily: Trade News Lifts Market Sentiment

Original article by Chris Turner, ING | Adapted and expanded for clarity and depth

As we move through a period of steady shifts in the foreign exchange (FX) market, recent trade agreements and better-than-expected economic data have injected a fresh sense of optimism into global markets. Currency markets are responding to developments on the geopolitical front, particularly with the progress made in trade negotiations. This article will explore how key currencies are reacting to these changes and what traders should watch in the coming days.

1. A Renewed Wave of Optimism in the Market

Markets are showing signs of relief after significant progress was made in several trading relationships. Momentum largely stems from positive economic headlines and commitments from major economies to de-escalate trade tensions. The ripple effects are being felt across multiple asset classes, including currencies.

Key drivers of this optimism:

– The announcement of a preliminary trade agreement between the United States and China.
– Strengthening dialogue between the European Union and the UK post-Brexit.
– The US-Mexico-Canada Agreement (USMCA)’s ratification process gaining traction.
– The UK’s additional bilateral trade negotiations with non-EU nations.
– Positive macroeconomic releases, such as stronger US retail sales data and improved business sentiment surveys in Germany.

All of these elements combined appear to be feeding into a more risk-on environment, supporting risk-sensitive currencies while weighing on safe havens.

2. Dollar Under Pressure Despite Strong Economic Data

The US dollar has come under modest pressure in recent sessions despite strong data points such as:

– Higher-than-expected retail sales, indicating resilient consumer demand.
– Upbeat regional manufacturing indices, including the Empire State and Philly Fed surveys.
– An upward revision to GDP growth expectations for Q2 and Q3.

Normally, strong economic data would bolster the dollar via expectations of tighter monetary policy. However, markets have already priced in much of this good news, and geopolitical optimism has promoted a rotation toward higher-yielding and emerging market currencies.

In particular, the following dynamics are worth watching:

– The Federal Reserve remains committed to maintaining interest rates at current levels, barring unforeseen inflationary pressure.
– Diminished demand for the dollar as a safe-haven currency amid rising risk appetite.
– Monetary policy divergence is no longer as significant a tailwind for the greenback as it was during past tightening cycles.

3. Euro Rebounds as German Data Surprises to the Upside

The euro has managed to recover some ground recently, supported by better-than-expected data from the Eurozone’s largest economy. Notably:

– The Ifo Business Climate Index recorded a surprise increase.
– Consumer sentiment stabilized after months of decline.
– Industrial production showed tentative signs of recovery, led by a rebound in the automotive sector.

The European Central Bank (ECB) continues to take a cautious stance, with policymakers signaling patience and data dependency before committing to further rate hikes. This measured approach, coupled with green shoots in the German economy, has helped EUR/USD inch closer toward the 1.09 level.

Factors currently supporting the euro:

– Reduced tail risk from energy shortages this winter.
– Narrowing interest rate differentials with US Treasury yields.
– Waning fears of Eurozone fragmentation amid stronger fiscal coordination.

However, it remains to be seen if the improvements in economic data are sustainable or merely a short-term rebound.

4. Sterling Improves as Trade Progress and Data Support Rebound

The British pound has strengthened as fears of a hard Brexit fade and policymakers embrace pragmatic approaches to ongoing trade issues. A number of supportive developments include:

– The UK’s successful negotiation of trade pacts with countries outside the EU.
– A smoother-than-expected implementation of post-Brexit customs procedures.
– A rebound in services PMI and rising inflation expectations.

As GBP/USD tests the 1.28 level, traders are weighing the following:

– Whether the Bank of England will resume its rate hike cycle if inflation

Read more on EUR/USD trading.

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