The market’s upbeat mood is hindering the dollar

• The S&P 500 rally is putting pressure on the greenback as a safe-haven asset.
• The Labour Party’s defeat in local elections will create problems for the pound.

While the market tries to figure out tariffs, EURUSD is rising thanks to US stock indices and improved global trade. According to HSBC, supply chains have been restructured with a sharp increase in turnover in Asia. At the same time, trade in services, which is not affected by import duties, is growing faster than trade in goods. This dynamic supports the export-oriented economy of the eurozone and contributes to the strengthening of the euro.

According to 57% of Bloomberg experts, Christine Lagarde will leave her post as head of the ECB earlier than expected. Klaas Knot appears to be the main candidate to replace her. He is a ‘hawk’, which increases the likelihood of a deposit rate hike in 2027. The futures market expects the federal funds rate to decline next year. Divergence in monetary policy will be a powerful driver of the EURUSD rally in the medium- to long-term.

The rise in US stock indices is putting pressure on the US dollar as a safe-haven currency. At the same time, hawkish rhetoric from FOMC officials and the decline in the probability of the Fed easing monetary policy in June to 46% are holding back the bulls’ offensive on EURUSD. 

The statement by Board Member Hajime Takata that the Bank of Japan should raise the overnight rate sooner rather than later caused USDJPY buyers to retreat. According to the chief hawk, it is time to add to the rhetoric that the inflation target is almost achieved and that external shocks could accelerate consumer price growth.

However, the government recently approved two doves to the Bank of Japan’s board of governors, so the camp of supporters of higher rates is actively shrinking. This could lead to a prolonged pause in the cycle of monetary policy normalisation and pressure on the yen. The interest rate differential plays into the hands of the bulls on USDJPY.

The growth in global risk appetite has helped the pound recover. Nevertheless, GBPUSD remains under pressure. The Bank of England is moving closer to lowering its repo rate, and Labour’s defeat in local elections will fuel rumours of Keir Starmer’s resignation as Prime Minister. The Polymarket betting market gives a 63% probability that this will happen before the end of 2026.

The FxPro Analyst Team