The U.S. dollar (USD) is gaining strength against the euro (EUR), Japanese yen (JPY), and British pound (GBP) as the U.S. trading session begins. The EUR/USD pair has stabilized after some initial ups and downs. In contrast, the GBP/USD has dropped by 0.44%, impacted by weaker economic data from the UK for May. The UK GDP estimate fell by 0.1%, missing the expected increase of 0.1%, even though it was an improvement from April’s decline of 0.3%. UK Manufacturing Issues UK manufacturing output decreased by 1.0%, falling short of expectations and previous results, which has affected the GBP/USD. Meanwhile, the USD/JPY has increased by 0.47%. The Trump administration has imposed a 35% tariff on Canadian goods, leading to an initial spike in the USD/CAD, although the numbers have since stabilized. Canada intends to defend its interests as trade discussions continue. Canada remains open to cooperation with the U.S. on joint projects. Vietnam was caught off guard by tariffs as high as 20% to 40% on transshipped goods, having expected lower rates. A letter from Trump raises questions about possible tariffs on the EU. Federal Reserve President Austan Goolsbee has warned against interest rate cuts, expressing concerns over uncertainty following the April tariffs. He noted that tariffs have not significantly increased inflation but acknowledged business worries. ECB’s Isabel Schnabel confirmed that there are high barriers to further easing, indicating that the eurozone economy remains robust. ECB and U.S. Market Responses Markets expect the ECB to maintain stable rates throughout the summer, with little chance of cuts in the coming months. ECB’s Panetta mentioned that continued easing might be necessary if disinflationary risks persist. Following tariff announcements, U.S. stocks saw downturns, with declines in the Dow, S&P, and Nasdaq. Yields on U.S. debt rose across 2-year, 5-year, 10-year, and 30-year bonds. The dollar has gained strength against major currencies at the start of the U.S. session, making notable moves against the euro, yen, and pound. The euro-dollar pair has settled down after earlier volatility. On the other hand, sterling is under pressure due to disappointing UK economic data. The latest GDP estimate showed a slight contraction of 0.1%, when a slight growth was expected. While this is better than April’s bigger decline, it suggests fragile momentum in the UK economy. UK manufacturing output dropped more than anticipated, falling by 1.0%. This decline was unexpected and has further weakened GBP confidence. The GBP/USD is feeling the impact of reduced confidence in the UK’s industrial recovery. The USD/JPY pair, however, is gaining as investors seek safer U.S. assets, partly due to a lack of new Japanese policy measures. For traders, this renewed strength in the dollar is noteworthy, especially as short-term U.S. bond yields rise, providing the dollar with a yield advantage. Trade Policy Developments Trade policy is back in focus. The U.S. recently implemented a 35% import duty on Canadian goods, leading to an immediate spike in the USD/CAD pairing. Though the reaction has calmed, the initial jump reflected the surprise at the steep tariff rate. Canada’s response combines disagreement with the measures while continuing discussions, suggesting a more rhetorical approach for now. Tariff surprises also affected Vietnam, which faced much higher tariffs on goods rerouted to the U.S. than expected, with rates reaching as high as 40%. This will likely impact trade flows, particularly for goods re-exported through Vietnam. These changes indicate that future trade adjustments will require closer examination of supply chain routes. Monetary Policy Insights Monetary policy discussions are also gaining attention. Goolsbee has pushed back against short-term interest rate cuts, indicating that while tariffs have complicated things, they haven’t yet resulted in a clear inflation rise. However, he warned of increased uncertainty for the economic outlook, especially for Midwest manufacturers. This suggests the Federal Reserve may hold rates steady in the short term unless inflation rises significantly. Across the Atlantic, Schnabel has emphasized that future policy easing would need strong justification. Her stance indicates that despite some soft eurozone data, the overall economy shows enough resilience to keep current rates unchanged, minimizing expectations for any changes this summer. Panetta hinted at potentially easier conditions should price pressures continue to ease, but this seems more conditional than an active debate within the ECB. We should pay attention to upcoming inflation reports, especially in Southern Europe, where the variation in price trends might become more evident. Finally, in the U.S. stock market, traders reacted sharply to the tariff news. Broad market indices fell—not due to macroeconomic data but because of concerns over corporate earnings and supply chain risks. The Dow experienced the largest losses, followed by declines in tech stocks on the Nasdaq. Yields on U.S. government bonds increased across the board as the market anticipated greater government issuance or a delayed easing cycle. Overall, messages from different asset classes are converging: prepare for trade disruptions, rethink interest rate expectations, and stay alert for shifts in central bank communication as new data emerges. Create your live VT Markets account and start trading now.

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