Dollar Dips While Euro and Pound Climb: Forex Traders React to Inflation, Geopolitics

Euro and Pound Advance as Dollar Wobbles on Inflation Signals

The foreign exchange market is seeing sharp movements this May as investors recalibrate positions based on shifting economic data, central bank policy cues, and geopolitical developments. At the center of attention is the U.S. dollar, which has come under renewed pressure amid signs of weakening inflation and growing speculation that the Federal Reserve may pivot from its tightening stance.

A softer-than-expected U.S. Consumer Price Index (CPI) report has led markets to reduce bets on additional rate hikes in 2025, although Treasury yields remain relatively elevated, signaling investor caution. As a result, the greenback has weakened against most major currencies, providing an opening for gains in both the euro and the British pound.

The euro has benefited from the European Union’s recently approved €500 billion defense and infrastructure stimulus package, which has sparked renewed investor confidence. Manufacturing output across key Eurozone economies also beat expectations, giving further support to the EUR/USD pair, which is currently hovering between 1.1575 and 1.1200. Analysts at XE suggest this range could hold throughout the month barring any sharp data surprises.

The British pound has posted multi-month highs against the U.S. dollar, supported by optimism around fresh U.K. trade agreements. However, traders are closely watching signs of slowing domestic economic activity and whispers of a potential Bank of England rate cut, which may place a ceiling on sterling’s upward momentum.

Yen Weakens, AUD Gains, and Emerging Markets See Volatility

Across the Pacific, the Japanese yen has dropped to its lowest level in over a month. The recent U.S.-China trade truce, which lowered tariffs and calmed investor nerves, has encouraged risk-on sentiment—typically negative for the safe-haven yen. Japan’s finance minister has indicated plans to raise foreign exchange concerns with U.S. officials at the upcoming G7 summit, highlighting Tokyo’s unease over rapid yen depreciation (Reuters).

The Australian dollar, meanwhile, has outperformed many of its peers, lifted by both a weaker U.S. dollar and relative strength in the Chinese yuan. The AUD/USD pair has rallied near the 0.6515 resistance level, though analysts warn that further gains may be capped by waning global risk appetite and softer commodity prices (Forex.com).

Emerging markets are also experiencing mixed fortunes. The Indian rupee surged by 75 paise to 84.62/USD following a breakthrough ceasefire agreement with Pakistan and improving global sentiment post-U.S.-China trade thaw. Conversely, the Turkish lira has plunged to a record low of 42 per dollar amid ongoing political unrest, despite aggressive central bank intervention totaling $25 billion in forex sales.

As May unfolds, currency markets are expected to remain volatile. Traders will continue to watch inflation updates, central bank meetings, and geopolitical headlines for the next big catalyst.