Market Trends Driven by Shifting Currency Values

USD – S&P 500 Gains as the US Dollar Weakens

The US dollar forecast is turning increasingly bearish as the S&P 500 continues to climb. This inverse relationship is largely due to the global exposure of many US-listed companies, with around one-third to two-fifths of their total revenues generated overseas. When the US dollar weakens, foreign earnings convert into higher dollar values, lifting reported profits. This effect is most pronounced in the technology sector, where more than half of sales can come from international markets.

Despite Wall Street’s upward momentum, the rally remains uneven. The equal-weighted S&P 500 is close to record highs, yet only about half of its components are trading above their 50-day moving average. Corporate earnings have been the key driver, with over 80% of firms beating expectations. The US dollar’s recent 10% decline is tied to market expectations of a September interest rate cut, with bond markets pricing in a peak policy rate near 3% in 2026. While this monetary easing outlook supports equities, it also adds downward pressure to the currency.

GBP – Sterling Outlook Improves on UK Economic Strength

The GBP/USD outlook has brightened after the UK economy grew by 0.3% in the second quarter, easily outpacing the 0.1% forecast. Industrial and manufacturing output also came in stronger than expected in June, reversing May’s contraction. Although earlier gains were partly driven by exporters fast-tracking orders to avoid tariffs, the latest figures suggest underlying economic resilience despite tax hikes and trade headwinds.

Sterling has strengthened against the dollar, supported by the Bank of England’s more hawkish tone compared with the US Federal Reserve. The GBP/USD exchange rate has climbed into the 1.35 range, closing above its 50-day moving average for the first time in weeks. Traders are now watching for a break above the 1.36 level, with 1.37 the next significant target. Sustaining this momentum will depend on upcoming US economic data reinforcing the divergence in monetary policy between the two central banks.

EUR – Euro Gains Tied to US Monetary Policy

The EUR/USD trend for the rest of the year is likely to be shaped more by changes in US interest rates than by eurozone economic performance. EUR/USD has recently moved above 1.17, with 1.20 viewed as a realistic medium-term target, aligning with its historical average. Historically, a more accommodative US policy stance has benefited the euro through improved interest rate differentials and stronger capital inflows.

Market sentiment towards the eurozone remains subdued, meaning there is room for the single currency to appreciate if the US–Europe interest rate gap narrows. While the European Central Bank appears reluctant to cut rates further, even small steps towards capital market integration or collective borrowing could support long-term demand for the euro. Importantly, the euro could strengthen even without a robust eurozone recovery if the dollar continues to weaken.

Outlook – Policy Divergence to Remain the Main Driver

Looking ahead, currency market trends are set to be dictated by central bank policy expectations rather than short-term domestic performance. In the US, prospects for interest rate cuts are proving a double-edged sword – boosting equities while weighing on the dollar. The UK’s relative economic resilience could keep sterling supported if the Bank of England maintains its stance, while the euro may extend gains purely on the back of a softer US dollar. As a result, traders should watch interest rate differentials and policy divergence as the dominant forces shaping the US dollar forecast, GBP/USD outlook, and EUR/USD trend in the coming months.

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