A 25bp rate cut by the ECB is widely anticipated, so the market’s attention will mainly be on its forward guidance. With the policy rate nearing the neutral level, some hawkish signals are expected. Additionally, any comments regarding the euro's future role as a reserve currency could provide near-term support for the EUR. In contrast, persistent uncertainty around U.S. trade policy continues to pressure the USD outlook.

EUR: Cutting me slowly

Ahead of the June ECB meeting, Eurozone rates investors are expecting the Governing Council to cut rates by 25bp to 2.00%. The markets are further pricing in two additional rate cuts by the end of the year and expect additional easing in 2026, thus expecting the ECB to push its policy deeper into accommodative territory. Next to the policy rate decision, therefore, markets expect that the updated ECB forward guidance and staff economic projections would attract considerable attention. In that, expect the ECB will lower its inflation and growth forecasts, in part due to the recent aggressive EUR appreciation. Notwithstanding that, however, the bank’s updated forward guidance would remain rather vague about the prospect for further easing.

Turning to the FX market reaction, the EUR will take its cue from the price action in the Eurozone rates markets. The updated economic projections could lend support to the current dovish market expectations, the ECB’s vague forward guidance could discourage investors from frontloading their rate cut bets. Given that the EUR trades at a significant premium when compared to its relative rate disadvantage vs the USD and the GBP for example, it could struggle to perform in the wake of the ECB meeting.

In addition, FX investors to focus on any comments by ECB President Christine Lagarde about the future role of the EUR as a reserve currency. Key for market participants would be any indications about how the Governing Council may balance the benefits from growing international demand for the EUR (eg, more favourable financing conditions in the Eurozone) with the negatives (a blow to the Eurozone’s international competitiveness and persistent disinflation). Any signals by Lagarde that the prospects for potential sustained EUR gains could ultimately make the ECB more dovish and keep the EUR-bulls side-lined.

USD: Trump’s legal troubles

The latest twist in the legal drama surrounding the US trade policy saw the US Federal Appeals Court temporarily block an earlier decision of the US International Trade Court to suspend President Donald Trump’s trade tariffs implemented under the International Emergency Economic Powers Act of 1977 (IEEPA). The Trump administration and the trade court have until 9 June to present their arguments before the Appeals Court decides on any long-term stay of the tariff suspension.

Trump administration officials have already highlighted that there are additional legislative routes that President Trump could pursue to preserve the status quo like Sections 122 and 232 as well as Section 338 of the Trade Act and Section 301 investigations. That being said, such tariffs would: (1) be temporary, have limited scope and require US Congressional approval (Section 122); (2) have only limited economic impact beyond existing tariffs (Section 338); and (3) apply at industry- and company-level and may take longer to implement (Sections 232 and 301). The ongoing litigation process and/or the pursuit of alternative legislative routes could slow down the implementation of Trump’s tariffs. These developments could limit Trump’s ability to use the threat of tariffs to impose trade deals on US trading partners which, in turn, could be emboldened to resist any pressure. The latest developments could prolong but not necessarily escalate the global trade war.

Looking ahead into this week, FX investors will focus on Non-farm payrolls, manufacturing and services ISM for May as well as a slew of Fed speakers that include Fed Chair Jerome Powell who is due to deliver opening remarks on 2 June. With the worst of the trade war hit to the US economy potentially behind us, investors will use the incoming data to assess the damage done by Trump’s policies. It would take negative economic surprises and/or dovish Fedspeak to encourage investors to front-load their Fed rate cut bets and thus hurt the USD