USD
The US dollar lost ground against most major currencies yesterday, even as global markets experienced another bout of risk aversion. Typically, rising trade tensions would drive demand for the dollar as a safe-haven asset. However, investors are shifting their focus beyond short-term fluctuations to the broader economic impact of these tariffs. Market trends suggest that mounting worries over slower US economic growth and declining corporate profitability are starting to outweigh the dollar’s immediate defensive appeal. The Greenback has now fallen for seven consecutive days, down 6.5% from its 2025 peak.
President Trump’s latest tariff hike has added to financial market volatility. Just days after broadening import duties on Canada and Mexico, he announced that steel and aluminum tariffs on Canada would double to 50%, citing Ontario’s recent increase in electricity export taxes. This decision sent ripples through equity markets, with the S&P 500 extending its three-week slide to nearly 10%, while the VIX, Wall Street’s "fear gauge," surged to its highest level since last August. The Canadian dollar also dropped to a weekly low, underscoring the outsized impact of trade disputes on North and Central American currencies.
Beyond tariffs, US economic data offered a mixed outlook. The NFIB Small Business Optimism Index fell to 100.7—its lowest reading since October 2024—as business owners faced near-record levels of uncertainty. Concerns over inflation and labour shortages are mounting, with confidence in future economic conditions taking a significant hit. However, the JOLTS report revealed an increase in job openings to 7.74 million, signalling sustained labour demand in key industries like retail, finance, and healthcare.
Looking ahead, markets will closely watch US inflation data, central bank signals, and geopolitical developments. The dollar’s recent slump could continue if trade tensions further erode economic sentiment and corporate confidence, as investors weigh short-term market reactions against broader economic trends.
EUR
The euro continues to climb against the US dollar, surpassing the $1.09 level for the first time since Donald Trump’s election. This month alone, the currency has surged over 5.5% as investors pivot away from the US, where fears of a looming recession and uncertainty surrounding trade policy are dampening market sentiment.
Fuelling the euro’s latest gains are developments in Germany, where talks of a historic fiscal expansion are picking up steam. Franziska Brantner, co-leader of the Greens, has signalled openness to negotiations on increased government borrowing to support defence spending and economic stimulus. While details remain uncertain, markets have reacted positively to the potential for enhanced fiscal support. Paired with expected rate cuts from the European Central Bank (ECB), this combination of monetary and fiscal stimulus is a rare occurrence for the eurozone.
The shifting political landscape in Europe is also reinforcing the euro’s strength. Hopes are mounting that Germany’s potential policy shift could lead to a significant increase in borrowing and investment over the next decade. However, political hurdles remain, with the Greens resisting broader debt rule reforms and a proposed €500 billion infrastructure fund. Investors will be watching closely in the coming days, as a finalized fiscal agreement could push the euro even higher.
Meanwhile, growing economic concerns in the US, persistent trade uncertainties, and diverging policy paths between the Federal Reserve and the ECB are weighing on the dollar. With euro bulls firmly in control, traders are focused on any signs of a breakthrough in German fiscal negotiations and further indications of economic slowdown in the US.
GBP
The recent weakness of the US dollar, driven in large part by diminishing expectations of American economic exceptionalism, has coincided with a boost for the pound, likely fuelled by Europe’s fiscal revaluation. However, it is the euro that has reaped the greatest benefits from Germany’s ground-breaking stimulus plan, which includes a debt brake reform to enable increased spending on defence and infrastructure. Following a major shift in sentiment towards the euro last week, EUR/USD has surged more than 5% this month, greatly outpacing GBP/USD’s modest rise of less than 3%.
Over the past two years, sterling has benefitted from a notable yield advantage compared to many other currencies, supporting GBP/USD’s stronger performance against EUR/USD. This trend has also helped push GBP/EUR to two-year highs in recent months. However, this dynamic seems to be changing. With Europe’s economic outlook improving and German bond yields climbing, the euro looks set for a period of sustained outperformance against major rivals, including the pound.
GBP/EUR has already dropped 2.2% this month, falling below its 50-week moving average for the first time in a year. This suggests further downside potential, with a possible move towards €1.17. While the close correlation between EUR/USD and GBP/USD is likely to remain, the euro seems to have more room to climb against the dollar than sterling does.
Looking ahead, on Friday the Office for National Statistics (ONS) is set to publish the UK's Gross Domestic Product (GDP) figures for the fourth quarter of 2024, offering a clearer picture of the nation's economic performance during that time.
Projections for the UK's economic growth remain cautious. The British Chambers of Commerce (BCC) has downgraded its 2025 GDP growth forecast to 0.9%, down from a previous estimate of 1.3%. This revision reflects concerns over rising business costs, including higher payroll taxes and employment expenses, which are expected to weigh on investment and hiring. Similarly, the Bank of England has cut its 2025 growth forecast from 1.5% to 0.75%, citing ongoing economic challenges and uncertainty.
Although the forthcoming ONS report will provide insight into the UK's economic activity in late 2024, recent forecasts suggest a more subdued outlook for growth in 2025.