US Dollar Weakens Amid Tariff Uncertainty and Market Jitters
After a brief rebound on Friday, the US dollar remains under pressure, weighed down by growing concerns over President Trump’s proposed tariffs. Slowing economic growth and rising inflation expectations have added to the uncertain outlook, keeping investors on edge.
US equities extended their losses last week, with the S&P 500 plunging 10% in just 16 sessions before managing a slight recovery on Friday. Credit markets also reflected mounting economic worries, as junk bond spreads widened. The US dollar has now fallen roughly 6% from its January peak, marking its worst post-inauguration performance since President Nixon’s second term in 1973. While tariffs could drive safe-haven demand for the dollar, they may also dampen sentiment and economic growth, limiting the potential for a sustained recovery.
Looking ahead, all eyes are on the Federal Reserve’s upcoming rate decision. While no immediate policy changes are expected, markets will scrutinise the Fed’s economic projections and Chairman Powell’s comments for hints on the future path of monetary policy. With trade tensions rising, labour market weakness emerging, and shifting expectations around interest rates, volatility is likely to remain elevated in the coming week. Investors will be closely monitoring inflation data, central bank statements, and trade developments to gauge where the US economy—and the dollar—may be headed next.
Euro Strengthens as German Fiscal Reform Sparks Optimism
The euro continued its upward momentum on Friday, gaining against major currencies after progress in Germany’s fiscal policy talks boosted investor confidence. The newly agreed deal, which includes significant changes to borrowing regulations and a €500 billion infrastructure investment plan, is expected to provide much-needed support for both Germany’s economy and wider Eurozone growth. With incoming Chancellor Friedrich Merz securing the Greens’ approval, a key political obstacle has been cleared, and the package is set for parliamentary approval this week.
This marks the second consecutive week of gains for the euro against the dollar, pound, and Swiss franc. While Germany’s fiscal stimulus may help sustain the currency’s strength, further improvements in economic sentiment and concrete data will be required to maintain its upward trajectory.
Industrial production figures for January surprised to the upside, posting a 2% monthly increase and recovering from the previous month’s 1.5% decline. Wholesale prices also showed solid growth, reinforcing a more positive outlook. However, uncertainty remains over how aggressively the European Central Bank will lower interest rates this year. Policymakers must weigh Germany’s fiscal expansion, rising inflation in goods and food, and potential tariff risks against declining wage growth and weaker services inflation.
A sustained hold around the $1.07–$1.08 level could indicate a stronger foundation for further gains. However, this would likely depend on improved European economic indicators or increasing recession risks in the United States. In the meantime, markets will closely watch economic sentiment data and the upcoming Federal Reserve meeting for further direction.
Sterling Holds Ground as Markets Await Bank of England Decision
The British pound has remained resilient despite a weaker UK growth outlook, disappointing economic data, and ongoing tariff uncertainty. While concerns over economic slowdown persist, inflationary pressures have kept expectations for Bank of England (BoE) policy steady. GBP/USD continues to trade above its five-year average of $1.29, while GBP/EUR remains close to €1.19—levels that align with real interest rate differentials. With inflation showing signs of picking up again, the BoE is expected to keep interest rates unchanged at its upcoming meeting.
As a risk-sensitive currency, sterling remains vulnerable to swings in market sentiment. A downturn in global equities could put the pound under pressure, but any resurgence in risk appetite—especially if ceasefire talks between Russia and Ukraine show progress—may provide support. Additionally, with no escalation in US tariff threats, sterling could attempt a move towards $1.30, particularly if the euro strengthens towards $1.10 against the dollar, given the close correlation between GBP/USD and EUR/USD.
Attention now shifts to the BoE’s interest rate decision on Thursday. Markets anticipate the central bank will hold rates at 4.5%, citing ongoing economic uncertainty and data that has broadly aligned with forecasts since February. Unlike the Federal Reserve, the BoE has not seen expectations for rate cuts rise significantly, keeping UK bond yields attractive and offering sterling some stability.
The BoE’s cautious stance on monetary policy remains unchanged, with policymakers weighing economic risks carefully. While Catherine Mann’s recent call for a 50-basis-point rate cut made headlines, it remains an outlier. With UK wage growth still at 6% and services inflation at 5%, most members of the Monetary Policy Committee are likely to favour a steady approach, reducing the likelihood of aggressive rate cuts in the near term.