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.

Volatility Surges Amid Economic Uncertainty

US stocks are on course for their weakest start to a presidential term since 2009, weighed down by recession fears and lingering uncertainty surrounding tariffs. The Nasdaq 100 plummeted by as much as 4% on Monday, marking its worst day since 2022, while the S&P 500 extended its decline from a record high to 8% and closed below its 200-day moving average for the first time since November 2023. Benchmark US Treasury yields tumbled as expectations for Federal Reserve (Fed) interest rate cuts increased, while the US dollar index steadied following its worst weekly performance in two years.

US President Donald Trump’s shifting stance on tariffs has been unsettling financial markets for some time. More recently, concerns have intensified that policy uncertainty could push the US economy into recession. In an interview over the weekend, Trump refused to dismiss the possibility of an economic downturn, brushing aside business concerns over a lack of clarity regarding his tariff policies. This has fuelled speculation that his administration is willing to tolerate short-term economic hardship in pursuit of longer-term objectives. Amid the uncertainty surrounding trade policy, persistent inflation, and the uncertain trajectory of the Fed’s interest rate easing cycle, investors should prepare for continued market volatility. The VIX index, a key measure of anticipated volatility in the S&P 500, has already surged to its highest level since December. While implied volatility in the currency markets has risen, it remains well below the peaks seen in 2022 and 2020.

The fundamental principles behind Trump’s economic plan of deregulation and tax cuts were expected to support the dollar. However, the implementation of his tariff policies has soured market sentiment, turning the outlook for the dollar negative. In the very short term, a consolidation phase or a slight rebound may be possible following last week’s turbulence, but it is likely that we have already seen the peak of dollar strength for 2025. Attention now turns to today’s US JOLTS job openings data, followed by inflation figures on Wednesday, which will be closely scrutinised.

A Defining Moment for the Euro

Following its strongest week since March 2009, EUR/USD’s momentum appears to be losing steam, with the pair now residing in overbought territory on the daily chart. Nevertheless, today’s high of $1.0875 is nearly five cents higher than where it traded just a week ago. A short period of consolidation may precede another upward movement, but several bullish factors remain in play.

As previously reported, the European Union plans to amend fiscal regulations to allow for increased government spending, which has driven bond yields higher across Europe while also bolstering optimism regarding economic growth in the region. A report suggesting that Germany’s Green Party is willing to negotiate and foresees an agreement on defence spending by the end of the week has reinforced this narrative. Further impetus may come from potential US-Ukraine negotiations on Wednesday and additional details on EU member states’ plans to increase defence spending, including support for Ukraine. However, short-term enthusiasm could be premature, given the slow transmission of expansionary fiscal policies into economic growth and the European Central Bank’s (ECB) policy response. Moreover, the possibility of a trade war targeting Europe remains a risk. As a result, further gains for the euro will likely depend on continued signs of economic slowdown in the US. One thing is certain, though: the divergence between US and European economic trajectories is set to drive increased foreign exchange market volatility.

With no major economic data releases from Europe today, attention will turn to comments from ECB officials. Following last Thursday’s interest rate cut, markets are now pricing in only one additional quarter-point reduction in 2025, which would bring the ECB’s deposit rate to 2.25%. Just a week ago, expectations had been for the rate to decline to 2% by December.

Sterling Tests Key Support Against the Euro

This morning, the pound is testing its 50-week moving average against the euro, a key support level. A break below this threshold could pave the way for a move towards €1.1740, as the gap between German and UK bond yields narrows and expectations for stronger Eurozone growth rise in light of Europe’s expansive fiscal plans. Meanwhile, GBP/USD has struggled to gain further traction, hovering near the $1.29 level following last week’s significant 2.7% rally.

With US recession risks on the rise, sterling suffered its biggest losses against the Japanese yen yesterday, as heightened risk aversion drove demand for safe-haven currencies. Although the UK is in a comparatively better position to avoid US tariffs due to its goods trade deficit, the pound remains vulnerable via the risk sentiment channel. This is largely due to the UK’s deteriorating net international investment position and persistent current account deficit, making sterling dependent on foreign capital inflows, which often diminish in times of market turbulence.

On the macroeconomic front, data released early this morning showed that UK retail sales grew by just 0.9% year-on-year in February, a sharp slowdown from January’s 2.5% increase and well below the expected 2.4% rise. Consumers have continued to rein in spending amid the ongoing cost-of-living crisis. Later this week, UK GDP figures will be in focus for sterling traders.

The pound’s mixed fortunes

Sterling has been caught in the middle, weakening against the euro but strengthening against the US dollar. The latter move was driven by fears over US economic growth and increased expectations of Federal Reserve rate cuts, which improved UK-US interest rate differentials in the pound’s favour. GBP/USD surged 2.7% last week, breaking through key resistance levels and opening the door to a test of the $1.30 threshold in the near term. However, the daily chart suggests the pair is overbought, hinting at either a correction lower or a period of consolidation. From a valuation perspective, GBP/USD remains 4% below its 10-year average of $1.35.

Against the euro, however, the pound endured its worst week in two years, falling 1.6% before stabilising around its 50-week moving average—a key support level for over a year. The fiscal divergence between the UK and the Eurozone is tilting sentiment in favour of the euro, particularly as Europe’s substantial spending plans fuel growth expectations. Should GBP/EUR struggle to reclaim its 200-day moving average at €1.1929, further downside could be in store. However, a more stable UK fiscal outlook should help limit sterling’s losses, while near-term monetary policy and the pound’s yield advantage remain supportive.

In focus this week is the UK’s latest GDP data. The British economy has been on fragile footing since mid-2024, and January’s figures are expected to confirm a slowdown in growth from 0.4% to 0.1% month-on-month. However, the three-month average is forecast to improve from 0.0% to 0.2%. Unless the data significantly deviates from expectations, it is unlikely to influence Bank of England policy projections.

No "Trump put" to hope for?

The US dollar suffered its largest weekly decline since 2022, driven by a combination of economic uncertainty, weakening data, and renewed optimism in European markets following Germany’s historic debt announcement. Investors were left uneasy as concerns over trade, fiscal policy, and monetary direction continued to weigh on sentiment.

On Friday, US labour market data pointed to a slowdown, with nonfarm payrolls rising by 151,000—falling short of the 160,000 consensus estimate. While the miss was not drastic, it added to fears of an economic deceleration. At the same time, President Trump’s decision to delay tariffs on Canada and Mexico failed to reassure markets, which remained focused on long-term stability rather than short-term adjustments.

Investor confidence in Trump’s second term has also started to wane, as expectations of a repeat economic boom appear increasingly unrealistic. Both the President and Treasury Secretary Bessent have acknowledged the need for structural reforms, warning that market turbulence may accompany government policy changes. With government spending and employment levels deemed excessive, Bessent stressed that a reduction in both is necessary. As a result, investors are beginning to accept that there may be no “Trump put” after all.

US equities ended the week lower, reflecting these concerns, though Federal Reserve Chair Jerome Powell provided some temporary relief on Friday. Powell reassured markets that the economy remained on solid ground and that he was not overly alarmed by current conditions. However, his remarks failed to arrest the dollar’s slide, which continued into the weekend. With growing doubts over Trump’s economic agenda, history suggests that his approval ratings could also be at risk of a decline.

Betting on Europe again

The euro gained significant ground last week, benefiting from broad dollar weakness, a shift in investor sentiment, and renewed fiscal optimism in the Eurozone. Germany’s historic debt issuance announcement strengthened expectations of robust economic growth, while the European Central Bank’s (ECB) quarter-point rate cut was counterbalanced by a more cautious policy outlook.

On Saturday, ECB Executive Board member Isabel Schnabel warned that Eurozone inflation is more likely to remain above the 2% target for an extended period than to sustainably decline below it. Her remarks signalled a growing resistance within the ECB to further rate cuts in the near term. As policymakers prepare for a crucial decision in April, divisions are emerging over the extent of further monetary easing. Meanwhile, Europe’s economic landscape continues to evolve, with governments set to deploy hundreds of billions of euros in defence and infrastructure investment, particularly in Germany.

The euro surged by 4.4% against the dollar last week, marking its strongest advance since 2009—the year Germany introduced its debt brake. However, resistance emerged around the $1.0850 level as traders reassessed the implications of a hawkish ECB amid improving economic conditions. Looking ahead, market participants will closely watch Eurozone inflation data and ECB communications for further policy signals. With the region’s cyclical recovery gaining traction and inflation risks still high, expectations of additional ECB easing are becoming increasingly uncertain.

Carney to the rescue!

Former Bank of England Governor Mark Carney is set to become Canada’s next prime minister—at least for now. He will need all his experience in managing economic crises, as the country braces for an escalating trade war with its largest trading partner, the United States.

Carney made history in 2013 as the first non-British governor of the Bank of England, having previously steered Canada through the Great Recession as head of the Bank of Canada. His reputation for crisis management saw him recruited to Britain’s top banking role, where he played a key part in navigating post-financial crisis recovery and the Brexit fallout.

Unlike most prime ministerial hopefuls, Carney has never held elected office. Yet, he convincingly won the leadership contest to replace outgoing Prime Minister Justin Trudeau. Now, he faces one of Canada’s biggest economic challenges—a deepening rift with the US under President Trump’s aggressive trade policies.

However, remaining in power will be a challenge of its own. Canada’s next federal election is scheduled for October, but speculation is growing that it could be called as early as this month. Carney’s ability to transition from technocrat to politician will be tested as he seeks to steer Canada through economic turbulence while securing his position as prime minister.

Trump's Tariff Reversal Adds to Market Uncertainty

Donald Trump has once again reversed course on tariffs, postponing duties on numerous goods from Canada and Mexico for another month. This marks the second consecutive month-long delay of his own tariffs, prolonging uncertainty that continues to unsettle financial markets. The tech-focused Nasdaq index, for instance, has dropped 10% from its recent peak—a decline classified as a market correction—while the US dollar is on track for its worst weekly performance in over two years.

While the dollar's position as a global reserve currency and safe-haven asset is unlikely to vanish overnight, this week’s shift away from it has been striking. The primary driver behind this trend is Trump's unpredictable policymaking, which has shaken confidence in the currency. Additionally, concerns over US economic growth and expectations of a more dovish Federal Reserve have kept US bond yields relatively stagnant compared to other major economies. On the macroeconomic front, the US trade deficit widened to a record high in January, fuelled by a 10% surge in imports ahead of anticipated tariffs. Meanwhile, job cuts have surged to their highest level since 2020, exacerbated by major layoffs at DOGE. However, a silver lining appeared as initial jobless claims came in below expectations, providing some reassurance.

Attention now turns to the latest US jobs report. Last month’s data presented a mixed picture for investors—hiring slowed, yet wage growth picked up, reinforcing concerns over inflation amid the ongoing tariff war. Headline payrolls increased by 143,000, falling short of the 175,000 forecast. However, upward revisions to previous months added a further 100,000 jobs, while the unemployment rate remained steady at 4.0%. For today’s report, analysts expect 170,000 new jobs to have been added in February, with the unemployment rate projected to hold at 4.0%.

Euro Rallies as German Yields Surge, but ECB Uncertainty Looms

Germany’s 10-year bond yield has jumped by a record 42 basis points this week, while the euro’s 4% surge against the US dollar ranks among its strongest gains ever. However, both assets have edged lower following a somewhat hawkish European Central Bank (ECB) press conference, where policymakers debated the necessity of further rate cuts. Markets now assign a 50% chance of another reduction in April. While the ECB remains data-driven, disagreements persist over the neutral rate, with signs of stronger growth and slowing disinflation potentially limiting further easing. European equities have benefited from ongoing monetary and fiscal support, but the ECB’s firmer stance has put the STOXX 600 on track for its first weekly decline in ten weeks.

Adding to the uncertainty, the tariff dispute continues to weigh on sentiment. The Trump administration’s latest decision to postpone tariffs on Canadian and Mexican goods has left investors questioning whether European exports will be targeted next. If new tariffs are imposed, the ECB may be forced to extend its easing cycle, whereas a more stable trade environment and fiscal stimulus could justify holding rates steady. The euro-dollar exchange rate has met resistance at $1.0850 and now hinges on a weaker-than-expected US nonfarm payrolls report to reclaim its recent highs.

Sterling Holds Firm Against the Dollar but Slides Against the Euro

The pound remains resilient against the US dollar, trading near $1.29—around one cent above its five-year average. However, due to significant spending plans announced by Germany and the EU, coupled with rising European bond yields, sterling has weakened by 2% against the euro this week. This puts it on course for what could be its largest weekly decline in two years. The GBP/EUR downtrend may slow as it approaches its 50-week moving average, a key support level for over a year, currently sitting at €1.1878.

On the economic front, the final UK PMI data confirmed that the private sector grew modestly in February. While the services PMI was revised slightly lower, it still exceeded initial estimates of 50.8, helping to offset weakness in manufacturing. Meanwhile, a key leading indicator for UK GDP reached its highest level since 2017 late last month. Despite this, the British Chambers of Commerce recently downgraded its UK growth forecast, citing the combined impact of tax and trade pressures on businesses. However, with concerns over US economic growth mounting, the gap between UK and US growth rates is narrowing. This shift has also driven a notable increase in the UK-US interest rate differential, as markets price in further Federal Reserve rate cuts—both of which have contributed to sterling’s recent strength against the dollar.

Sterling has now entered overbought territory against the dollar, yet the probability of GBP/USD hitting $1.30 before the end of the month has surged to over 60%, up from just 14% a week ago, according to FX options pricing. Furthermore, traders hold their strongest conviction in five years that the pound will continue to strengthen in the coming weeks. However, from a one-month perspective, gains are likely to be capped due to heightened uncertainty surrounding global trade and foreign policy.