USD

Investors widely expect the Federal Reserve to keep interest rates unchanged, shifting attention to the latest economic forecasts and Chair Jerome Powell’s press conference. Policymakers have emphasised a data-driven approach, waiting for clearer signs of disinflation and assessing the broader impact of Trump’s policies. Ongoing trade uncertainty has unsettled markets, with investors struggling to factor in the ever-changing landscape of tariffs.

Recent economic indicators have been mixed. A stronger-than-anticipated recovery in single-family housing starts and steady industrial production have eased fears of an imminent US recession. However, unexpectedly high import prices have raised concerns that inflation could become more persistent, complicating the Fed’s next steps.

Despite the cautious market mood, the US dollar has been unable to fully benefit from safe-haven demand, reflecting broader uncertainty over Trump’s economic policies. As Powell prepares to speak later today, traders will be looking for any clues about the future path of interest rates. A signal that rates may remain elevated for longer could offer short-term support to the dollar, while a more dovish outlook might put renewed pressure on the currency.

EUR

A substantial spending package has been agreed upon, yet the German economy's structural constraints and implementation challenges mean its impact may be limited. The Euro faces the risk of "buy the rumour, sell the fact" price action following the German parliament’s approval of a law allowing increased government spending on defence and infrastructure.

The Bundestag has approved a €500 billion infrastructure fund and adjustments to the debt brake, enabling nearly unlimited defence expenditure and allowing state governments to borrow more freely. However, despite the passage of this law, the Euro has struggled to advance against the Pound Sterling, the US Dollar, and other major currencies, suggesting that much of the news had already been priced in by the markets.

The Euro had previously gained momentum after incoming Chancellor Friedrich Merz announced his intention to modify the debt brake to facilitate higher spending. Following this decision, the Pound-to-Euro exchange rate has declined by 2.0%, prompting analysts at Goldman Sachs to revise their forecasts for the pair downward.

Expectations of higher German inflation have driven up German bond yields, as investors demand greater returns for holding German debt. Rising yields, in turn, attract investor capital, supporting the Euro. This raises the question of how much further bond yields can climb—if the trend continues, the Euro’s rally may persist.

Most analysts agree that Germany’s economic reforms will have positive knock-on effects on other sectors and neighbouring European economies. The widely followed ZEW confidence survey reflected improved sentiment in March. “The brighter mood is likely due to positive signals regarding future German fiscal policy, such as the agreement on the multi-billion-euro financial package for the federal budget,” said Achim Wambach, President of ZEW. “Prospects for metal and steel manufacturers, as well as the mechanical engineering sector, have improved. Furthermore, the European Central Bank’s sixth consecutive interest rate cut ensures favourable financing conditions for both households and businesses,” he added.

While the Euro’s recent gains could fade, any setbacks may be relatively shallow, and the currency’s 2025 lows could already be behind us.

GBP

The pound briefly pushed above the $1.30 mark yesterday as the US dollar weakened across the board. However, GBP/USD failed to sustain its position above this key level, signalling potential exhaustion in its upward momentum. Several technical indicators are flashing “overbought” warnings, raising the likelihood of a meaningful pullback in the coming weeks if the currency continues to struggle at these levels.

Traders may also be positioning for a decline ahead of Thursday’s Bank of England (BoE) meeting, as recent trends suggest such events tend to weigh on sterling. While a dovish Federal Reserve could push the dollar lower today, many market participants may opt to take profit on the more than 7% gain in GBP/USD since early February. Looking further ahead, the $1.35 level could emerge as a key upside target, but this would require improved global risk sentiment, a deteriorating US economic outlook, and widening UK-US yield spreads. The pair has remained below $1.35 for over two years—its longest-ever period under this threshold. However, should GBP/USD hold above $1.30, bullish traders are likely to set their sights on $1.35 later this year. That said, from a technical standpoint, the 14-day relative strength index has been hovering near or within overbought territory for most of the month, suggesting a short-term correction may be on the horizon before the broader uptrend resumes.

Conversely, sterling’s prospects against the euro appear less favourable. Following Germany’s decision to increase expenditure—an event seen as pivotal broader European economy growth. If GBP/EUR closes below its 50-week moving average this week, we view €/£0.85 (€1.1764) as a key downside support target.

Euro Gains Momentum Amid Global Optimism

The euro is making steady gains, buoyed by a shift towards risk appetite in financial markets. Stock indices across major economies are on the rise, driven by stronger-than-expected economic data from China and significant fiscal policy changes in Germany, which could shape Europe’s long-term economic trajectory. As a result, EUR/USD has climbed back above $1.09 and is edging closer to testing its yearly peak of $1.0955.

China’s economy has shown surprising strength, with industrial production expanding by 5.9% year-on-year in the first two months of the year, exceeding forecasts of 5.3%. Meanwhile, retail sales grew by 4.0%, up from December’s 3.7% increase, marking the most robust consumer spending performance since October. This resilience is encouraging for global trade and, by extension, the Eurozone, given its deep economic ties with China. Stronger demand from Asia, coupled with an improved market outlook, is providing broad-based support for the euro.

In Europe, Germany is set to implement major constitutional reforms this week, lifting restrictions on borrowing to finance defence spending beyond 1% of GDP. This shift signals a potential boost for the wider Eurozone economy, as increased government investment in defence and infrastructure could counteract existing growth challenges and bolster economic prospects.

With these tailwinds, the euro remains in an upward trend, benefiting from an improved risk environment and expansionary fiscal policies. However, its trajectory will depend on upcoming US economic data, particularly inflation figures and signals from the Federal Reserve, which could influence dollar sentiment. At the same time, expectations around European Central Bank policy remain a crucial factor—while markets anticipate rate cuts later this year, signs of economic resilience or increased government spending could challenge this outlook.

US Retail Sales Miss Forecasts as Economic Concerns Grow

Retail sales in the United States edged up by just 0.2% in February, falling short of predictions, while January’s figures were revised downward to show a sharp 1.2% contraction—the steepest decline since July 2021. Out of 13 retail categories, seven reported lower sales last month, though online retailers saw their strongest surge since late 2023.

Despite relatively stable economic data, warning signs of a potential slowdown are becoming more pronounced. For instance, manufacturing activity in New York state plunged, while input costs for businesses surged to their highest level in over two years. This suggests that rising tariffs may be dampening consumer spending while simultaneously stoking inflationary pressures.

Markets reacted mildly, with the dollar index slipping towards a five-month low and Treasury yields easing across the board.

The Federal Reserve now faces the difficult task of reassuring investors while acknowledging growing economic risks. Chair Jerome Powell is set to address the public on Wednesday after the central bank’s policy meeting, where interest rates are widely expected to remain unchanged.

Sterling's Outlook Tied to Interest Rate Expectations

Foreign exchange markets are heavily influenced by monetary policy, and while neither the Federal Reserve nor the Bank of England (BoE) is expected to lower interest rates this week, future expectations currently favour the pound. Market pricing suggests a roughly 75% likelihood of a BoE rate cut in May, compared to just 25% for the Fed. However, the US central bank is expected to implement more rate cuts overall by the end of the year. This shifting outlook has bolstered sterling due to an improving UK-US yield differential.

That said, sterling remains vulnerable to a shift in sentiment should inflation in the services sector and private-sector wage growth begin to ease significantly. For now, market participants are increasingly sceptical that the BoE can sustainably achieve its inflation target within its forecast horizon, with key breakeven inflation rates still exceeding 3%. Given the uncertain economic landscape—compounded by domestic fiscal policy measures and ongoing trade tensions—the BoE is likely to proceed with caution.

Amidst this uncertainty, sterling’s ability to break and hold above the $1.30 threshold may hinge more on a weakening US dollar, rather than domestic strength.

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.

The Australian dollar is anticipated to weaken in the coming months as the Reserve Bank of Australia (RBA) embarks on a substantial rate-cutting cycle. The central bank has reduced its cash rate for the first time in this phase, signalling the end of the most prolonged period of interest rate increases in three decades. This decision follows nearly three years of monetary tightening, during which rates rose by a total of 4.25%. However, despite these aggressive hikes, the peak interest rate remains the lowest seen in 30 years, according to the report.

Although the Australian dollar has experienced a modest rebound against the US dollar in recent weeks, analysts suggest this is more a reflection of USD weakness rather than any inherent strength in the AUD. Against most other major global currencies, the Australian dollar has continued its downward trajectory. Experts at Commerzbank predict a further decline, forecasting AUD-USD to fall to 0.60 by the end of 2025 and 0.58 by late 2026.

Despite the sustained rise in interest rates over the past 33 months, Australia’s labour market has shown remarkable resilience. Employment growth has remained strong, with only minor indications of a slowdown—an unusual trend compared to previous tightening cycles.

Analysts caution that the Australian dollar is likely to face considerable depreciation, particularly against a strengthening euro. Commerzbank projects the EUR-AUD exchange rate to climb from 1.67 by mid-2025 to 1.90 by late 2026, pointing to a sharp fall in the AUD’s relative value. With interest rates being cut more rapidly than expected, ongoing global economic uncertainties, and a slowdown in Chinese demand, the Australian dollar may encounter further downward pressure in the months ahead.

The Australian dollar is also under strain due to ongoing economic uncertainty and lingering deflationary risks in China, its largest trading partner, as investors await crucial policy updates from Beijing.

Over the past year, the GBP/AUD exchange rate has risen by 5.84%, fluctuating within a 52-week range of 1.8897 to 2.0639.