Monfor Weekly Update

USD

Concerns over trade policies, inflation risks, and the Federal Reserve’s next moves are fuelling uncertainty across financial markets. Economic data presents a mixed picture—business confidence surveys hint at a slowdown driven by fears of tariffs and fiscal tightening, yet employment and manufacturing figures indicate resilience. This disconnect has deepened market unease, prompting the Fed to scale back its growth forecasts, while the OECD warns that US trade policies could weigh on global economic momentum.  Fed Chair Jerome Powell has acknowledged these risks but emphasised that concrete data has yet to confirm a significant economic downturn. Despite this, the US dollar has struggled to benefit from its usual safe-haven status, as investors assess the long-term consequences of policy shifts.

This week, investors will be paying close attention to the early estimates of March’s Purchasing Managers' Index (PMI) figures, which will shed light on economic activity across key global sectors. In the United States, expectations point to a slowdown, with manufacturing PMI forecast to drop from 52.7 in February to 51, while the services sector is also predicted to weaken, slipping from 51 to 49.5. A downturn in these indicators could suggest a loss of economic momentum, potentially weighing on the US dollar.

Meanwhile, markets remain on edge as they await President Trump’s upcoming announcement on 2 April regarding a fresh round of “reciprocal tariffs” designed to tackle trade imbalances. While these measures are expected to be more precisely targeted than previous proposals, their wider economic ramifications remain unclear, keeping investors in a cautious stance.

GBP

The British pound has seen a mixed performance lately, shaped by global trade tensions, monetary policy shifts, and domestic economic pressures. GBP/USD has remained above $1.29, supported by the Federal Reserve’s cautious approach and expectations of interest rate cuts in 2025. However, the currency remains exposed to broader market jitters and geopolitical instability. Meanwhile, GBP/EUR has climbed back above €1.19, as the euro appears to have already priced in optimism surrounding fiscal reforms in Europe.

In the coming days, sterling’s trajectory will be influenced by key economic data and policy developments. This week’s flash PMIs will offer insight into how business activity is faring amid policy uncertainty, while upcoming inflation and employment figures will provide a clearer picture of the UK’s economic health and the Bank of England’s (BoE) policy outlook. The BoE’s decision to keep interest rates on hold last week lent some stability to the pound, but any downside surprise in inflation could trigger a shift in market expectations, weighing on sterling.

The most closely watched event for the pound this week is Wednesday’s Spring Statement, where Chancellor Rachel Reeves will address the challenges of rising debt interest payments and broader fiscal constraints. Investors will be paying close attention to updates from the Office for Budget Responsibility (OBR) for any indications of tax adjustments or public spending changes.

For now, GBP/USD and GBP/EUR remain in a delicate equilibrium, caught between domestic resilience and external pressures. While the pound draws support from steady growth prospects and a relatively firm stance from the BoE, increasing trade frictions with the US and global economic uncertainties could limit further gains.

EUR

The euro’s decline showed no signs of abating on Friday, with EUR/USD dropping to $1.08 after a third consecutive day of losses. The currency had been set for a third straight weekly advance, but weaker-than-expected economic data and a strengthening US dollar reversed its momentum.

Consumer confidence across the Eurozone took a sharper-than-expected hit in March, with the index sinking to -14.5, dashing hopes of an improvement. A similar slump in the wider EU measure reinforced fears that households remain hesitant despite a slowdown in inflation. In France, manufacturing sentiment continued its downward spiral, with the industry climate indicator slipping to 96—the lowest level since November. A significant weakening in foreign demand weighed on order books, highlighting ongoing challenges for Europe’s industrial sector.

The euro’s pullback is largely driven by renewed strength in the US dollar, as investors reassess the Federal Reserve’s policy outlook. While the Fed left interest rates unchanged last week, officials reiterated their forecast for two rate cuts this year, though inflation concerns remain prominent. Meanwhile, market participants are bracing for potential trade turbulence ahead of Trump’s planned tariff announcement on 2 April, which could put further strain on global commerce and Europe’s economic prospects.

Recent euro gains have been partly fuelled by Germany’s fiscal expansion, but with much of that now factored into the market, upward potential appears limited. The European Central Bank’s cautious approach further adds to the uncertainty, as policymakers weigh sluggish growth against persistent inflation. If economic conditions continue to deteriorate, speculation over a rate cut in the near future could gather pace, adding further downside pressure on the euro. For now, EUR/USD remains vulnerable, with risks tilted towards further losses if the dollar extends its rebound.

BoE remains patient

Bank of England Keeps Interest Rates Steady as Inflation Concerns Grow

The Monetary Policy Committee (MPC) of the Bank of England has voted overwhelmingly, by a margin of 8-1, to keep interest rates unchanged. This decision highlights a growing sense of unease among committee members regarding the persistent rise in inflation since February.

With inflation anticipated to hit 4.0% in the near future, doubts are emerging over whether it will steadily decline to the 2.0% target by 2026 as previously projected.

"Although inflation is expected to ease later on, the Committee will remain vigilant for any indications of prolonged inflationary pressures," the Bank stated.

Following the announcement, the Pound strengthened against the Euro, extending its daily gains. However, GBP/USD slipped as the US dollar experienced broad-based strength.

The decision comes in the wake of another strong set of wage growth figures released earlier in the day, reinforcing the view that the economy has yet to see the kind of deflationary pressures necessary to justify lowering the Bank Rate to 2.0%.

Additionally, the Bank’s latest inflation expectations survey points to an unsettling rise in inflation concerns, raising the risk of ingrained inflationary trends as workers push for higher wages and businesses adjust their prices accordingly.

Euro Under Pressure Amid Market Jitters and Trade Disputes

The euro remains under strain as financial markets turn increasingly risk-averse. Earlier this week, EUR/USD suffered its sharpest daily drop in March and is now on track for its first weekly decline in three. The recent slide has been compounded by cautious remarks from European Central Bank (ECB) President Christine Lagarde, which have dented confidence in the common currency.

Addressing European lawmakers on Thursday, Lagarde warned of slowing economic growth but downplayed the likelihood of inflation surging if the EU retaliates against US tariffs. She noted that a 25% tariff imposed by the US on European imports could reduce eurozone growth by 0.3 percentage points in the first year, with EU countermeasures potentially deepening the impact to 0.5 percentage points. While the initial effects would be most severe, inflationary pressures are expected to diminish over time, suggesting the ECB is unlikely to respond with rate hikes.

At the same time, developments in Ukraine, including progress towards a ceasefire, have introduced fresh optimism but also new concerns about Europe's economic and energy stability.

Ongoing tensions over US-EU trade relations, including renewed tariff threats from Donald Trump, continue to undermine the euro’s stability. For now, EUR/USD remains in limbo, caught between shifting investor sentiment and economic policy expectations.

US Economic Indicators Show Resilience Amid Uncertainty

US economic data released yesterday painted a mixed picture. Weekly jobless claims saw a slight uptick to 223,000, yet they remain near historically low levels, suggesting that the labour market continues to hold steady despite wider economic challenges.

In contrast, the housing market showed unexpected strength, with existing home sales rising by 4.2% in February to an annualised 4.26 million. This surge was driven by pent-up demand and stable mortgage rates, encouraging more buyers to step back into the market.

Fed Keeps Rates Unchanged; BoE Expected to Follow

 

Federal Reserve Holds Firm as Trump Disrupts the Narrative

The US Federal Reserve has opted to keep interest rates unchanged, sticking to its strict data-driven approach on future monetary policy decisions—much to the frustration of those hoping for a swifter reduction. The central bank maintained its target range for the federal funds rate at 4.25% to 4.50%, reiterating that any future adjustments would be guided by incoming economic data and potential risks.

Given this cautious stance, the March policy update was effectively ‘hawkish’, which under normal circumstances might have prompted a relief rally for the US Dollar, following a recent period of weakness. However, any spotlight on the Fed’s decision was swiftly overshadowed by an unexpected intervention from President Donald Trump.

Trump took to social media to declare: “The Fed would be MUCH better off CUTTING RATES as U.S. tariffs start to transition (ease!) their way into the economy. Do the right thing. April 2nd is Liberation Day in America!!!”

Ordinarily, an independent institution like the Federal Reserve would not expect political interference of this nature, yet Trump’s comments make it clear the White House is intent on pushing for lower interest rates—despite mounting evidence of rising inflation. This stance flies in the face of the Fed’s core mandate to steer inflation back towards its 2.0% target.

For investors, Trump’s intervention injects yet another dose of uncertainty into US economic policy, and if there’s one thing financial markets despise, it’s unpredictability. Since taking office, Trump’s administration has provided uncertainty in abundance, which has contributed to the Dollar’s persistent weakness. As a result, by Thursday, the GBP/USD exchange rate was hovering close to 1.30—whereas, under normal conditions, the Fed’s position would have likely kept it in the lower 1.29s.

The Federal Reserve remains steadfast in its view that now is not the right time for rate cuts. It points to continued solid economic growth, a stable labour market, and persistently high inflation as justification for its current stance. However, with growing uncertainty clouding the economic outlook, the Fed maintains it will closely monitor risks that could impact its dual mandate of maximum employment and stable prices.

Markets Look Past Powell’s Warnings, Focus on Fed’s Softer Stance

Federal Reserve Chair Jerome Powell highlighted the growing uncertainty surrounding the economic outlook, particularly the effects of tariffs on inflation. However, financial markets largely chose to overlook these concerns, instead honing in on the Fed’s more accommodative shift in balance sheet policy, rather than the slightly more hawkish stance reflected in interest rate projections.

US Treasury yields dropped in response, with the two-year note slipping below 4% as traders recalibrated their expectations for the Fed’s next moves. Despite this market reaction, Powell’s remarks underscored the central bank’s continued reliance on economic data. With uncertainty on the rise, future policy decisions will be dictated by inflation trends and employment figures in the months ahead.

Bank of England Set to Hold Rates as Traders Eye Policy Signals

Market attention today is firmly on the Bank of England (BoE) as it announces its latest interest rate decision. This morning’s UK labour market report aligned closely with expectations, showing wage growth remaining high and unemployment steady at 4.4%.

Given the BoE’s well-established pattern of cutting rates once per quarter, it is highly unlikely that the Bank Rate will move from its current level of 4.5%. Consequently, a significant market reaction is not expected, as traders have already priced in a no-change decision. However, the focus will be on the voting split among policymakers, particularly whether Alan Taylor aligns with previous dissenters in advocating for a further rate cut.

One of the biggest surprises in February was the 7-2 vote split, with Catherine Mann shifting from the Bank’s most hawkish stance to one of its most dovish, joining Swati Dhingra in calling for a larger 50-basis-point cut. It is likely that these two will once again push for looser policy, but attention will also be on Taylor, who backed consecutive cuts in December and has since argued that weak demand is the dominant factor shaping inflation trends. However, the majority of the committee remain cautious, fearing that supply constraints will sustain elevated wage growth and inflation. Private sector wages continue to grow at over 6%, while services inflation remains stubbornly around 5%, complicating the BoE’s decision-making at a time of economic stagnation. Given these dynamics, there is little in the data to suggest a shift in the Bank’s cautious policy stance. The BoE is also likely to consider global risks, including trade tariffs and geopolitical developments in the Middle East, which could impact inflation.

Looking ahead, the UK’s upcoming budget announcement could pose a greater risk to the pound. Chancellor Rachel Reeves faces a difficult balancing act—either cutting spending, raising taxes, or potentially unsettling the gilt market. In the short term, the pound’s outlook appears tilted to the downside, though global uncertainties add to the unpredictability.

Fed Decision in Focus: Markets Await Powell’s Guidance

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 extends gains

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.

Please note:  The news and information contained on this site should not be interpreted as advice or as a solicitation to offer to convert any currency or as a recommendation to trade.

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