Market Volatility Rises Amid Geopolitical Tensions and Economic Uncertainty

Global markets faced renewed pressure last week as tensions flared between President Trump and Ukrainian President Zelenskiy during a meeting in the Oval Office. Their disagreements over the war in Ukraine led to the abrupt cancellation of a planned joint press conference, signalling that a peace agreement remains distant. Meanwhile, ongoing geopolitical uncertainty and tariff concerns have weighed heavily on risk assets, adding to investor unease.

Compounding these worries, doubts about the strength of the U.S. economy have intensified. Weaker-than-expected macroeconomic data and a surge in imports ahead of impending tariffs have driven growth expectations sharply lower. The Atlanta Fed Nowcast for Q1 plummeted from 2.3% to 1.5%, a decline typically seen during periods of economic distress. Inflation data released on Friday met expectations, with the PCE index rising 0.3% month-over-month in January. However, personal spending fell by 0.2%, marking its first decline in nearly two years.

Despite worsening economic indicators, the U.S. dollar extended its rally for a third consecutive session, buoyed primarily by geopolitical instability rather than strong fundamentals. Investor expectations for Federal Reserve rate cuts have shifted dramatically, with markets now pricing in three cuts for 2025 instead of just one. This sentiment is reflected in Treasury yields, as the 2-year yield dipped below 4% for the first time since October, aligning with the recent drop in the U.S. surprise index. This week’s labour market data will serve as a crucial test for both the U.S. economy and the dollar.

Tariff decisions on Mexico, Canada, and China are set to be confirmed on Tuesday, potentially shaping global foreign exchange trends for the week and beyond.  

The March 4th announcement is expected to see the U.S. President move forward with 25% tariffs on Mexico and Canada, directly impacting those economies, along with a 10% tariff on China. If these measures proceed, the message for the Eurozone will be clear: the European Union is likely next in line for similar trade penalties. As a result, the euro could face additional pressure in the coming days.

Euro Faces Pressure Amid Geopolitical Uncertainty and Policy Challenges

Geopolitical uncertainty continues to weigh on the euro, dampening market sentiment despite signs of gradual improvement in European economic conditions. While the U.S. economic outlook is deteriorating, leading investors to price in three Federal Reserve rate cuts, the European Central Bank (ECB) faces a more complicated policy landscape as inflation picks up again.

However, recent currency movements have been driven more by political tensions than economic data. The ongoing rift between Trump and Zelenskiy, along with fading hopes for a near-term peace agreement, has pushed the euro lower for the second consecutive week, bringing it back below the $1.04 level. Those anticipating a decisive market reaction from Thursday’s ECB meeting may be left disappointed.

With a 25-basis point rate cut already fully priced in, the focus will shift to the ECB’s forward guidance. Yet, with ongoing geopolitical risks and trade uncertainties, policymakers are likely to tread cautiously. Today’s Eurozone inflation report is expected to show some easing in price pressures, but the euro’s next major move may depend on broader political or economic developments. A significant surprise in Friday’s U.S. labour market report would likely be needed to push the currency meaningfully above $1.05 or below $1.03.

GBP/USD Retreats Amid Geopolitical Uncertainty but Holds Firm Against Euro

After briefly climbing to a two-month high above $1.27 last week, GBP/USD has retreated toward the $1.26 level as geopolitical tensions resurface. The tense White House meeting between Trump and Zelenskiy has cast doubt on a potential U.S.-brokered ceasefire between Ukraine and Russia, weighing on risk-sensitive assets like the pound. While sterling has weakened against safe-haven currencies, it remains resilient against the euro, with GBP/EUR closing the month above €1.21 for the first time since 2016.

The UK’s reliance on foreign capital inflows, due to its persistent current account deficit and worsening net international investment position, makes sterling vulnerable to shifts in risk sentiment. A sharp decline in equity markets could put additional pressure on the pound. However, Britain remains a lower priority for Trump’s tariff policies, both due to the relatively balanced UK-U.S. trade relationship and his generally favourable stance toward the UK. As a result, sterling is seen as somewhat insulated from tariff risks, with FX options markets showing less bearish positioning on GBP compared to other G10 currencies.

This week, the key upside risk for sterling lies in potential policy shifts from the White House. If Trump delays or reverses planned tariff increases on Mexico and Canada set for Tuesday, broader risk sentiment could improve, supporting the pound. Additionally, disappointing U.S. economic data—particularly Friday’s labour market report—could further bolster GBP/USD, potentially pushing it back above the $1.27 level.

Dollar Balancing Tariffs, Weaker Growth

Once again, trade and geopolitical developments overshadowed what appeared to be a significant day for US macroeconomic updates. Data on durable goods, home sales, jobless claims, and GDP presented mixed signals regarding the state of the world's largest economy. GDP grew at an annualised rate of 2.3%, while unemployment claims reached a two-month high and declined for the second consecutive month. Overall, the data continues to indicate weakening economic momentum, and the dollar would likely have depreciated under these circumstances were it not for the latest tariff announcements.

Markets reacted to fresh tariff measures announced by the US President. Donald Trump confirmed that the 25% tariffs on Canada and Mexico would proceed, while also hinting at the possibility of new tariffs on China as early as March. This news bolstered the dollar against the Canadian dollar and Mexican peso. However, the Greenback’s strength extended to most major currencies as well.

Beyond trade, Trump’s refusal to commit to a security backstop in Ukraine added another layer of geopolitical uncertainty. During his meeting with UK Prime Minister Keir Starmer, he reiterated that the priority should be securing a peace agreement between Russia and Ukraine rather than discussing long-term military commitments.

Nevertheless, conviction in a sustained dollar rally is waning, as tariff fatigue and growth concerns begin to dampen sentiment. Traders remain cautious despite heightened trade uncertainty and a lack of policy clarity. For now, foreign exchange markets continue to be driven by trade headlines, with the dollar benefiting from renewed tariff speculation—yet the long-term outlook remains uncertain.

The US dollar index is likely to finish the week higher, a feat it has only managed once in the past seven weeks. The final obstacle to overcome is the US Personal Consumption Expenditures (PCE) report due today. The core figure could show a slowdown on a month-on-month basis; however, personal spending is expected to remain robust.

Euro Back on the Defensive

Fresh trade tensions are exerting pressure on the euro, as President Trump confirmed 25% tariffs on Canada and Mexico and hinted at new measures against China. While the EU has not been directly targeted, the risk of further escalation weighs on market sentiment, particularly given Trump’s ongoing criticism of European trade policies and VAT systems.

While the dollar initially strengthened following the tariff news, belief in sustained US dollar strength is diminishing, as the economic repercussions of higher trade barriers may outweigh short-term inflationary effects. For the euro, uncertainty continues to limit its upside, with EUR/USD hovering below $1.0400 as traders evaluate whether tariffs will remain a US-focused issue or broaden further.

Meanwhile, the European Central Bank (ECB) remains confident that monetary policy is still restrictive. However, debate over future rate cuts is intensifying, as reflected in the meeting minutes released yesterday. A 25-basis-point cut next week to 2.5% is widely expected, yet policymakers remain divided. Some express concerns about persistent services inflation and trade risks, while others fear weak growth and missing the 2% inflation target. The neutral rate remains a contentious issue, with policymakers questioning its reliability as a policy guide. While disinflation remains on track, wage growth and energy-related risks necessitate a cautious approach.

Risk-Sensitive or Safe-Haven Sterling?

As discussed in yesterday’s report, the pound’s high-yielding status is a double-edged sword. When market sentiment is positive, sterling tends to appreciate, but in deteriorating global risk conditions, it becomes more vulnerable. Consequently, the latest bout of tariff concerns has pushed GBP/USD down from $1.27 to $1.2570 within 24 hours. GBP/USD has erased its weekly gains and more, while several key moving averages continue to present resistance to the upside.

Although the pound has weakened against the US dollar, some analysts suggest that the FX market is viewing sterling as a tariff safe haven, based on confidence that the UK is less economically exposed to tariffs than major exporters such as the EU. This is evidenced by sterling’s appreciation against all G10 currencies this week except the US dollar and Swiss franc. Should GBP/EUR close the week above €1.21, it would mark the highest weekly closing price in nearly three years. However, a broader look at sterling’s performance shows that it appreciated against fewer than 50% of its global peers yesterday, contradicting the notion of sterling as a safe haven. Furthermore, sterling’s vulnerability to global risk aversion—due to its dependence on foreign capital inflows—would likely limit any haven appeal.

Nevertheless, the meeting between US President Donald Trump and UK Prime Minister Keir Starmer appeared constructive, with hopes of a trade deal boosting the likelihood of the UK avoiding tariffs. The UK is one of the few countries with a neutral trade relationship with the US in goods, making it unlikely that Trump would impose tariffs. However, even if the UK does evade direct tariffs, a global trade slowdown would still impact the UK economy, weighing on the pro-cyclical pound.

Equity markets are faltering, and demand for safe-haven currencies is on the rise as investors navigate the shocks stemming from trade policy, geopolitics, and political uncertainty. The euro has retreated from one-month highs against the US dollar, though it remains 1% up year-to-date. Meanwhile, the pound has gained 2% against the dollar this month and is edging closer to the €1.21 level against the euro – a key resistance mark for the past eight years.

Equities unsettled, currencies steady
Uncertainty continues to mount regarding the timing and scale of tariffs to be introduced by the US administration following President Donald Trump’s cabinet meeting on Wednesday. Trump announced that the 25% tariffs on Mexico and Canada would take effect on 2 April, rather than the previously anticipated 4 March date. It remains unclear whether he was affording the countries additional time or simply confused the dates with another initiative. Either way, the inconsistencies have fuelled investor scepticism regarding his policy agenda.

Equity markets have been shaken by the ongoing uncertainty surrounding tariffs, with US stocks now erasing the initial post-election rally. However, currency markets appear more composed, with realised volatility in G10 FX declining recently. Beyond tariff concerns, fears over slowing US economic growth have intensified, prompting a risk-averse market sentiment. A combination of weaker growth and disinflationary pressures is likely to encourage further interest rate cuts by the Federal Reserve (Fed), with markets now pricing in two 25 basis point cuts this year, up from expectations of just one cut two weeks ago.

In the commodities sector, oil prices have fallen to multi-month lows, losing approximately 4% this month. Trump’s aggressive trade measures have exacerbated market anxiety at a time when oil traders were already concerned about tepid demand in China. Furthermore, optimism regarding a potential Russia-Ukraine peace deal has weighed on prices, as the lifting of Russian sanctions could boost global oil supply. As a result, commodity-linked currencies such as the Australian and Canadian dollars remain under pressure.

Tariff threats losing impact on the euro
The euro has pulled back from a one-month high of $1.0528, while Germany’s 10-year bond yield has dropped to 2.44%, nearing a one-week low, amid doubts over a swift increase in European defence spending and its financing through bond issuance. Meanwhile, economic data indicates that German consumer sentiment unexpectedly weakened heading into March.

President Trump has issued another round of tariff threats, but their impact on the euro has been relatively muted. EUR/USD continues to test the $1.05 level, yet the 100-day moving average positioned just above this threshold remains a strong resistance point. The euro dipped only 50 pips following Trump’s latest trade-related remarks, in which he stated his intention to impose a 25% tariff on European Union goods, without clarifying whether this would apply to all exports from the bloc or specific sectors.

Meanwhile, Germany’s incoming chancellor, Friedrich Merz, has ruled out an immediate reform of the country’s borrowing limits and suggested it was too soon to determine whether the outgoing parliament would approve a substantial increase in military expenditure. Investors will closely monitor trade and fiscal policy developments. On the macroeconomic front, Spanish inflation data due today could provide insights into the broader Eurozone inflation outlook ahead of next week’s European Central Bank (ECB) meeting. Markets anticipate another 25 basis point rate cut and a total of 82 basis points of ECB easing this year. The spread between US and German 10-year yields closed at 181 basis points on Wednesday, its narrowest since October, marking its most significant monthly contraction since May. This has helped support the euro’s modest rebound over the past month.

Sterling’s double-edged sword
Due to relatively higher interest rates in the UK compared to other G10 economies, the pound’s elevated carry status increases its sensitivity to equity market fluctuations. A modest recovery in equities helped sterling inch higher against the euro and US dollar on Wednesday, with GBP/EUR hovering just below the €1.20 level. Month-to-date, GBP/EUR has risen by over 1% but remains flat on the year, while GBP/USD has climbed over 2% and is nearing its highest level in two months.

However, sterling’s yield advantage is both a blessing and a curse. In risk-on environments, where investors are more willing to take on risk for greater returns, the pound typically appreciates. Conversely, in deteriorating global risk conditions, sterling becomes more vulnerable. This sensitivity is exacerbated by the UK’s worsening net international investment position and persistent current account deficit, which make the currency reliant on foreign capital inflows. Should equity markets experience a more substantial downturn, sterling is likely to suffer as well. Several warning signs are emerging, including bearish investor sentiment surveys and a surge in demand for hedging against a stock market correction.

One way to assess potential market volatility is through one-month implied-realised volatility spreads in the FX space. This measure indicates whether markets expect future volatility to surpass historical levels. Currently, traders are paying a premium for protection in safe-haven currencies such as the Japanese yen and Swiss franc, as they seek to hedge against possible shocks arising from trade policy, geopolitical tensions, and political uncertainty.

Sterling Highly Exposed to Potential Market Correction

The British pound remains at significant risk of a downturn should global markets shift towards a risk-off sentiment, according to a research note from BNP Paribas. The bank identifies Sterling as one of the most vulnerable currencies among its G10 peers, citing structural weaknesses and heightened sensitivity to investor risk appetite.

This warning comes amid prevailing risk-on market conditions, in line with the ongoing bull run in equities, which has supported recent gains in the pound’s exchange rate. The recent setback in the pound-to-euro exchange rate recovery aligns with a dip in the U.S. S&P 500 index, widely regarded as a benchmark for global investor sentiment.

While the decline has been relatively modest, it underscores Sterling’s sensitivity to broader market trends, suggesting that a more substantial market correction could trigger far greater losses. A key vulnerability is the UK’s deteriorating net international investment position (NIIP) and its persistent current account deficit, which has left the currency reliant on foreign capital inflows.

The research also highlights Sterling’s susceptibility to a broader economic slowdown, placing it alongside emerging market high-yield currencies such as the Brazilian real and the Hungarian forint. In contrast, safe-haven currencies such as the Japanese yen and Swiss franc are expected to outperform in risk-off conditions.

UK: Bank of England Speakers in Focus

In the UK, while no major economic data releases are scheduled, several members of the Bank of England’s Monetary Policy Committee (MPC) will be speaking throughout the week. Deputy Governor for Monetary Policy Clare Lombardelli will deliver the opening remarks at the annual BEAR conference on Monday, with Chief Economist Huw Pill set to provide the closing remarks—comments that are typically closely scrutinised by markets.

Later in the day, Dave Ramsden will discuss the Bank’s balance sheet ahead of a key decision on its future structure later this year. He is scheduled to speak again on Friday, providing ample opportunity to address interest rate policy. Ramsden is considered ‘dovish,’ and markets will be keen to determine whether he may vote for another interest rate cut next month.

Swati Dhingra is also due to speak and is widely expected to confirm her preference for another rate cut, though her stance is well known and unlikely to impact markets significantly. Following last week’s stronger-than-expected economic data, market expectations for Bank of England rate cuts this year have been pared back, with only two more reductions now priced in. The Bank itself has indicated a preference for around three further cuts, maintaining its quarterly pace.

As a result, some dovish MPC members may attempt to guide markets towards greater expectations of easing, which could put pressure on Sterling. However, any downside is likely to be limited, as economic fundamentals suggest inflation risks remain skewed to the upside, restricting the Bank’s scope for further cuts.

EUR/USD – Bulls Holding Firm

EUR/USD gained bullish momentum on Tuesday, closing in positive territory. While the pair remains relatively steady around 1.0500 in Wednesday’s European morning session, technical indicators suggest little sign of a deeper correction. Tuesday’s sharp decline in US Treasury bond yields weighed on the US dollar, helping EUR/USD push higher.

US Treasury Secretary Scott Bessent stated that President Donald Trump’s administration aims to reduce spending while simultaneously easing monetary policy and lowering Treasury yields. Following these comments, the benchmark 10-year US yield dropped more than 2% on the day, touching its lowest level since early December at below 4.3%.

President Trump is set to hold a press conference at 14:00 GMT, with investors closely watching for remarks on tariff policy. A further decline in US bond yields could put renewed pressure on the dollar, paving the way for additional gains in EUR/USD. As of the latest update, the 10-year yield had edged slightly higher to 4.305%.

The Relative Strength Index (RSI) on the four-hour chart remains above 50, and EUR/USD continues to trade above its 20-period and 50-period Simple Moving Averages (SMA), indicating a lack of strong selling pressure. EUR/USD faces key resistance at 1.0500-1.0510 (round level, Fibonacci 78.6% retracement of the recent downtrend), with further resistance at 1.0540 (100-day SMA) and 1.0600 (starting point of the previous downtrend).

On the downside, support levels are observed at 1.0440 (Fibonacci 61.8% retracement), 1.0390-1.0400 (50-day SMA, Fibonacci 50% retracement), and 1.0350 (Fibonacci 38.2% retracement).