Volatility jumps on economic jitters
George Vessey – Lead FX & Macro Strategist
US stocks are heading toward their worst start to a presidential term since 2009, weighed down by recession fears and related uncertainty around tariffs. The Nasdaq 100 sank up to 4% on Monday, its worst day since 2022, while the S&P 500 extended its slide from a record to 8% and closed below its 200-day moving average for the first time since November 2023. Benchmark Treasury yields plunged as bets on supportive Federal Reserve (Fed) rate cuts rose, whilst the US dollar index steadied after suffering its worst week in two years.
US President Donald Trump’s shifting stance on tariffs has been stoking anxiety across financial markets for some time. But more recently, it’s raising concerns that policy uncertainty could tip the US economy into a recession. Indeed, Trump refused to rule out the possibility of a recession in an interview over the weekend, dismissing business concerns over lack of clarity on his tariff plans. This intensified speculation that short term economic pain will be tolerated by his administration in pursuit of longer term goals. Amidst the uncertainty around trade policy, sticky inflation and the unknown pace of the Fed’s interest-rate easing cycle, investors should anticipate continued volatility. We’ve already seen the VIX index, a gauge of expected volatility in the S&P 500 jump to its highest level since December. Implied volatility in the currency space has risen, but remains far from the 2022 and 2020 peaks.
The fundamentals of the Trump plan of deregulation and tax cuts were supposed to be dollar positive, but the execution of his plan with tariffs has soured the market mood and looks like it’s now dollar negative. In the very short term, a consolidation phase or slight correction higher looks feasible for the dollar after last week’s turbulence but we think we’ve already seen peak dollar strength for 2025. US JOLTS job openings data today followed by inflation data on Wednesday will be closely monitored on the data docket.
A watershed moment for the euro
George Vessey – Lead FX & Macro Strategist
After its best week since March 2009, EUR/USD’s momentum looks to be waning given the pair now sits in the overbought zone on the daily chart. Still, a high of $1.0875 today is almost five cents greater than where it was trading this time last week. We may be in for a short period of consolidation before another leg higher, but a few bullish factors remain in focus.
As we’ve reported, the EU plans to adjust fiscal rules to ramp up spending and that has sent yields soaring across Europe but has also fuelled optimism about a boost to the region’s economy. A report that Germany’s Green Party is ready to negotiate and see chances for an agreement over the defence spending by the end of this week is boosting this narrative. The theme may get some fresh impetus from potential US-Ukraine negotiations on Wednesday and further details about provisions by EU states for increased defence spending, including in support of Ukraine. However, there is a hint of overexuberance in the short term because of the slow transmission from an expansionary fiscal policy into growth and ECB’s reaction function. Plus, let’s not forget that a trade war might still be heading Europe’s way. Hence, further gains for the common currency are also going to rely on a continuation of the US slowdown story. One thing seems certain though, the narrative of independent US and European stories stands to lift FX volatility.
In the absence of top-tier economic data from Europe today, focus will also be on ECB speakers. After last Thursday’s interest rate cut, traders are now only fully pricing in one further quarter-point reduction in 2025, which would take the deposit rate to 2.25%. About a week ago they had fully priced in the rate moving to 2% by December.
Sterling testing key support versus euro
George Vessey – Lead FX & Macro Strategist
The pound is testing its supportive 50-week moving average against the euro this morning. A close below could open up the door to €1.1740 as German and UK yields narrow and prospects for Eurozone growth look stronger in the wake of the bazooka spending plans from Europe. Meanwhile, GBP/USD upside traction has stalled, with the pair perched near the $1.29 handle after last week’s massive 2.7% climb.
With US recession risks rising, the risk sensitive pound lost the most ground against the Japanese yen yesterday as heightened risk aversion drove demand for safe-haven currencies. Although the UK looks better positioned to avert tariffs from the US due to its goods trade deficit, the pound is likely to remain vulnerable via the risk sentiment channel due to its worsening net international investment position and the fact it has a persistent current account deficit. This means sterling is reliant on foreign capital inflows, which often dry up when the market mood turns sour.
Meanwhile, on the macro front, data early this morning showed retail sales in the UK rose by 0.9% y/y in February, a sharp slowdown from January’s 2.5% gain and well below the expected 2.4% increase. Consumers continued to cut back on purchases amid the ongoing cost-of-living crisis. UK GDP figures later this week will be in spotlight for pound traders.
Equities, oil and yields tumbling
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Calendar: March 10-14
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