Written by the Market Insights Team
On both sides of the border
Kevin Ford – FX & Macro Strategist
A Bank of Canada (BoC) survey last week revealed that due to tariff tension with the U.S. more Canadians are worried about job security, especially in industries that rely on exports to he U.S. People are also cutting back on non-essential spending. At the same time, businesses are reducing investments in response to rising inflation expectations. Over in the U.S., the University of Michigan (U-Mich) survey showed a drop in consumer confidence and a rise in inflation concerns. It’s clear that tariff tensions are weighing heavily on both sides of the border. While sentiment surveys aren’t always the best indicators of future economic activity, unexpected trade uncertainty often ends up slowing growth in the following quarters.
Canada’s February Consumer Price Index (CPI) comes out today, with a year-over-year projection of 2.2%. This will help reveal whether inflation expectations are already influencing prices or if we might see disruptions from tariffs in the months ahead. For now, things on the tariff front should stay quiet until April 2nd, when the U.S. is expected to announce its reciprocal tariffs. Word has it the U.S. plans to roll out 25% tariffs across the board for Canada, along with a host of new measures, according to top officials who spoke with a Canadian delegation.
The United States is currently adding a 25% surcharge on Canadian steel, aluminum, and goods that don’t comply with the CUSMA/USMCA trade deal. In future negotiations, the U.S. and Canada will tackle some major sticking points, like Canada’s 3% digital services tax on online revenue and its dairy quotas—issues that have caused friction since the 2018 USMCA revisions. Even without new tariffs, though, it doesn’t look like this trade dispute will get fully resolved until the trade agreement is renegotiated. In the meantime, the uncertainty is expected to put pressure on the Canadian economy. All eyes are on April 2nd, when the U.S. administration’s tariff strategy will become clearer, setting the stage for future trade talks.
Retail sales miss weighs on dollar
George Vessey – Lead FX & Macro Strategist
US equity indices have started the week in the green and the US dollar in the red as investors continue to weigh trade policy uncertainty, recession risks and geopolitical developments. Volatility across stocks and currencies continues to subside following the mixed US retail sales report yesterday, but plenty of catalysts this week could challenge this trend.
On the macro front, US retail sales rose 0.2% in February, less than forecast, and January data was revised to a 1.2% decline, the biggest drop since July 2021. Seven out of the 13 categories saw a decline in February, whilst non-store retailers, a proxy for online spending, posted the largest jump since late 2023. While the hard data are holding up somewhat for now, sentiment and forward-looking indicators show an elevated slowdown risk. For example, we saw a sharp drop in New York state manufacturing activity, whilst the prices paid component jumped to its highest level in over two years. Combined, this adds to evidence that tariff risks are hitting consumer spending whilst reigniting inflationary pressures for businesses. The market reaction was fairly muted, but the day ended with the dollar index sliding back towards 5-month lows and Treasury yields slipping across the curve.
Balancing growth-related concerns with the need to reassure investors of the economy’s resilience presents a significant challenge for Federal Reserve Chair Jerome Powell this week. He is scheduled to address the public following the conclusion of the central bank’s meeting on Wednesday, where policymakers are anticipated to keep interest rates unchanged.
Clearing the $1.09 barrier
Boris Kovacevic – Global Macro Strategist
The euro continues to push higher, starting the week on a positive footing as risk-on sentiment drives markets. Equity benchmarks across major economies are rising, supported by stronger-than-expected macro data from China and significant fiscal policy developments in Germany that could have long-term implications for European growth. EUR/USD is trading above $1.09 again and could test its year high at $1.0955.
China’s industrial production expanded by 5.9% year-over-year in two months to February, surpassing market expectations of a 5.3% increase. Retail sales rose by 4.0% in the same period, accelerating from 3.7% in December and marking the strongest retail turnover since last October, largely driven by increased consumer spending during the Spring Festival. The resilience of the Chinese economy is a positive signal for global trade, particularly benefiting the Eurozone, given its strong economic ties with China. The risk-on mood, combined with stronger demand signals from Asia, is offering broad support for the euro. At the same time, developments in Germany are adding another layer of support for the common currency.
Lawmakers in Berlin are expected to pass sweeping constitutional changes this week that will remove borrowing restrictions for defense spending in excess of 1% of GDP. This move could have broader implications for the Eurozone economy, as increased government spending on defense and infrastructure could help offset some of the current growth headwinds and support the economic outlook.
Against this backdrop, EUR/USD remains in an upward trend, benefiting from improving risk sentiment and fiscal expansion prospects in Germany. However, further upside will depend on upcoming US economic data, particularly inflation figures and Fed guidance, which could influence expectations around the dollar. Meanwhile, ECB policy expectations remain a key factor, as markets continue to price in rate cuts later this year, but any signs of resilience in the European economy or fiscal expansion could challenge these.
Knocking on the door of $1.30
George Vessey – Lead FX & Macro Strategist
One again, sterling traded within a whisker of the $1.30 handle versus the US dollar, with GBP/USD notching $1.2999 yesterday. The $1.30 handle is a key psychological level, which if overturned, could trigger an acceleration higher as it did in August last year. However, the pound’s already circa 7% rally from its low of 2025 raises the question, is there much more room for it to run higher in the short term?
Monetary policy is a key driver of FX trends and whilst no cuts are expected by the Fed or Bank of England (BoE) this week, the pricing further out favours sterling at this stage. Overnight indexed swaps are pricing in nearly a 75% chance that the BoE will cut in May and just a 25% chance of a cut by the Fed that month, but more easing by the US central bank is expected overall by the end of this year. This is constructive for sterling via an improving UK-US yield spread. But it also leaves it vulnerable to a dovish repricing if sticky services inflation and private sector wage growth start meaningfully easing. For now though, traders are losing confidence that the BoE will be able to meet its inflation target sustainably over its forecast horizon, with breakeven rates across key tenors all well above 3%. Ultimately, the situation is complex for the BoE, and it will likely tread carefully, especially amidst heightened uncertainty due to domestic fiscal policy initiatives and trade policy tensions.
In light of the muddy domestic backdrop then, a break and rally above the $1.30 mark might therefore be more reliant on the fading US exceptionalism narrative, weakening the dollar. Indeed, speculative FX traders are once again betting on the pound appreciating versus the dollar, with CFTC data showing the highest GBP net long position since mid November.
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Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 17-21
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.