Written by the Market Insights Team
April 2nd will lead the show
Kevin Ford – FX & Macro Strategist
This week brought two big updates on inflation in North America. First, core inflation in Canada is still stubbornly high. Second, the U.S. Federal Reserve acknowledged that elevated core inflation isn’t going anywhere soon. They even raised their CPI and PCE projections for the coming months, blaming “tariff-induced inflation.”
Central banks play a key role in keeping long-term inflation expectations steady. But recent data and surveys have put them under the spotlight. In the U.S., for example, Fed Chair Powell pointed out a clash between market indicators and survey results. The University of Michigan’s latest survey shows consumers expect prices to rise by 3.9% annually over the next 5 to 10 years. Meanwhile, the Fed’s preferred measures—5-year forward breakevens and 10-year TIPS—suggest long-term inflation expectations are steady at 1.8% and 2.2%, which aligns with price stability. Why the gap? It could be due to over-reaction to current policies, the University of Michigan’s switch to online-only surveys, or even political leanings. For instance, Republicans predict just 0.1% inflation for the next year, while Democrats expect 6.5%. Despite these differences, Powell remains confident that long-term expectations are well anchored.
At the FOMC press conference this past Wednesday, Powell also discussed ‘tariff- inflation. He emphasized that not all inflationary pressures need immediate action, especially if they’re likely to resolve on their own. Reflecting on past criticism for calling pandemic inflation “transitory,” he defended the occasional need to wait and see. Meanwhile, Treasury Secretary Scott Bessent argued that Trump ‘47 tariffs would cause a one-time price hike. Powell, however, avoided making any firm commitments, citing the challenges of predicting the broader economic effects of these tariffs.
After last Wednesday’s press conference, it’s clear the Fed is sticking to its cautious approach. In contrast, the Bank of Canada (BoC)’s recent rate cut shows a more pre-emptive stance. Adding to the negative survey data, Canada’s largest small business association, the CFIB, released its 12-month business outlook yesterday. As anticipated, the results confirmed an all-time low in confidence, even worse than during the Global Financial Crisis and the COVID-19 pandemic.
While there’ll be relevant macro data from the U.S. next week, all attention is on April 2nd, where U.S. trade policy will lead the show for central bankers and markets alike.
Post-Fed euphoria fades
Boris Kovacevic – Global Macro Strategist
The post-Fed euphoria proved short-lived, as US equities slipped back into negative territory on Thursday, weighed down by renewed trade uncertainty and ongoing concerns over global growth. After delivering what markets perceived as dovish signals, the Fed had momentarily boosted market sentiment. However, traders are still uncertain about the trajectory of the US economy amid continued policy and geopolitical risks.
The S&P 500 gave back a portion of Wednesday’s gains, with volatility set to rise due to month-end and quarter-end option flows. Meanwhile, the dollar extended its rebound, gaining ground despite falling Treasury yields, as weaker performances from the euro, pound, and Swiss franc helped drive demand for the greenback. The dollar’s strength came as rate expectations for other major central banks were pulled lower. The Bank of England signaled a growing willingness to cut rates, while the Swiss National Bank’s surprise decision to ease policy underscored a more dovish global backdrop. The euro also struggled, with markets digesting softer comments from ECB policymakers regarding the pace of future rate cuts.
On the economic front, US data remained mixed. Initial jobless claims rose slightly to 223,000 last week, but remained at historically low levels, reinforcing the notion that the labor market is holding up despite the broader macro uncertainty. Meanwhile, existing home sales surprised to the upside, climbing 4.2% in February to an annualized rate of 4.26 million, as pent-up demand and stable mortgage rates encouraged buyers to return to the market.
Trade tensions remain the primary wild card. Trump’s promise of a “big one” in reciprocal tariffs set to take effect on April 2 continues to hang over markets, with investors uncertain about the scale and scope of the potential measures. Fed Chair Jerome Powell acknowledged these risks but emphasized that policymakers would remain patient, noting that the Fed’s stance is “well-positioned to react to what comes”.
Euro bracing for a weekly decline
George Vessey – Lead FX & Macro Strategist
The euro continues to stumble as heightened risk aversion grips financial markets. EUR/USD logged its sharpest daily decline in March earlier this week and is bracing for its first weekly drop in three. Cautious remarks from European Central Bank (ECB) President Christine Lagarde have likely also contributed to the common currency’s decline against most peers from recent peaks.
The weakness in Asian equity markets has spread to Europe, which are on track to end a four-day winning streak. There doesn’t appear to be a fresh catalyst, so we can only deduce its related to ongoing tariff uncertainty and global growth prospects. The move lower in global equities has also prompted limited demand for haven assets, suggesting some resilience in broader risk sentiment. However, EUR/USD is retreating from a near five-month high of $1.0954, with key moving averages located under $1.08 – potentially downside targets for short-term traders.
Speaking to European lawmakers on Thursday, ECB President Lagarde warned of weaker growth but downplayed inflation risks if the EU retaliated against US tariffs. She cautioned that a 25% US tariff on European imports could cut euro area growth by 0.3 percentage points in the first year, with a counter-tariff deepening the hit to 0.5 percentage points. The sharpest impact would come in the first year, with lingering effects on output, though inflationary pressures would fade over time, signaling the ECB would not respond with higher rates. Meanwhile, progress toward a ceasefire in Ukraine introduced optimism this week, but also fresh uncertainties about Europe’s economic and energy future.
Overall, rising US-EU trade tensions, including Trump’s renewed tariff threats, continue to challenge euro stability. For now, EUR/USD remains trapped between shifting market sentiment and fiscal expectations.
BoE in no rush
George Vessey – Lead FX & Macro Strategist
The Bank of England (BoE) kept rates unchanged at 4.5% as expected, but what comes next is fairly ambiguous amid evident nervousness surrounding the inflation outlook. The vote split was one of the key focus points, and at 8-1, that suggests momentum has shifted in a more hawkish direction. The pound initially pared early losses versus the dollar, but lacked impetus despite markets trimming bets of a rate cut in May.
The BoE’s Catherine Mann, who surprised by dissenting in February in favour of a larger cut, rejoined the majority again by voting to keep rates on hold. Long-standing dove, Swati Dhingra, was the sole dissenter, but scaled back her call for half a point move previously. At the margin, the updated voting pattern leans more hawkish.
The overall message from the BoE was that there had been little in the way of domestic economic developments since the February meeting, but that the degree of global trade policy uncertainty has increased. Though UK economic growth is obviously sluggish, private sector wage growth remains above 6%, while services inflation is bouncing around 5%, and headline inflation is expected to hit almost double the BoE’s 2% target later this year. Based on global uncertainties and subsequent inflation risks, it seems the bar to deviating from the “gradual and cautious” approach to easing is high.
Ultimately, other than the vote split, the rest of the policy statement was largely a reiteration of that issued after the February meeting, hence the limited reaction in sterling and gilts. The overnight index swaps curve was relatively unchanged too, with around 50 basis point of cuts priced in by year-end, although the odds of a May cut were reduced. We still favour a cut in May though, in line with the cut-hold tempo signalled by the BoE.
GBP/USD is on track for its first weekly fall in three as momentum waned around the $1.30 mark – a level the pair has been below for almost two thirds of the post-Brexit period. GBP/EUR on the other hand is firmly back above the €1.19 with the 50-week moving average (€1.1888) offering decent support still. Near-term monetary policies and sterling’s carry advantage due to higher UK yields remains constructive for the cross as UK rates are expected to be closer to 4% whilst Eurozone rates are expected to be near 2% by year-end. However, narrowing growth and real rate differentials should benefit the euro over the medium term, potentially capping upside beyond 2025 peaks.
Dollar index snaps back
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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