Written by the Market Insights Team
Risks around “fiscal and trade policies”
Boris Kovacevic – Global Macro Strategist
Equities managed to stage a late-week rebound, but uncertainty remains the dominant theme in markets. New York Fed President John Williams and Chicago Fed President Austan Goolsbee both emphasized the elevated risks surrounding fiscal and trade policies, with Williams noting that monetary policy is well-positioned to adapt to evolving conditions. Goolsbee acknowledged the economic uncertainty but expressed confidence that if inflation continues to ease, rates will likely be lower in 12 to 18 months.
Traders in the currency market have turned bearish on the US dollar for the first time since 2016, with hedge funds and asset managers now net-short on the Greenback. This shift highlights growing concerns over trade policies, inflation risks, and uncertainty surrounding the Federal Reserve’s next steps. Economic data remains mixed, with sentiment surveys indicating a slowdown amid fears of tariffs and fiscal tightening, while official employment and manufacturing statistics suggest resilience. This divergence has heightened uncertainty across financial markets, prompting the Fed to lower its growth projections and the OECD to warn that US trade policies could drag on global economic momentum.
While Fed Chair Jerome Powell acknowledged these risks, he noted that “hard data” has yet to confirm a significant downturn. Despite this, the US dollar has struggled to benefit from safe-haven demand as investors weigh the long-term impact of policy shifts. Adding to the uncertainty, President Trump is set to announce a new wave of “reciprocal tariffs” on April 2, aimed at countering trade imbalances with foreign partners. Although these measures are expected to be more targeted than previous threats, their broader economic implications remain unclear.
Euro under pressure
Boris Kovacevic – Global Macro Strategist
The euro extended its losing streak on Friday, with EUR/USD falling to $1.08 after a third consecutive daily decline. The common currency had been on track for a third straight weekly gain, but weaker-than-expected economic data and a stronger US dollar weighed on sentiment.
Consumer confidence in the Eurozone fell more than forecast in March, with the index dropping to -14.5, disappointing expectations for an improvement. The broader EU measure also declined, reinforcing concerns that households remain cautious despite moderating inflation. In France, manufacturing sentiment deteriorated further, with the climate indicator slipping to 96, its lowest since November. Weakening order books, particularly for foreign demand, contributed to the decline, highlighting ongoing external pressures on European industry.
EUR/USD’s pullback reflects a combination of factors, including renewed US dollar strength as markets reassess the Fed’s rate outlook. While the Fed kept rates unchanged last week, officials maintained their projections for two rate cuts this year, but with inflation risks still in focus. Meanwhile, investors remain wary of Trump’s upcoming tariff announcement on April 2, which could add further pressure on global trade and weigh on European growth prospects.
Germany’s fiscal expansion has been a key driver of recent euro strength, but with much of that now priced in, the currency’s upside appears more limited. The ECB’s cautious stance also adds to the uncertainty, as policymakers weigh softening growth data against sticky inflation. If economic sentiment continues to weaken, expectations for a rate cut in the coming months could rise, putting further pressure on the euro. For now, EUR/USD remains vulnerable to external headwinds, with risks tilted toward further downside if the US dollar continues to recover.
Monetary caution and fiscal consolidation influence pound
George Vessey – Lead FX & Macro Strategist
The British pound has experienced mixed fortunes recently, influenced by global trade tensions, monetary policy decisions, and domestic economic challenges. GBP/USD has shown resilience, holding above $1.29, supported by the Fed’s cautious stance and expectations for rate cuts in 2025. However, the pair faces headwinds from broader risk aversion and geopolitical uncertainties. Meanwhile, GBP/EUR is back above €1.19, since the optimism over fiscal reforms in Europe appear to be baked into the common currency’s valuation.
Looking ahead, the pound’s outlook remains tied to key economic data and policy developments. This week, flash PMIs will offer a first read on how business activity is holding considering policy uncertainty. Additionally, UK inflation data and employment figures will provide insights into the domestic economy’s health and the Bank of England’s (BoE) policy trajectory. The BoE’s hawkish hold last week offered sterling some support, but it’s vulnerable to a dovish repricing if inflation surprises lower. The biggest risk event we see for the pound this week though is the Spring Statement on Wednesday, as Chancellor Rachel Reeves addresses rising debt interest costs and fiscal challenges. Investors will closely monitor updates from the Office for Budget Responsibility (OBR) and any hints of tax changes or spending cuts.
Looking ahead, GBP/USD and GBP/EUR remain caught in a delicate balance between modest domestic resilience and external pressures. While the pound benefits from stable growth prospects and a hawkish tilt from the BoE, rising trade tensions with the US and global economic uncertainties could limit upside potential. Interestingly though, the pound has exhibited a negative correlation with US equites over the past month, the most negative since 2014, which supports our view of this fading rotation from US stocks to European seemingly helping the dollar out more due to increased flows into US assets.
Antipodeans on backfoot
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 24-28
All times are in GMT
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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.
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