Loonie, the barometer of the tariff story – United States
Written by the Market Insights Team
USD/CAD trading back above 1.43
Kevin Ford –FX & Macro Strategist
Despite weaker-than-expected US consumer confidence and macro data softening the US Dollar, the Loonie remains tied to tariff news, gradually approaching the 1.435 level. Throughout the week, markets have been flooded with President Trump headlines, causing uncertainty around his policies and driving investors towards safe-havens. The yield on the US 10-year Treasury note fell 10 basis points to 4.3% yesterday, its lowest level since mid-December, and WTI oil dropped below $70 a barrel. FX markets seem more resistant to tariff news for now, awaiting clearer direction before March 4th. The Loonie however, is the pivotal gauge amidst tariff discussions. Speculation about another push towards April 1st has grown, but Trump’s recent remarks keep investors guessing.
Separately, the Conference Board’s US consumer confidence index hit its lowest level in February since September 2024, sparking renewed fears of an economic slowdown. Recent US macro data suggests a slowdown rather than a recession. Last week’s weaker housing starts and existing home sales figures followed a similar trend in retail sales from the previous week. More significantly, the Services PMI dropped below the critical 50 mark, signaling stronger economic weakening, as the services sector accounts for about 60% of US GDP. The latest University of Michigan survey also shows a decline in consumer confidence. Policy uncertainties, especially regarding tariffs and potential government layoffs, seem to be impacting economic momentum. This might be the first time in a while that markets haven’t shrugged off bad economic news, as growth becomes the focus and investors reassess the impact of Trump’s administration policies on the economy.
Today’s data calendar is relatively quiet in both the US and Canada. News around fiscal policies and tariffs from the US will be the focus. In the US, the House of Representatives has passed a budget proposal bill that sets the stage for approximately $4 trillion in tax cuts. While it doesn’t specify changes to individual spending or revenue plans, it suggests a $2 trillion reduction in Medicaid spending. Additionally, the bill aims to raise the debt ceiling by $4 trillion, thus delaying the risk of a government shutdown.
Trump’s tax plans optimism
George Vessey – Lead FX & Macro Strategist
US stocks closed at a five-week low and bonds soared yesterday as another disappointing reading on the US consumer fuelled concern about the health of the world’s largest economy. The US dollar index also retreated after US Secretary of the Treasury Scott Bessent said that US yields and the dollar will drop lower due to the Trump policy even if the Federal Reserve (Fed) keeps rates on hold. However, both the dollar and Treasury futures have gone into reverse after House Republicans passed a budget blueprint, paving the way for $4.5 trillion in tax cuts.
The twists and turns in macro and political developments are keeping investors on edge and financial markets volatile. The growth-scare narrative in the US worsened on Tuesday as a closely watched measure of consumer confidence fell by the most since August 2021 in February on concerns about the outlook for the broader economy. That prompted traders to boost bets on Fed rate cuts this year even as inflation pressures seem to be intensifying. Treasury yields fell to their lowest levels in 2025. A gauge of megacaps extended a plunge from its peak to more than 10%, Bitcoin and the wider crypto-market suffered substantial losses and the US dollar index closed below its 100-day moving average for the first time since October 2024. A lot of the sudden moves look to be part of a reversal in the Trump trade and a growing narrative of softening consumption in the US driving Fed easing bets.
However, the tax cut plans have halted the slide in equities and the dollar, whilst Treasuries have steadied. Republicans have defended the cuts, insisting they will stimulate economic growth and, along with other Trump measures such as tariffs, limit increases to the deficit. The refocus on fiscal matters might help the dollar temporarily and divert attention from weak consumer activity until tariffs become a priority again next week.
Euro faltering at $1.05
George Vessey – Lead FX & Macro Strategist
The euro has staged a prominent appreciation against the US dollar in February, despite having fallen to an over 2-year low earlier in the month. EUR/USD has risen around 4% from near $1.01 to testing the key psychological (and resistance) handle of $1.05, though still six cents below its 5-year average.
A cyclically-driven turn in the US dollar has been noteworthy, with soft US economic data disappointing, helping EUR/USD rebound, but hard data remains robust for now. Reports of a possible peace agreement in Ukraine is also seen as providing a modest boost to EU economies, mainly due to higher military spending prompted by increased security fears, plus lower gas prices alleviating energy cost concerns and providing further support to the euro. Tariff fatigue also set in, allowing risk appetite to improve, aiding the pro-cyclical euro. Germany’s election results, despite bringing relief, has so far failed to enhance the euro’s uplift meaningfully though.
Stability in rates markets has also failed to boost the euro. The inverse relationship EUR/USD usually has with the MOVE index (volatility in fixed income), decoupled around the US election. The index is down around 16% since then and was recently trading near its lowest levels since early 2022. All else being equal, EUR/USD should’ve risen above $1.10.
But of course a huge variety of variables drive FX, and the weight those variables have on currencies often fluctuates. As a result, EUR/USD’s struggle to convincingly break north of $1.05 of late implies that hopes of sustained rally might be pinned more on a substantial turn in the US economy, though predicting the timing on that front is difficult.
Pound lacking fresh catalyst against euro
George Vessey – Lead FX & Macro Strategist
Sterling rallied to near its highest level of 2025 against the euro last week, and remains over two cents above its year-to-date low of €1.18 and well above its 5-year average of €1.16. GBP/EUR has been in a steady, healthy, uptrend for the best part of two years, enduring just six months of modest losses over this period and gaining almost 8% overall. There are some reasons to expect more gains over the course of 2025, but the absence of a fresh positive catalyst could limit upside potential.
Though excess euro pessimism is arguably here, the euro domestic context, both cyclical and political, remains euro-negative at this stage. Although the UK economy is expected to grow only ~1% this year, recent activity data has been more upbeat. Meanwhile, the Eurozone economy is expected to grow around 0.9%, with stronger US protectionism limiting growth in both regions. If and how US President Trump delivers on his tariff threats remains to be seen, but the UK should fare better than the Eurozone under most scenarios given the majority of UK sales to the US are services. Political uncertainty is also higher across Europe versus the UK, though the German election result has boosted hopes of pro-growth structural changes in Europe’s largest economy. The most significant bullish factor supporting GBP/EUR though is interest rate differentials. The European Central Bank is likely to cut interest rates more than the Bank of England (BoE) this year. Still-elevated UK wage growth and services inflation supports this assumption. That said, this is likely priced into the exchange rate and in fact, the real rate differential (taking into account inflation) suggests €1.19 is a fairer value.
So, where to next for sterling versus the euro? Barring any major deviations in the above (slightly stronger UK growth, less political uncertainty and fewer BoE rate cuts), GBP/EUR should remain supported and we don’t see a major trend reversal occurring anytime soon. However, the pair continues to bump into resistance around €1.21, which is near the upper limit of the post-Brexit vote range since 2016. We need a decisive break above here to establish a new higher trading range.
Equities, oil and yields lower
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 24-28
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.
