Written by the Market Insights Team
Between rumors and dollar softness
Kevin Ford –FX & Macro Strategist
Despite the U.S. ISM services PMI (a measure of U.S. service sector activity) exceeding expectations in February, the narrative of a U.S. economic slowdown, coupled with Germany’s significant shift in fiscal policy, has driven markets to adopt a short-term bearish stance on the U.S. dollar. The DXY index has continued to struggle, losing approximately 2.8% in the last few days. This decline has capped gains for the Loonie above the 1.445 level, which has eased some of its tariff premium amid confirmation that President Trump is exempting automakers from newly imposed tariffs on Mexico and Canada for one month, and renewed hopes that tariffs could be lifted altogether if an agreement is reached soon. While the Loonie remains in uncertain territory and seeks firmer footing on trade policy, it has, for now, benefited from tariff rumors and the unexpected shift in U.S. dollar sentiment.
Altogether, the recent U.S. macro data published this week (ISM Services PMI, ISM Prices Paid, S&P Manufacturing PMI, and ISM Manufacturing) challenges the market narrative of an economic slowdown. This Friday’s payroll data will provide a more complete picture in what has been seen as a key test of the U.S. economy, amid fears of cooling following two years of failed recession predictions. The two-year Treasury yield has rebounded above 4%, reaching 4.03%, in response to this week’s positive macro news. The narrative of a U.S. economic slowdown has gained traction, supported by the Atlanta Fed GDP nowcast. However, given the indicator’s inherent volatility, it may serve as a key variable in shaping investor sentiment ahead of next month’s data, which will account for recent tariff developments.
There is also speculation that payroll data may eventually reflect the impact of DOGE’s federal employee layoffs, which number at least in the tens of thousands. However, these layoffs are unlikely to significantly influence this Friday’s payroll report, which reflects February’s data. Their effect may instead show up in March payroll figures, expected next month.
The USD/CAD is trading close to its 60-day SMA of 1.436 and has found some around the 1.433 level. In the near term, rebounds toward the 1.443 level could present shorting opportunities, especially if no significant tariff news emerges and U.S. dollar weakness persists.
The next 36 hours will be packed with market-moving events, including the ECB policy meeting outcome, remarks from U.S. Secretary Scott Bessent, key Fedspeak led by Chair Jerome Powell, the U.S. jobs report, and additional data releases from Europe, Canada and the U.S.
Tearing down the black zero and euro bears
Boris Kovacevic – Global Macro Strategist
This is what European investors have eagerly been waiting for. Germany’s likely next coalition of the CDU and SPD is preparing for a major fiscal expansion, potentially widening the deficit to 4% of GDP over the next decade. While details remain unclear and implementation risks are high, the plan aims to bolster military deterrence, drive economic recovery, and reshape Germany’s lagging infrastructure.
Around €500 billion could potentially be available for investment over the next ten years. How much of this will go into the expansion of the military complex is unclear. However, a report from the European Commission estimated that about €800 billion or 4.5% of the EU’s GDP could be mobilized in the coming years. To illustrate how significant the likely adjustment of the German black zero (rule of not increasing debt levels) is, we can take a look at their market impact. The 10-year government bond yield surged by an incredible 28 basis points to 2.8%. This is the largest single-day increase in financing costs since the reunification of East and West Germany in the 1990s.
It is also safe to say that no analyst saw the euro surging by 4% this week. However, we have consistently highlighted two key points over the past few weeks: first, that the dollar’s tariff-driven gains were likely to lose momentum as the US economy slowed, and second, that European pessimism had reached extreme levels—making positive surprises far more impactful on markets than any disappointing data or news. The German defense bazooka and signs that the Trump administration is monitoring the impact of tariff announcements on markets and the economy have pushed EUR/USD to the highest level this year above $1.08.
From now on, we warn on turning too optimistic too soon. First, the adjustment of the deficit rule needs a 2/3 majority in the German parliament which is still not guaranteed. Second, the global (US vs. RoW) tariff war has just started. Both can still act as headwinds for the euro. Still, the real rate differential makes it clear that levels such as $1.07 or $1.08 are not unjustified.
Dollar down 4% in 2025
Boris Kovacevic – Global Macro Strategist
Yesterday was probably the first trading session of the year in which global markets were not driven by developments in the US, but by the news flow coming out of Europe. The proposed increase of German defence spending and signs that the US economy are slowing have put the dollar on track for its worst week since November 2022.
The 3% drawdown is happening despite Trump’s rhetoric becoming more hawkish. This is likely due to two factors. First, investors are looking beyond the short-term safe haven flows and are asking what damage tariffs will do to the US economy. Second, despite this week’s tariff increases on Mexico, Canada, and China, potential exemptions and the undefined duration of the tariffs continue to confuse investors. Statements by the Trump administration have signalled that they are watching the impact of tariffs on markets and the economy. The White House excluded automakers from the newly imposed tariffs on Mexico and Canada for example. Could that mean that a large enough drop in equity prices or economic momentum could make Trump pivot?
Economic data came in mixed yesterday. The services sector beat forecasts and expanded modestly. Anxiety is high but the employment index rose from 52.3 to 53.9. This does contradict the ADP report, which showed that private hiring fell to the lowest level since July at 77,000. Against this ambiguous backdrop, all eyes will be on the nonfarm payrolls report tomorrow. The dollar needs an upside surprise on the jobs figure to stop the bleeding.
Pound now 7% higher than January low
George Vessey – Lead FX & Macro Strategist
As the US dollar dump continues, GBP/USD marches to fresh 4-month highs above the $1.29 handle. The pair has broken above key resistance levels including key moving averages like the closely watched 200-day and 200-week moving averages, which is a bullish signal. Moreover, in FX options markets, short-term risk reversals, favouring further sterling strength, have surged to their highest in around five years.
Expectations of the US dollar outperforming on escalating trade war tensions are fading as investors focus more on the negative repercussions on the US economy, with stagflation fears overwhelming. Instead of safe haven USD demand, traders are focused on a recent slowdown in US data, versus improvement in UK and European data, and the potential for relative outperformance between the economies. This is also having a positive impact on interest rate differentials between Europe and the UK versus the US, given the rise in Fed easing bets. Moreover, the spillover effect from surging German bund yields as a result of the proposed bazooka spending plan, saw the UK 10-year yield jump by the most in over a year yesterday, to over 1-month highs. This sent UK-US 10-year spreads soaring to an 18-month high, which has helped the pound’s rally against the battered and bruised US dollar.
But the near 7% climb from the low of $1.21 in January, and the 2.6% rally this week has pushed the pound into the overbought zone according to the 14-day relative strength index. A period of consolidation or a correction lower may be in the offing, but the psychological $1.30 level now serves as next resistance. Elsewhere, GBP/EUR has dropped 1.5% this week after enduring its biggest single day loss in five months as stronger flows into the euro dominate.
Pound now 7% higher than January low
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 03-07
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.