- Global equities remain under pressure, while the US dollar extends its rebound amid rising risk aversion. Treasury yields are experiencing their worst weekly slide since September.
- Recent US economic data has been mixed, with GDP growing at 2.3% but jobless claims hitting a two-month high. Despite signs of slowing momentum, the dollar found support from geopolitical concerns and tariff announcements.
- Trump confirmed the implementation of 25% tariffs on Canada and Mexico and hinted at further levies on China. Trump declined to commit to a security backstop for Ukraine, instead prioritizing peace talks with Russia.
- Trump is now targeting the EU with potential 25% tariffs, though details remain unclear. Meanwhile, Germany’s incoming chancellor, Friedrich Merz, signaled no immediate fiscal reforms or military spending increases.
- The ECB is expected to cut rates by 25bps next week to 2.5%, but policymakers remain divided. Some worry about persistent inflation and trade risks, while others highlight weak growth and the risk of missing the 2% inflation target.
- The ECB meeting will be closely watched for guidance on future rate cuts, while the US jobs report will shape expectations for the Fed’s policy path. These events will be crucial in determining currency and market movements in the coming week.
Global Macro
Risk-off across the board
The global equity selloff continues, the US dollar’s rebound is gaining traction and Treasury yields are suffering their worst weekly slide since September. Investors are avoiding risky bets due to Donald Trump ratcheting up tariff threats, which has seen the euro pull back sharply from 2-month highs versus the dollar. Meanwhile, the pound is outperforming most G10 peers bar the dollar and franc this week and is eyeing its highest weekly close in over three years versus the euro.
Weaker data. The trade and geopolitical news flows once again overshadowed what seemed to be a pretty important week for US macro developments. Durable goods, home sales, jobless claims and GDP data sent mixed signals about the state of the world’s largest economy. GDP grew by an annualized 2.3%, while unemployment claims rose to a 2-month high and tumbled for a second consecutive month. Overall, the data continues to point to weaker economic momentum ahead and the dollar would have depreciated against this backdrop would it not have been for the tariff news.
Tariff uncertainty. Markets once again reacted to fresh tariff announcements made by the US President. Donald Trump confirmed that the 25% tariffs on Canada and Mexico will go into effect, while also hinting at potential new levies on China as soon as March. This bolstered the dollar against the Canadian Dollar and Mexican peso. However, the strengthening of the Greenback broadened out to most major currencies as well.
Ukraine in focus. Beyond trade, Trump’s refusal to commit to a security backstop in Ukraine added another layer of geopolitical uncertainty. Meeting with UK Prime Minister Keir Starmer, he reiterated that the focus should first be on securing a peace deal between Russia and Ukraine, rather than discussing long-term military commitments.
Commodities lower for now. In the commodities space, oil prices are trading a multi-month lows having lost around 4% this month as Trump’s aggressive moves on trade triggered anxiety at a time when oil traders were already concerned about lackluster consumption in China. Moreover, hopes for a potential Russia-Ukraine peace deal weighed on the market, as lifting Russian sanctions could increase global oil supply. Commodity FX thus remains under pressure with the Aussie and Canadian dollars trading softer.
Trump’s new target. Trump stated he intends to impose duties of 25% on the European Union without giving any further details on whether those would affect all exports from the bloc or only certain products or sectors. Meanwhile, Germany’s incoming chancellor, Friedrich Merz, ruled out a swift reform of the country’s borrowing limits and said it was too early to determine whether the outgoing parliament could approve a major military spending increase.
Cautiously dovish. The ECB remains confident that policy is still restrictive, but the debate over future rate cuts is intensifying as per the meeting minutes released yesterday. A 25bp cut next week to 2.5% is expected, yet officials are divided. Some have shown worries about sticky services inflation and trade risks, while others fear weak growth and missing the 2% inflation target. The neutral rate remains a wildcard, with policymakers questioning its usefulness as a policy guide. Meanwhile, disinflation is on track, but wage growth and energy risks call for caution.
Week ahead
Litmus test for the US economy
This week brings a crucial mix of central bank decisions, inflation data, and labor market reports that will shape market sentiment and dictate currency movements. The ECB meeting takes center stage, as investors assess whether policymakers will hint at a timeline for rate cuts. Meanwhile, in the US, the February jobs report will provide key insights into the strength of the labor market and its implications for the Federal Reserve’s policy path.
US. ISM PMI data will provide key insights into US economic momentum. A weak manufacturing print could raise growth concerns, while the services sector remains crucial for inflation trends. The ADP Employment report will serve as a preview of Friday’s payrolls release, with markets watching closely for any signs of labor market softening. The most critical release of the week, however, will be Nonfarm Payrolls and Unemployment. If job growth slows from the previously weak 143k, expectations for a Fed rate cut could accelerate, putting pressure on the dollar.
Eurozone. The spotlight in the Eurozone will be on the European Central Bank’s policy decision, with markets expecting a rate cut that would bring the deposit facility rate down to 2.5% from 2.75%. However, the outlook beyond this move remains uncertain. Policymakers are divided between concerns over sticky services inflation, higher energy costs, and potential U.S. trade tariffs on one side, and sluggish economic growth alongside the risk of missing the 2% inflation target on the other. The latest GDP figures will also provide insight into the region’s economic trajectory.
FX Views
Back to havens as uncertainty prevails
USD Balancing tariffs and weaker growth. The US dollar index will likely end the week higher, a feat the dollar has only achieved once in the last seven weeks. Overall, US macro data continues to point to weaker economic momentum ahead and the dollar would have depreciated against this backdrop would it not have been for the tariff news boosting the safe haven buck. Conviction around a sustained dollar rally is fading though, as tariff fatigue and growth concerns begin to weigh on sentiment. In fact, the dollar has suffered its biggest monthly loss (-1%) since August 2024 and is negative against most G10 peers year-to-date. Traders remain cautious amidst elevated trade uncertainty and lack of policy clarity and FX markets will remain driven by trade headlines, with the dollar benefiting from renewed tariff bet. But the long-term picture remains far from clear. For a meaningful rebound, dollar bulls will need either stronger US economic data or an escalation in the global trade war. The upcoming Nonfarm Payrolls report will be critical. If job growth slows, expectations for a Fed rate cut could accelerate, pressuring the dollar.
EUR Topped out in short term. The euro has staged a modest 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. However, the latest bout of tariff risks in the latter stages of this week saw the euro slide back under $1.04 after failing to break above its 100-day moving average multiple times. Next week, all eyes are on the ECB rate decision. A 25bps cut is expected so attention will be on forward guidance and how officials view the weak growth outlook versus reflation fears.
GBP Snaps 4-month losing streak. After appreciating against just 6% of its global peers in January, the pound’s good fortunes returned as it appreciated against over 70% of its peers in February. This was thanks to some more upbeat UK data, hawkish BoE commentary and the fact the UK is seen as less exposed to Trump’s tariff threats. Due to higher interest rates in the UK relative to other G10 peers though, the pound’s elevated carry status increases its exposure to equity market fluctuations. Hence, this week’s risk aversion has dragged GBP/USD from a fresh 2-month high of $1.27 to under $1.26. However, sterling has also appreciated against all other G10 peers this week bar the franc, in a sign that it may be deemed a tariff-haven of sorts. Indeed, against the euro, the pound has edged up above the €1.21 resistance level and a weekly close above here would be the highest in three years, with €1.22 the next upside target. Against the dollar, despite the slide this week, the pound is still primed for an over 1% rise this month, snapping a 4-month losing streak.
CHF Turning to havens. The Swiss franc appreciated against 70% of its global peers in February, up from the mere 20% it rose against the month prior. FX traders are seeking safety in traditional havens like CHF as they look to hedge against potential shocks from trade policy, geopolitics and political uncertainty. This is further evidenced by the fact one-month implied-realized volatility spreads show only franc and yen options are overpriced amongst the G10. However, the franc is vulnerable against the yen as the prospect of a positive carry on the latter currency looms large. Still, CHF/JPY has gained a whopping 55% over the past six years, so a correction lower is long overdue. Against the euro and the pound, the franc is also historically overvalued and has appreciated for two weeks on the trot against the former. However, if talks to end the war in Ukraine show signs of bearing fruit, the franc could come under selling pressure if it spurs risk appetite, though tariff policy remains a key source of uncertainty.
CAD On edge until the last minute? The USD/CAD has rebounded from its weekly low of 1.4182, just above its 20-weekly SMA, reaching a 3-week high of 1.4443—a 261 pips increase—as tariff risk premia rise amidst uncertain trade policy decisions. Contradictory messages about plans to enact tariffs on Canada and Mexico have heightened volatility, especially in the USD/CAD pair, with implied volatility surging as March 4th approaches. A last-minute deadline extension to April 2nd remains possible, but we expect volatility to remain elevated until a formal confirmation is made. The Loonie is targeting important resistance at 1.445 and may maintain upward momentum as nervousness increases and protection against a break above 1.45 puts pressure on it. The 60-day SMA at 1.433 is a crucial support level if tariffs are postponed for another month.
Next week will be filled with macroeconomic data that will provide a better gauge of the US economy, featuring payrolls (Fri) and ISM manufacturing (Mon) as key data points. In Canada, manufacturing (Mon) and the unemployment rate (Fri) will be in focus.
AUD RBA’s communication shift bolsters Aussie resilience. The RBA may stop naming dissenting board members under its new monetary policy committee regime to limit “noise” around rate decisions. Deputy Governor Hauser expects further positive inflation news but remains cautious given Australia’s tight labor market. The committee will likely present unified views in public speeches moving forward. Technically, AUD/USD shows mixed signals after Cloud rejection on February 21 with easing upward momentum suggesting a potential near-term pullback. However, the broader outlook remains positive with price closed within the Cloud and the falling wedge pattern resolved after reaching 93% of its 0.6421 target. Any pullback should find support at the lower Cloud (around 0.6200). A breakout above the Cloud would expose moves to 0.6545, then 0.6688. Market focus shifts to upcoming current account, retail sales, and GDP data for further directional cues.
JPY Wage demands fuel Yen’s technical breakout. Japan Metal Worker Unions are demanding record pay increases of 14% year-on-year, adding to wage growth momentum that could support BOJ policy normalization. Market pricing for a May BOJ rate increase remains modest at 5.375bp, supported by recent increases in underlying inflation measures. The rising wedge pattern in USD/JPY remains valid with a technical target at 145.50. A head and shoulders top formation on the weekly chart reinforces the negative outlook. Rebounds to Cloud resistance (around 153.74) would be tolerated before reconsidering this view. Chart shows USD/JPY performance over the years from 1975 onwards. USD/JPY returned circa -5% YTD. Markets will closely monitor upcoming unemployment rate, capital spending, monetary base, and household confidence data for additional clues on BOJ policy direction.
CNY Diplomatic tones accelerate Yuan strength. President Xi urged officials to respond calmly to challenges while expanding economic opening, signaling a measured approach to Trump policies. Trump indicated the US-China relationship will be “a very good one,” encouraging bilateral investment, though decoupling concerns persist with looming tariffs and his America First Investment Policy. USD/CNH displays increasing downside bias after closing below the Cloud, though overnight downside exhaustion candlestick with softer downward momentum suggests a potential near-term corrective rebound. The pair remains technically negative below the Cloud with 7.1475 as the next target. Any upside should be rejected around Cloud resistance (approximately 7.3000). A break above the Cloud would weaken negative conviction and expose 7.3682. No significant economic data releases are scheduled, keeping focus on geopolitical developments.
MXN 50bps cuts will continue
- Banxico’s latest report supports further monetary easing, citing lower growth forecasts and stable inflation projections.
- The dovish tone suggests additional rate cuts are anticipated. Governor Rodríguez reiterated that future rate cuts will likely mirror the recent 50 basis point reduction.
- Banxico presented different technical research summaries, with an emphasis on the evolution of average and extreme variations in core inflation.
- The inflation study indicates reduced inflationary pressures, aligning core inflation closer to pre-pandemic levels.
- Effects of global shocks on inflation have diminished, with most seasonally adjusted price variations returning to pre-pandemic levels.
- Extreme variations in core inflation have reached levels below pre-pandemic trends.
- The report reinforces expectations of a 50-basis point rate cut at the next two meetings, bringing the reference rate to 8.50%.
- Despite global uncertainties, Banxico remains committed to its rate cut strategy.
- The unresolved tariff threat and the ongoing USMCA renegotiation contribute to elevated market uncertainty.
- Structural issues related to USMCA may take time to resolve, maintaining heightened uncertainty.
- Gradual carry loss is expected to weigh on the Mexican peso (MXN), reducing its capacity to absorb external shocks.
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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.