Written by the Market Insights Team
Kevin Ford – FX & Macro Strategist
Wave of hard data reinforces US growth concerns
A wave of US macro data released yesterday points to mounting economic weakness. The economy contracted by 0.3% in the first quarter of 2025, slightly more than expected, marking its first decline since early 2022. This follows the 2.4% growth recorded in the previous quarter, underscoring a sharp reversal in momentum. A key driver of the slowdown was a staggering 41.3% surge in imports, as businesses rushed to stockpile goods ahead of anticipated tariff hikes. This widened the trade gap, with net exports dragging down GDP by nearly 5 percentage points, the largest impact on record. Government spending also contributed to the downturn, subtracting 0.25% from overall growth, its first negative impact since 2022. Additionally, private expenditure saw a significant decline, as businesses and investors navigated heightened uncertainty throughout the quarter. These combined factors highlight deepening concerns over the trajectory of the US economy.
Businesses and consumers scrambled to stockpile goods in anticipation of looming tariff hikes, a pattern previously observed when reports highlighted a widening trade deficit and a surge in durable goods orders. While the economic slowdown largely aligned with forecasts, these pre-tariff distortions had a substantial impact on the overall data, skewing key indicators and amplifying short-term fluctuations.
The slowdown in consumer spending growth to 1.8%, its weakest pace since Q2 2023, suggests that economic weakness will likely extend into Q2. With the direct impact of tariffs introduced on April 2 still yet to appear in the data, underlying consumer strain is becoming increasingly evident. This trend underscores mounting pressure on household activity as shifting trade policies and broader economic uncertainty take hold.
We also got to know the Fed’s preferred measure of inflation for the month of march, which came out slightly higher than expected, but cooled off. PCE prices in the US increased 2.3% year-on-year in March 2025, the lowest in five months but above market expectations of 2.2%. In February PCE prices was revised upwardly to 2.7%. This could be read as bad news for the Fed, as stagflation worries mount.
So, how have markets reacted? In FX, there were no major shifts barring the strengthening dollar. The 10-year Treasury yield briefly climbed 5 basis points to 4.22% following the GDP and PCE data releases but swiftly retreated to 4.16%, right back to its opening level, as growth concerns dominate sentiment. US equities reacted negatively, yet indexes remain surprisingly above pre-April 2 levels. Have markets fully shrugged off reciprocal tariffs, or have they absorbed the sweeping trade measures and embraced the administration’s more dovish stance as approval ratings slide, particularly on economic management? With Q1 2025 corporate earnings reports now underway, businesses may begin revising their earnings expectations downward, especially if the recent GDP contraction extends into Q2, reinforcing concerns over the broader economic outlook.
Loonie steady after wave of macro data
Kevin Ford – FX & Macro Strategist
Canada’s economy slipped 0.2% in February, its first monthly decline since November, as mining, oil and gas, and construction sectors weighed on growth. Mining and energy took the biggest hit, falling 2.5% after two months of gains, while construction dipped 0.5%. Other sectors like transportation, warehousing, and real estate also showed weakness, with residential construction down 0.9%, its steepest drop since April 2024.
The weaker-than-expected figures point to a challenging period ahead, with little to no economic expansion anticipated over the next two quarters. Canadian 10-year yields dipped below 3.12%, nearing a two-week low, as softer domestic and U.S. data reinforced expectations of further central bank easing. The latest Bank of Canada Governing Council deliberations reveal that while some policymakers advocated for a rate cut to support growth, they ultimately opted to hold the policy interest rate at 2.75%, citing ongoing uncertainty. Inflation risks remain subdued, providing room for future cuts if necessary, but officials stressed the importance of a cautious and responsive approach given the unpredictable economic climate. With the BoC’s next rate decision set for June 4, markets are pricing in a 57% chance of a 25 bps cut. Meanwhile, despite growing concerns over a deeper North American slowdown, the drop in short-term yield differential has helped the Loonie test the 1.38 level.
Dollar weakness has been primary support for the Loonie during April, which has gained around 4% against the greenback. The USD/CAD is now testing key support at 1.378, level not seen since October 2024.
Euro softens after historic April rally
George Vessey – Lead FX & Macro Strategist
Last month proved to be the best ever April for EUR/USD since the inception of the euro back in 1999, but the pair has dipped under the $1.13 mark this morning following the optimistic tone from President Trump regarding trade deals with various countries.
The rebound in risk appetite and hopes that the peak of trade policy uncertainty is behind us has weighed on the euro this week. The common currency has been a surprise beneficiary of the global trade war given its status as a cheap liquid alternative, backed by its current account surplus and positive fiscal impulse from the historic German spending plans. Despite the reversal from 3-year highs, investors are weighing contrasting economic signals from the US and Europe, which could support further euro strength in the future. The unexpected contraction in US GDP for Q1 contrasts with the Eurozone’s stronger-than-expected 0.4% growth, driven by resilient domestic demand. Germany expanded by 0.2% as forecast, while France lagged with a modest 0.1% increase.
Inflation trends are mixed across Europe though. German headline inflation eased to 2.1% in April, though core pressures rose, while France’s annual rate remained stable at 0.8%. Money markets are pricing another ECB rate cut in June and 67-basis points of easing in total by year-end.
Mexican Peso stays at 5-year average
Kevin Ford – FX & Macro Strategist
Mexico’s economy grew by 0.2% in the first quarter of 2025, bouncing back from a 0.6% contraction in the previous quarter and beating expectations of flat growth. Agriculture led the way with an 8.1% surge, recovering from a sharp drop at the end of 2024, while industry dipped 0.3% and services remained unchanged. On an annual basis, GDP rose by 0.6%, but the overall outlook remains fragile due to domestic uncertainty, tight financial conditions, and fallout from the U.S. trade war.
The recent appreciation of the peso could ease inflation concerns, while slower growth may help keep broader price pressures in check. Trump’s softened stance on key policies has improved sentiment, with the peso trading stronger in the near term. President Claudia Sheinbaum enjoys high approval ratings, with 67% of Mexicans holding a positive view of her leadership—surpassing her predecessor’s popularity. Despite challenges like tariffs and recession risks, optimism persists, with 54% expecting economic improvement in the next six months and 75% confident Sheinbaum will negotiate better trade agreements.
Euro tumbles, US stocks and dollar gain, Oil continues rout
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 28- May 2
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 quothave 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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