Written by the Market Insights Team
Dollar between (-) macro and (+) geopolitics
Boris Kovacevic – Global Macro Strategist
Rising inflation expectations and tariff angst are threatening the path of the US economy towards a soft landing, a scenario that seemed increasingly more likely from October onwards. That was when economic momentum started gaining traction again as the labor market began outperforming expectations. The election of President Trump led to a one-off boost in confidence as small and medium sized enterprises bet on tax cuts and the cutting of red tape. Now this narrative is in danger of falling apart due to tariff confusion and lower growth.
Last week, for example, ended on a sour note as Trump and Zelenskiy clashed in the Oval Office due to multiple disagreements regarding the war in Ukraine. The joint press conference that should have followed was canceled, sending a stark signal to the rest of the world that an immediate peace deal seems out of reach. Geopolitics and tariff chatter have clearly been a net-negative factor for risk assets as of late.
To make matters worse, investors have started questioning the health of the US economy. Last week’s weaker than expected macro data and front-loading of imports before US companies are hit by tariffs lead to a drastic drop of growth expectations. The Atlanta Fed Nowcast for Q1 fell from 2.3% to 1.5%, a decline only seen during periods of significant turmoil or crises. Inflation published on Friday was in line with expectations with the PCE index rising by 0.3% m/m in January. However, personal spending fell by 0.2%, the first decline in almost two years.
The dollar rose for a third consecutive session and is currently only supported by the geopolitical uncertainty as the macro picture looks increasingly bad. Investors went from pricing in one rate cut by the Fed just days ago to now expecting three for 2025. This is reflected in Treasuries as well. The 2-year yield fell below 4% for the first time since October, matching the low of the US surprise index. This week’s labor market data will be the first large litmus test for the US economy and therefore the US dollar in some time.
Euro in the shadow of Trump
Boris Kovacevic – Global Macro Strategist
The euro is once again feeling the force that geopolitical uncertainty can have on sentiment and markets. European sentiment as of late has been improving, although at a slower than expected pace. The US macro picture seems to be deteriorating, and investors are back at pricing in three rate cuts from the Fed. At the same time is the narrative surrounding policy easing by the ECB becoming more complicated as inflation is picking up again.
However, none of this mattered for investors concerned with the spat between Trump and Zelenskiy and the falling implied probability of a peace deal being reached in the near term. The euro pushed lower for a second consecutive week and is once again trading below the $1.04 mark. Investors expecting the ECB meeting on Thursday to be a new catalyst to push the currency in either direction might be disappointed.
The 25-basis point cut is fully priced in, so it will be about the forward guidance to play the role of the market mover. However, the uncertain trade and geopolitical environment will likely mean that policy makers should remain caution and sensitive to the news flow. Today’s inflation print for the Eurozone is expected to show some deceleration in inflation pressures. The bigger catalyst for renewed selling pressure might once again come from the political or macro front. We would need a significant surprise on the US labor market report on Friday to see some price action of above $1.05 or below $1.03.
Swinging with risk sentiment
George Vessey – Lead FX & Macro Strategist
Having jumped to a more than 2-month high above $1.27 last week, GBP/USD is back flirting with the $1.26 handle following renewed geopolitical uncertainty as the hostile White House meeting between Trump and Zelensky threatens prospects of a US-brokered ceasefire with Ukraine and Russia. The risk sensitive pound slid against safe haven peers, but remains firm against the euro, with GBP/EUR closing the month above €1.21 for the first time since 2016.
The UK’s worsening net international investment position and the fact it has a persistent current account deficit leaves sterling reliant on foreign capital inflows. With this in mind, if we see a bigger drawdown in equity markets, then realistically the pound should come under pressure as well via the risk sentiment channel. However, on the trade front, Britain is way down on Trump’s list for tariffs, both because he likes the UK and because the UK-US trading relationship is much more balanced than most, with US actually having a goods trade surplus with the UK. This is why sterling is viewed as a tariff haven of sorts. Indeed, the FX options market reveals that one-week risk reversals are least bearish on sterling right now versus most of the G10.
The main upside risk for sterling this week is if President Trump reverses or delays increases to tariffs on Mexico and Canada that are scheduled for Tuesday as this would likely boost risk sentiment across the board. Moreover, if the influx of US data disappoints this week, particularly the labour market report on Friday, this could help the pound resume its recovery back above $1.27 versus the dollar.
Dollar jumps despite yield slump
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 3-7
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.