Written by the Market Insights Team
Stagflation fears rock dollar
George Vessey – Lead FX & Macro Strategist
Financial markets remain on edge as President Trump’s tariff rhetoric amplifies uncertainty ahead of major trade policy announcements this week. A sea of red across global equity markets this morning marks the start of hectic week. The S&P 500 is heading for its worst quarter since 2022, but more downside is likely amid risk from a prolonged global trade war. Treasuries could see more upside due to risk aversion, whilst the dollar’s safe-haven appeal has diminished, with selling pressure intensifying – a stark contrast to its dominance during past crises as the US exceptionalism narrative fades and stagflation fears rise.
On the economic data front, the Fed’s preferred measure of inflation came in higher than expected for February and the University of Michigan Consumer Sentiment Index fell to a 2-year low, whilst 5-year inflation expectations surged to 4.1% – the highest since 1993. The Atlanta Fed GDP nowcast was adjusted lower to -2.8% for Q1, down from -1.8% earlier last week. All of this added to worries the US is heading for a bout of stagflation at a time when investors are worried that Trump’s trade levies combined with a broader sense of uncertainty will hurt US economic growth while also increasing price pressures.
Over the weekend, President Donald Trump reaffirmed plans to impose reciprocal tariffs on all countries this week and reportedly urged his advisers to take a more aggressive stance on trade policies. Markets are increasingly worried that these measures could trigger retaliation from key trading partners, reignite inflation, and slow economic growth.
Looking ahead, markets will focus on Trump’s tariff announcements, and their implications for trade and inflation, but key data releases will also be monitored, including the March employment report, factory orders, and PMI updates, which will provide insights into the economic impact of trade tensions. Investors will also monitor Fed Chair Powell’s remarks for clues on monetary policy adjustments. With volatility expected to persist, the dollar’s trajectory remains uncertain, shaped by geopolitical developments and shifting sentiment.
Tariffs are backfiring for the U.S.
Kevin Ford – FX & Macro Strategist
The US economy is sending mixed signals, creating a challenging landscape for businesses and investors alike. In March, consumer confidence fell sharply, reaching its lowest point since January 2021—a sentiment echoed by the University of Michigan survey. Although S&P PMIs indicated some improvement, the gains were concentrated in the services sector, likely supported by favorable weather conditions. Meanwhile, manufacturing PMIs weakened, possibly reflecting earlier front-loading.
Compounding this uncertainty, tariffs remain a source of inflationary pressure concerns, raising critical questions for the Federal Reserve: Will these tariff-driven price increases prove temporary, or will they spark more persistent inflationary effects? Recent data has done little to ease concerns. On Friday, the core PCE deflator rose 0.4% month-over-month, surpassing expectations. At the same time, real personal spending edged up by just 0.1% month-over-month, while January’s contraction was revised further downward to 0.6%. These developments suggest that declining confidence is beginning to translate into tangible behavioral shifts. Inflation expectations are also trending higher, as revealed in the final University of Michigan survey, which reported elevated near-term and long-term forecasts.
Looking ahead, beyond the so-called ‘Liberation day’ on Wednesday, markets are focused on the upcoming US labor market report. Nonfarm payroll growth is projected to slow to 125,000 in March, down from February’s 151,000, with risks skewing toward even weaker outcomes as layoffs—particularly in the tech sector—continue to unfold. Meanwhile, the unemployment rate is expected to hold steady at 4.1%, following a slight uptick last month.
At present, soft data paints a more concerning picture than hard data, but the precise point at which sentiment shifts meaningfully impact behavior remains uncertain. For investors, these factors weave a complex narrative. Declining consumer confidence, mounting inflation risks, and potential labor market softening highlight the importance of adaptability and strategic foresight in navigating an increasingly unpredictable economic environment.
Euro pounces on US weakness
George Vessey – Lead FX & Macro Strategist
European stock markets declined sharply on Friday, with the Stoxx 50 dropping 1.1% and the Stoxx 600 falling 0.8%, marking its third consecutive negative close. But the euro ended the week on a stronger footing versus the US dollar as traders sold the US currency amidst a string of disappointing US data. EUR/USD rebounded back above the $1.08 handle after support held firm around its 50-week moving average at $1.0738.
Investors are closely watching the looming April 2 deadline, when Trump is set to unveil reciprocal tariffs on key trading partners. Trump has already announced a 25% tariff on imported cars and light trucks, set to take effect this week. While uncertainty over tariffs is weighing on markets, the initial announcement could pave the way for further negotiations, potentially softening the final impact. In fact, the European Commission has signalled that it has prepared concessions for the US to escape reciprocal tariffs.
Meanwhile on the data front last week, the eurozone’s latest economic activity indicator showed the fastest expansion in seven months, with the composite PMI inching up to 50.4. While this was slightly below market expectations, the manufacturing sector outperformed, offering a glimpse of optimism for an economy that has struggled with stagnation. Germany led the improvement, as anticipation builds over the economic boost from its newly approved fiscal expansion focused on infrastructure and defence.
Europe’s fiscal boost still supports the medium-term bullish outlook for the euro, which is why the repricing at the back end of the euro’s volatility skew shows sentiment is the least bearish for the euro in over three years.
Preliminary inflation readings from Italy, Germany and the wider euro-region are also due this week, but will play second fiddle to tariff developments.
Tariff resilience underpins positive pound view
George Vessey – Lead FX & Macro Strategist
Due to concerns that President Trump’s tariffs will ignite inflation and dampen economic growth in the US, dollar selling is acting as a tailwind for GBP/USD, which is looks to be clawing its way back towards $1.30. With a gain of over 3%, the pound is on track for its best month since November 2023 against the US dollar, whilst April is one of the pair’s strongest months of the year historically.
On the domestic front, despite the UK government’s fiscal plans facing mounting scrutiny, the pound has held up relatively well in the wake of the Spring Statement. Gilts remain vulnerable as concerns over sustainability of the spending plan take centre stage, with the fiscal buffer eroding. But investors aren’t dumping the pound and gilts simultaneously like they were at the start of the year when confidence in UK policy was bleak, and stagflation fears were rising. A slew of data last week showed UK services PMI beating expectations, offsetting the fall in manufacturing, whilst retail sales, rose 1% m/m in February – against exceeding consensus forecasts and keeping Bank of England easing bets at bay, with just two more rate cuts fully priced in by year-end.
Meanwhile, sterling appears to hold an international advantage when it comes to tariffs as well. Optimism that the UK will avoid the worst of Trump’s reciprocal tariff plan makes it an attractive hedge against tariff noise. This is also evident via its rare positive (albeit weak) correlation with the VIX fear index. President Trump has suggested he may not take all of the non-tariff barriers into account when setting tariff rates, specifically mentioning VAT taxes, which will be welcomed by the UK. The UK’s greater resilience to direct tariffs than the eurozone could also act as a tailwind for GBP/EUR, which is hovering beneath the €1.20 handle this morning.
Gold surges to record high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 31- April 4
All times are in ET
Have a question? [email protected]
*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.