Written by the Market Insights Team
Good data is good news
George Vessey – Lead FX & Macro Strategist
US equity markets are still in drawdown territory, with the S&P 500 around 7% from its recent peak, whilst FX speculators have turned bearish on the US dollar for the first time since October. Heightened uncertainty surrounding tariff policy and fears of a US economic slowdown have driven these moves. But comments from President Trump on his tariff plans and flash PMI data called into question these fears fears, helping stocks rebound and the dollar rise across the board.
It wasn’t all rosy. Manufacturing unexpectedly slipped back below 50, indicating contraction. Input price inflation soared to a near 2-year high, especially in manufacturing, due to tariffs. And business expectations for the year ahead dropped to their second-lowest since October 2022 amid growing caution due to demand concerns and Trump’s administration policies. However, investors focussed on the good news. The composite PMI reading jumped to 53.5, much higher than expected, driven by the larger services component, which rebounded strongly to a 3-month high after hitting a 15-month low in February. This rebound was driven by improved business inflows, strengthening customer demand and better weather conditions. Overall, recession fears appear to be easing.
Aside from yesterday’s services PMI though, we’ve seen a lot of “soft” data print weaker than expected over the last couple of months, while “hard” data, like employment, industrial output, consumer spending, has been resilient. Based on this real lagging data, we are not anywhere near a recession, but the divergence between soft and hard data is creating confusion about the true state of the economy. All of this culminates in an exceptionally murky outlook for monetary policy, as the Federal Reserve remains highly data-dependent. Cutting rates too soon risks stoking inflation, at a time when inflation expectations are on the rise, while keeping rates too high could weigh on growth.
In any case, the selling pressure on the dollar is already fading, helped by the strong PMI data and wavering US slowdown fears, but also because reports emerged that President Donald Trump’s April 2 tariffs are poised to be softer and more targeted than initially anticipated. However, even if tariff risks and recession fears escalate, we don’t expect the dollar to be shunned completely, purely due to its safe haven appeal in times of rampant risk aversion.
Euro down on buyers’ fatigue
Boris Kovacevic – Global Macro Strategist
The euro extended its decline for a fourth consecutive session, with EUR/USD slipping to $1.08 despite relatively resilient PMI data and signs of flexibility from President Trump on the tariff front.
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 defense.
Yet, despite these glimmers of recovery, the euro’s recent rally has run out of steam. After surging to a six-month high of $1.0955 last week on optimism over Germany’s fiscal shift, the common currency has been unable to hold onto those gains. The passage of the debt brake reform in Germany’s upper house of parliament last Friday marked a historic shift in European fiscal policy, but the market reaction suggests that much of the optimism was already priced in.
Investors now appear to be looking for tangible signs that fiscal stimulus will translate into stronger growth, particularly in light of ongoing global trade uncertainties. Meanwhile, Trump’s latest remarks on tariffs injected some relief into markets, with the US president signaling openness to a more measured approach. The path forward for the euro will likely hinge on whether this fiscal-driven optimism can be sustained and whether the manufacturing recovery proves durable in the coming months.
Sturdy start for sterling
George Vessey – Lead FX & Macro Strategist
Sterling started the new week on a stronger footing against many major peers after PMI data revealed UK business activity growth hit a 6-month high in a sign of an economic recovery in Q1. Then came the stronger US PMI figures, which sent GBP/USD into reverse again. The pair continues to trade sideways with $1.30 the topside barrier and $1.28 a downside support for now. GBP/EUR remains 1.4% down month-to-date, but is still two cents above its 2-year average of €1.17.
Robust demand in financial and consumer services drove UK services sector growth to its strongest since August last year and surpassing market forecasts. The manufacturing sector continues to underwhelm, with the PMI reading pointing to the sixth straight month of worsening conditions and pushing the index to the lowest since late 2023. However, because service industries account for 80% of total UK economic output, this bodes well for the economy’s growth numbers for the first quarter, following the sluggish growth over the last half of 2024. Coupled with the slightly hawkish Bank of England (BoE) meeting last week, this data adds to the market skepticism around how much the BoE will cut rates this year, particularly when wage growth and inflation appear so sticky. Indeed, within the services PMI data, on the price front, service providers recorded a steep rise in input prices, largely reflecting intense wage pressures and efforts by suppliers to pass on higher payroll costs.
All-in-all, money markets are pricing a 60% chance of a quarter-point rate cut by the BoE in May, and only 45 basis points of easing this year compared to over 60 at the start of the month. This repricing will limit any gains in front-end gilts and should also prove constructive for sterling via the yield channel. However, inflation data and the Spring Statement on Wednesday risk generating a fresh gust of headwinds for bullish GBP traders.
Euro under pressure towards month end
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 24-28
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.
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