Written by the Market Insights Team
February wrap-up with unresolved tariff issues
Kevin Ford –FX & Macro Strategist
February is drawing to a close, and after five consecutive months of declines, the USD/CAD’s losing streak has eased near the 1.44 mark amidst heightened volatility and unresolved tariff issues. The Loonie has edged upward from its weekly low of 1.4182—resting just above the 20-week SMA—to a three-week high of 1.4453—a 271-pip increase. While no definitive trade policy decisions have been made, tariff risk premia keep the Loonie above 1.44. Contradictory messages about tariff plans for Canada and Mexico have heightened volatility, particularly in the USD/CAD, where implied volatility has surged with March 4th just around the corner. A last-minute extension to April 2nd isn’t ruled out, but volatility is expected until formal confirmation.
Volatility surged yesterday as equity markets grappled with escalating risk aversion. While Nvidia’s strong quarterly results initially offered a lift to markets, the optimism was short-lived. Risk aversion soon took the upper hand, driving the VIX index back above the critical 20 threshold.
Amid this month’s chaos and volatility, one clear winner has emerged: the Canadian Liberals. PM Trudeau’s decision to prorogue parliament has benefited his party, which now leads the Conservatives in polls for the first time in years. The Liberals have gained momentum by taking a strong stance against Trump’s tariff threats and increasing investment in citizen-friendly infrastructure projects. Mark Carney has overtaken Chrystia Freeland as the most likely successor, with a final decision expected on March 9th. As we enter March, Canadian politics will unfold against a backdrop of continued uncertainty and volatility.
Today, all eyes are on the US PCE, the Fed’s preferred inflation measure. Any upside surprises could further unsettle market sentiment.
The key resistance at 1.445 has proven strong for the Loonie. 1.447 is the next level to monitor. Protection against a break above 1.45 adds pressure on the Loonie. The 60-day SMA at 1.433 serves as critical support if tariffs are delayed another month.
Next week’s packed macroeconomic calendar will provide a clearer picture of the US economy, with payrolls (Friday) and ISM manufacturing (Monday) as key data points. For Canada, manufacturing (Monday) and the unemployment rate (Friday) will take center stage.
Dollar balancing tariffs, weaker growth
Boris Kovacevic – Global Macro Strategist
The trade and geopolitical news flows once again overshadowed what seemed to be a pretty important day for US macro developments. Durable goods, home sales, jobless claims and GDP data sent mixed signals about the state of the worlds 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.
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.
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.
Still, conviction around a sustained dollar rally is fading, as tariff fatigue and growth concerns begin to weigh on sentiment. Traders remain cautious despite the elevated trade uncertainty and lack of policy clarity. For now, FX markets remain driven by trade headlines, with the dollar benefiting from renewed tariff bets—but the long-term picture remains far from clear.
The US dollar index will likely end the week higher, a feat the dollar has only achieved once in the last seven weeks. The last hurdle to overcome is the US PCE report due today. The core figure could slow on a month-on-month basis. However, personal spending is expected to remain robust.
Euro back on the defence
Boris Kovacevic – Global Macro Strategist
Fresh trade tensions are adding pressure to the euro, as President Trump confirmed 25% tariffs on Canada and Mexico and hinted at new levies on China. While the EU was not directly targeted, the risk of further escalation weighs on sentiment, especially with Trump’s criticism of European trade policies and VAT systems still lingering.
While the dollar initially rallied on the tariff news, conviction around sustained USD strength is fading, as the economic drag from higher trade barriers could outweigh short-term inflationary effects. For the euro, the uncertainty keeps upside limited, with EUR/USD hovering under $1.0400 as traders assess whether tariffs will remain a US-focused issue or expand further.
On the other hand, 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.
Risk sensitive or safe haven sterling?
George Vessey – Lead FX & Macro Strategist
As we explained in yesterday’s report, the pound’s high yielding status is a double-edged sword in that when the market mood is upbeat, sterling tends to appreciate, but in deteriorating global risk conditions, the pound becomes more vulnerable. Hence, the latest bout of tariff angst has sent GBP/USD tumbling from $1.27 to $1.2570 in 24 hours. GBP/USD has erased its weekly gains and more, whilst several key moving averages continue to act as hurdles to the upside.
Apart from weakening against the US dollar though, some analysts think the FX market is viewing the pound as a tariff safe-haven of sorts, driven by confidence that the UK is less economically vulnerable to tariffs compared to major exporters like the EU. This is evidenced by sterling appreciating against all G10 peers this week bar the US dollar and Swiss franc. Meanwhile, if GBP/EUR closes the week above €1.21, it will be the highest weekly closing price in almost three years. If we look at sterling more broadly though, it appreciated against less than 50% of its global peers yesterday, which contradicts this sterling safe haven theory. Moreover, sterling’s vulnerability to global risk aversion due to its reliance on foreign capital inflows would likely limit any haven demand in our view.
Nevertheless, the meeting between US President Donald Trump and UK Prime Minster Keir Starmer appeared constructive, with hopes of a trade deal boosting the odds of the UK avoiding tariffs. The UK is one of the only countries in the world to have a neutral trade relationship with the US in goods, so it’s hard to see how/why Trump would have imposed them anyway. But even if the UK does evade tariffs, a slowdown in global trade would still hurt the UK economy, which would weigh on the pro-cyclical pound.
Risk aversion drives stocks and yields lower
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 24-28
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 quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.