Written by the Market Insights Team
Kevin Ford – FX & Macro Strategist
Tough times for central bankers
It’s Fed Day. The consensus is that the Federal Reserve will hold rates steady for the second consecutive meeting. Markets are eagerly awaiting Chair Powell’s press conference, particularly his responses to questions on tariffs, trade policy, and politics. Investors are also keen to see if there will be any forward guidance on monetary policy.
Last week, the Bank of Canada (BoC) reiterated that, given the uncertainty surrounding tariffs, it cannot provide forward guidance. Following yesterday’s CPI data, it seems increasingly likely that the BoC will also hold rates steady at its next meeting. However, the outlook remains uncertain for both central banks. Preferred measures of inflation remain sticky, household and business survey data is concerning, the impact of tariffs on prices has yet to fully materialize in hard data, and economic growth is stalling—not just in Canada, but in the U.S. as well. Adding to the complexity is the ongoing debate over the Fed’s independence, fueled by political noise. The past three years have been anything but easy for central bankers, with challenges ranging from a trade war during Trump ’45 to a pandemic, historic inflation, and regional bank failures. The road ahead looks equally challenging for both Powell and Macklem.
In Canada, inflation was anticipated to rise following the expiration of the tax break, but the price increases turned out to be surprisingly broad-based. The annual inflation rate surged to 2.6% in February 2025, climbing from 1.9% in January. This marks an eight-month high, notably surpassing market expectations of 2.2% and the Bank of Canada’s forecast of 2.5%.
Notably, inflation rebounded sharply in sectors such as restaurants (-1.4% vs. -5.1% in January) and alcoholic beverages purchased from stores (-1.4% vs. -3.6%), driving a significant recovery in the food subindex (1.3% vs. -0.6%). Price increases also regained momentum in clothing and footwear (1.4% vs. -1.3%) and accelerated further in recreation, education, and reading (3.7% vs. 1.9%). Overall, goods inflation has outpaced service inflation, suggesting that the depreciation of the Canadian dollar has contributed to higher prices. The latest report highlights that inflationary pressures have remained persistent, with the recent tax break only temporarily concealing their full impact.
Meanwhile, in the absence of tariff-related noise, the Canadian dollar has slightly appreciated against the U.S. dollar, briefly trading below 1.43. Today, markets anticipate a slightly hawkish tone from Powell, which could introduce some volatility across asset classes.
Equity rout continues pre-Fed
Boris Kovacevic – Global Macro Strategist
Hopes of a continued equity rebound have stalled for now, with investors stepping away from risk assets ahead of today’s Federal Reserve (Fed) decision. The bar for rate cuts has crept higher, driven by concerns that inflation remains uncomfortably sticky. Selling resumed on Wall Street with the largest technology names being hit the hardest.
The S&P 500 fell, dragged lower by megacaps hitting their lowest levels since September. Meta officially turned negative for the year, becoming the last of the so-called Magnificent Seven stocks to erase year-to-date gains. The dollar is once again nearing its lowest level since October, having fallen against the euro and pound in yesterday’s session.
Market participants widely expect the Fed to hold rates steady, leaving the focus on updated economic projections and Chair Jerome Powell’s press conference. Policymakers have signaled a data dependent neutral stance, looking for more evidence of disinflation and greater clarity on the impact of Trump’s policies. Uncertainty surrounding trade has left markets on edge, with investors struggling to price in the full effects of tariffs that appear to change by the week.
Recent data has painted a mixed picture. A stronger-than-expected rebound in single-family housing starts and resilient industrial output have provided some reassurance that the US economy isn’t on the verge of a recession. However, hotter-than-expected import prices added to concerns about inflation becoming entrenched, further complicating the Fed’s path.
Despite softer risk sentiment, the greenback has struggled to capitalize on safe-haven flows, reflecting investor unease over the longer-term impact of Trump’s policies. With Powell set to address the press later today, markets will be watching for any hints about the timing of future cuts. Any signal that rates could remain high for longer may give the dollar a short-term boost, while a more dovish tilt could reignite pressure on the currency.
European confidence making a comeback
George Vessey – Lead FX & Macro Strategist
The outlook is brightening across Europe, buoyed by hopes of Ukraine ceasefire and the passage of a landmark spending package in Germany’s parliament. European equities have outperformed their US counterparts year-to-date, most notably with the German DAX up 17%. The euro is also over 5% stronger than the dollar this year and investors are becoming more optimistic about the future.
Germany’s ZEW Indicator of Economic Sentiment jumped to 51.6 in March, the highest level in over three years, compared to 26 in the previous month and forecasts of 48.1. The last time the indicator increased this substantially was in January 2023. The assessment of the current economic situation remains stable, but it’s the expectations index that depicts the positive impact surrounding Germany’s fiscal policy, including the agreement on a multibillion-euro financial package for the federal budget. Digging into the details, investors’ expectations of rising inflation has risen to the highest level since 2022. Moreover, while over 60% of respondents still expect interest rates to fall, the proportion has sharply dropped from its 1-year average of 80%. This likely reflects the anticipated effects of fiscal loosening and monetary tightening.
Such conditions should be supportive for the common currency, which continues to hold onto the $1.09 handle and well above its 200-day moving average support nearer $1.07. The Fed’s meeting today could inject fresh directional impetus for the pair, but in overbought territory according to the 14-day relative strength index, we’re dubious of further gains in the very short term.
Profit-taking risk ahead of BoE
George Vessey – Lead FX & Macro Strategist
The pound briefly peered above the $1.30 handle yesterday as the US dollar weakened across the board. However, GBP/USD failed to hold above this key level in sign of exhaustion to the upside as several technical indictors are flashing “overbought”. The prospect of a meaningful pullback cannot be discounted in the coming weeks if the pound continues to stall around these levels.
Market participants might also look be looking to sell sterling ahead of Thursday’s Bank of England (BoE) decision, which recent history shows tends to weigh on the UK currency. Although a dovish Fed might jolt the dollar lower today, traders may look to take profit on the more than 7% uplift in GBP/USD since early February. Looking further down the line, the $1.35 mark could be a key level to target to the upside though if the stars align. We’d need global risk sentiment to improve and the US economic outlook to continue worsening alongside rising UK-US yield spreads. GBP/USD has been under $1.35 now for over two years – its longest ever stint below this level. But should the pair hold above $1.30, bullish traders will likely be eying $1.35 as an upside target later this year. From a technical perspective though, we think the 14-day relative strength index being near to or in overbought territory for most of this month suggests a correction lower might be looming in the very short-term before a resumption of the uptrend takes hold.
On the flipside, sterling’s outlook versus the euro doesn’t look so rosy. The bullish narrative we were pushing last month has been turned on its head since Germany’s decision to boost expenditure, which is viewed as a significant moment for the entire European economy and its growth outlook. We see €1.1740 as a key downside target if GBP/EUR closes below its 50-week moving average this week.
Safe haven gold near all-time highs
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 17-21
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.