Written by the Market Insights Team
Contrasting trade war tactics
Kevin Ford – FX & Macro Strategist
Last week, the Mexican peso traded below the 20 level for the first time since November. Mexican President Claudia Sheinbaum chose to continue negotiations with the Trump administration rather than retaliate with tariff hikes against the U.S., delaying any response to U.S. tariffs on steel and aluminum imports. Commerce Secretary Howard Lutnick commended the Mexican President for avoiding tit-for-tat tariff escalations, contrasting this approach with that of the Canadian government. The Mexican peso has gained 4.8% against the USD year-to-date, approaching the 200-day SMA as net short positions unwind.
In contrast, the Loonie has remained flat against the USD year-to-date. Following a tariff-driven 25 bps rate cut by the Bank of Canada, the central bank expressed concerns about an impending crisis, not only due to steel and aluminum tariffs but also because of Canadian countermeasures. Also, as noticed by B.C. Premier David Eby, Canada may not afford to be caught in a trade war with both the United States and China—its two largest trading partners.
Because of this, bearish positioning against the USD/CAD remains historically short.
The USD/CAD reached a high of 1.4521 and a low of 1.434 last week, with significant intraday swings highlighting strong resistance above 1.45 and no signs of easing below 1.43. The Loonie remains above the 20-, 40-, and 60-day SMAs, while implied volatility has dropped significantly. April 2nd will be a key date to assess the broader trajectory of U.S. trade policy and its impact on the Canadian economy. President Trump’s advisors have distinguished between tactical tariffs, used as negotiation tools, and structural tariffs, such as the reciprocal tariffs set to be unveiled in early April, aimed at reshaping U.S. trade policy long-term.
Central bank actions will take center stage this week. After 100 bps of rate cuts in late 2024, the Fed is expected to keep rates unchanged for a second consecutive meeting on Wednesday. On Thursday, the Bank of England is also expected to hold rates steady at 4.5%, while Sweden’s Riksbank is anticipated to maintain rates at 2.25%.
Stocks rebound despite stagflation signs
Boris Kovacevic – Global Macro Strategist
Markets ended the week on a volatile but positive note as investors weighed weaker consumer sentiment versus the lack of news on the tariff front against each other. Despite rebounding initially on Friday, the US dollar remains in a clear downtrend, with investors questioning the long-term effects of tariffs. The University of Michigan survey revealed a sharp drop in US consumer sentiment to a more than two-year low in March. Despite this slowdown and weaker subjective employment prospects, inflation expectations jumped to 4.9% from 4.3%, reflecting growing concerns over President Trump’s incoming tariff plans. This stagflationary mix—weakening growth but rising price expectations—adds to uncertainty in the economic outlook.
US equities ended another week in negative territory, with the S&P 500 plunging 10% in just 16 sessions before staging a Friday rebound. Credit markets echoed growth fears, as junk bond spreads widened. The US dollar is now down about 6% from its January peak and is on track for its worst post-inauguration performance since Nixon’s second term in 1973. Investors are assessing the impact of tariffs, which could support the currency through safe-haven demand but also weigh on sentiment and economic growth, limiting the potential of a recovery.
The upcoming week will feature the Fed’s rate decision, where policymakers are expected to stay on hold. With no immediate rate move anticipated, attention will shift to the Fed’s projections and Powell’s press conference for clues on future policy direction. With rising trade tensions, a weakening labor market, and shifting Fed expectations, volatility is likely to remain elevated heading into the new week. Investors will be closely watching upcoming inflation data, Fed speak, and trade policy developments to gauge the direction of the US economy and the dollar’s next move.
Establishing a higher bottom?
Boris Kovacevic – Global Macro Strategist
The euro extended its gains on Friday, rallying against major peers as a breakthrough in German fiscal policy negotiations lifted sentiment. The deal, which includes sweeping borrowing rule changes and a €500 billion infrastructure fund, is seen as a potential boost to Germany’s economy and broader Eurozone growth. The next Chancellor Friedrich Merz secured the Greens’ backing for the fiscal package, clearing a major political hurdle. The agreement is expected to pass through the outgoing parliament this week.
The common currency has now posted a second straight week of gains against the dollar, pound, and franc. The fiscal revival in Germany could continue to be a tailwind for the euro. However, it will need to be followed by improving sentiment and hard data along the way to secure its potential for another leg higher.
Industrial production actually beat expectations in January, rising by 2% on the month, and reversing a 1.5% fall from the month prior. Wholesale prices rose as well and are now displaying growth rate that is well in positive territory. Markets are still questioning the resolve of the ECB to cut interest rates aggressively this year. The German fiscal package, rising goods and food inflation and tariff risks will be weighted against rapidly falling wage expectations and services inflation.
EUR/USD has been range-bound for about two years now, fluctuating between $1.02 and $1.12 since January 2023. A stabilization around the $1.07 – $1.08 level would be a good sign that we are making higher lows, which could set the pair up for another leg higher. However, this would need to be accompanied by stronger European data or increasing recession risks in the US. For now, markets are watching out for sentiment data and the upcoming Fed meeting.
Resilient sterling awaits BoE decision
George Vessey – Lead FX & Macro Strategist
Despite the downwardly revised UK GDP outlook following a bout of weaker data and ongoing tariff uncertainty, the British pound is holding up relatively firm against its major peers. GBP/USD remains above its 5-year average rate of $1.29, whilst GBP/EUR lingers close to €1.19 – which appears fair value based on real rate differentials. Signs of a rebound in UK inflation likely outweigh the cooling in economic activity, meaning we expect the Bank of England (BoE) to keep rates unchanged this week.
As a risk-sensitive currency, we think the pound is vulnerable to a deeper correction in equity markets, but it’s also likely to be supported by a rebound in risk appetite if Russia-Ukraine ceasefire talks gain traction. No news is also good news when it comes to Trump’s tariff threats, and sterling could be primed for a test of the $1.30 handle depending on whether the euro accelerates higher towards $1.10 versus the US dollar, due to the strong positive correlation between GBP/USD and EUR/USD. All eyes are also on the BoE’s meeting this week though. We expect the BoE to hold Bank Rate at 4.5% on Thursday, stressing heightened uncertainty and data evolving broadly as it expected since February. Markets have not ramped up expectations for BoE easing as much as for the Fed, hence the elevated UK-US yield spread adds to GBP/USD’s constructive backdrop.
The cut-hold tempo by the BoE has become well established and renewed concerns about supply weakness mean it’s very unlikely there will be more than two or three votes for back-to-back rate cuts. Although Catherine Mann, the arch-hawk-turned-dove, may have caught all the headlines last month with her vote for a 50bp rate cut, UK wage growth is at 6%, and services inflation is at 5%, meaning the rest of the committee will likely want to tread cautiously when it comes to cutting.
Safe havens yen and franc on backfoot
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.