Written by the Market Insights Team
Dollar higher, but politics clouds its path
Boris Kovacevic – Global Macro Strategist
The trade war between the Trump administration and the rest of the world has, so far, been milder than many had anticipated. However, with the President only 17 days into his term, tensions are already escalating. He has imposed new tariffs on China and made bold geopolitical demands, including calls to reclaim control of the Panama Canal and for Denmark to sell Greenland.
In this environment of heightened political uncertainty, staying attuned to daily developments is crucial for understanding market reactions. The uncertainty has already influenced investor expectations, leading to a reduced outlook for rate cuts this year—a view echoed by Chicago Fed President Austan Goolsbee today. While monetary easing is still expected, the two rate cuts currently priced into options markets are a far cry from the more aggressive expectations seen just a few months ago.
We also got to her from the US Treasury Secretary yesterday. Scott Besset emphasized that China will be absorbing part of the tariff impact, reducing its inflationary effects. Bessent believes that the 10-year Treasury yield will decline naturally and questions the notion that tariffs are inherently inflationary. Furthermore, he stresses the importance of maintaining a strong dollar.
This is an interesting point as it seems that the Trump administration is yet to form a clear consensus on the trajectory of the US currency. The Greenback has gained around 4% since the election in November, closely tracking its development following the 2016 election. However, DXY is still about 6% off its 20-year highs reached in 2022. We think that reclimbing those levels would need a clear trade escalation and signs that inflation is rebounding globally. Otherwise, the currency will be stuck in a range +- 3% from current levels.
On the macro front, weekly jobless claims rose more than expected to 219,000, up from 207,000 the previous week, suggesting some cooling in the labor market. However, strong private payroll data earlier in the week indicates that job growth remains resilient. With the all-important nonfarm payrolls report due on Friday, markets are closely watching for further clues on the Federal Reserve’s next steps.
Canadian labor bounce back
Kevin Ford – FX & Macro Strategist
The US and Canada both published job reports this morning. For the Bank of Canada (BoC), the release is significant as it confirms the rebound of the job market. The data showed that the Canadian economy created 76K jobs, far exceeding the 25K estimate. Both hours worked and hourly wages grew, indicating that monetary policy and fiscal stimulus have helped the labor market find a bottom. This is all good news for Governor Tiff Macklem. The BoC will meet again on March 12, and it will have the CPI monthly report to be released next week, today’s job report, and another one in March to better assess monetary policy. Of course, tariffs and trade policy with the US will be of paramount importance. The initial reaction of the USDCAD is a move down, testing the 1.43 level, eyeing the weekly low of 1.427.
On the other hand, during the last Federal Reserve (Fed) meeting, Jerome Powell mentioned that the Fed is not in a hurry to adjust the policy stance. The Fed’s next meeting is on March 19, and the market anticipates that the Fed will hold rates. Therefore, this data is more short-term noise than any other thing. However, the Fed will meet again on May 7, and it will have four months of payroll data and inflation figures to get a better picture of the state of the economy. The nonfarm payrolls increased by 143K last month, below the expected 175K. However, what’s initially affecting the dollar is the revised gain in December of 307K jobs, which is far above what analysts expected. On the other hand, wage growth remained stable, the labor force participation rate improved slightly, and the unemployment rate returned to 4, confirming the robustness of the US labor market.
Pound choppy after BoE cut
George Vessey – FX & Macro Strategist
The Bank of England’s (BoE) Monetary Policy Committee voted 7-2 to cut Bank Rate by 25bps to 4.5% yesterday. The decision was well-signalled by the BoE, but the vote split caught markets off guard and triggered a brief selloff in the pound. GBP/USD fell towards $1.23 having been at $1.25 the day before, whilst GBP/EUR lost its grip on the €1.20 handle. Selling pressure eased after Governor Bailey offered some supportive comments, whilst the upside inflation revisions called into question further rate cuts.
The BoE’s decision highlights the sharp contrast in views within the MPC though and underscores the deep uncertainty surrounding the UK’s economic outlook. The two dissenters – Swati Dhingra and Catherine Mann – voted for a 50bp cut. Mann’s vote was particularly surprising given she had previously been the most hawkish member of the committee. This was therefore a big dovish takeaway from the meeting. The hawkish takeaway though was the upward revision to the BoE’s inflation outlook. The BoE also slashed its forecast for GDP growth in 2025 to 0.7% from 1.5%, reflecting both the carry-over effect of the poor performance at the end of last year and a downgrade to its projections for H1 2025.
Persistently poor supply-side performance means the growth-inflation trade-off has worsened, reflecting low potential growth, plus greater stickiness in pay rises and risks that above-target near-term inflation will keep pay growth above a target-consistent pace. This means that a period of weak GDP growth will be required to get inflation back to target on a sustained basis.
Next week’s latest inflation and GDP figures will be crucial in determining whether the BoE cuts rates again in March. Sterling’s yield advantage is slowly crumbling but its low beta to tariff risks should keep it from weakening too much against major peers.
Equities surge, but inflation looms
Boris Kovacevic – Global Macro Strategist
European equity markets surged to record highs, driven by a strong earnings season and the postponement of U.S. tariffs on Canada and Mexico. Financial stocks have been key contributors to this rally, with European banks leading year-to-date gains as they continue to outperform expectations.
However, while equities push higher, the energy sector is facing renewed pressures. European natural gas prices climbed to a two-year high, surpassing €54 per megawatt-hour. This spike is attributed to an unexpected cold spell that has led to a significant drawdown in storage reserves, adding to inflationary concerns.
Despite the broad-based rally in global equities and a slight decline in bond yields, the euro remains under pressure. EUR/USD broke below the $1.04 mark again, signaling ongoing headwinds for the single currency.
Investors have recently adjusted their rate-cut expectations for the European Central Bank marginally following recent comments from ECB Chief Economist Philip Lane, who suggested inflation could take longer to subside than initially anticipated. But the dovish tilt from the Bank of England was enough to support the dollar across the curve.
Dollar stagnates before payrolls number
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 3 -7
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.
