Written by the Market Insights Team
Loonie slips on softer March inflation
Kevin Ford – FX & Macro Strategist
The Government of Canada bond curve saw gains at the short end, while the Canadian dollar weakened, following the release of March inflation data that came in lower than anticipated. Canada’s annual inflation rate fell to 2.3% in March 2025, down from the eight-month high of 2.6% recorded in February. This was below both market expectations of 2.6% and the Bank of Canada’s forecast of 2.5%.
The decline in inflation can largely be attributed to temporary factors, including a drop in gasoline prices (-0.3 percentage points) and reduced travel service costs (-0.3 percentage points). However, these drivers may not persist in the near term. In contrast, the expiration of the GST holiday added upward pressure on food prices, rising 3.2% compared to 1.3% previously, partially offsetting the overall decline. Restaurant costs were a significant contributor to this increase, jumping 3.2% following a decline of 1.4% in the prior period. Month-over-month, overall prices inched up by 0.3% from February to March.
Despite these fluctuations, the year-over-year trend for core CPI is encouraging. It has steadily eased from 2.9% a year ago to 2.3% in March. This downward trajectory suggests that underlying inflation is nearing the Bank of Canada’s target, providing some reassurance as the economy navigates challenges, including the trade war with the U.S.
Another important signal comes from the domestic demand front. Recreation services experienced a significant 2.1% month-over-month decline—marking the third steepest drop on record. Shelter costs, once a key driver of inflation, have now cooled for the second consecutive month, with rents and mortgage interest costs showing particularly subdued growth at under 0.2%. Shelter accounts for 30% of the total weight in Canada’s CPI basket, followed by Transportation (17%) and Food (16%), making this deceleration noteworthy for investors tracking inflation trends.
Following the CPI data release, the probability of a BoC rate cut has edged up slightly to 41%. However, markets anticipate a pause after seven consecutive cuts, giving policymakers time to evaluate the impact of tariffs on growth and inflation. Looking ahead to the BoC’s June meeting, expectations for a 25-basis-point cut remain high, with probabilities standing at 85%.
Trade uncertainty weighs on US assets
George Vessey – Lead FX & Macro Strategist
Risk-off moves are picking up once again as global equity markets turn lower and the US dollar extends its drop – trading at about the lowest level in three years. President Donald Trump urged China to initiate negotiations to address the escalating trade conflict between the world’s two largest economies. In response, China reportedly instructed airlines to halt further deliveries of Boeing Co. jets, marking its latest retaliatory move against Trump’s decision to impose tariffs of up to 145% on Chinese goods. The Trump administration then imposed new restrictions on Nvidia’s chip exports to China. These developments underscore the deepening standoff between the US and China, with no resolution in sight as both nations continue to raise trade barriers to unprecedented levels.
Market volatility has cooled off this week, but this does not signal that the critical issues facing investors have been resolved. Instead, trade uncertainty has surged to previously unimaginable heights, surpassing levels seen before “liberation day”. Overall US policy uncertainty also remains elevated and the adage that markets despise uncertainty remains frustratingly accurate – the current climate exemplifies this sentiment to an extreme degree.
Data from the US yesterday revealed companies’ expectations for business activity six months ahead plunged in April to its lowest since 2001, according to the Empire State manufacturing survey, while price increases — both actual and expected — became more widespread.
US assets, including the dollar, continue to carry a notable risk premium amid growing investor caution. The traditional correlation between the dollar and Treasury yields has reached its weakest point in three years, reflecting heightened doubts about the safety of US assets during periods of economic stress. The dollar’s rapid decline has been driven by capital flight from US markets, as fears grow that the Trump administration’s trade war could tip the economy into a recession.
Yields on US long-term debt remain near 17-month highs. Typically, higher bond yields bolster the dollar; however, the dynamics have diverged this time. Scepticism about the dollar’s haven appeal and its central role in the global financial system is causing this decoupling.
Pacey euro appreciation to force ECB’s hand
George Vessey – Lead FX & Macro Strategist
The euro resumed its rally against the US dollar this morning, though it remains in overbought territory based on the daily relative strength index. While the broader outlook favors the euro in the medium term as funds shift away from the dollar, the European Central Bank (ECB) may act to slow its appreciation with a rate cut expected tomorrow.
EUR/USD has surged approximately 5% this month, reaching fresh three-year highs, while EUR/CNY has climbed 6% since the March ECB meeting, hitting a decade high. The depreciation of the Chinese yuan relative to the euro raises questions about its potential to further support China’s exports to the EU, especially as US-China trade is set to decline sharply due to tariffs. President Trump’s ongoing tariff negotiations aim to pressure US trading partners to limit their dealings with China, a move Europe might consider given its growing trade deficit with China since 2020.
The ECB is widely anticipated to cut rates by 25 basis points on 17 April, citing intensified growth risks linked to US tariffs. While rates may be nearing neutral, further tariff-driven cuts remain possible. That said, the correlation between FX and rate differentials has evaporated since “liberation day” and the ongoing rotation from US to European assets could mean that EUR/USD will remains supported around $1.13 even if the ECB leans dovish.
On the macroeconomic front, investor confidence in Germany’s economy has plummeted amid the escalating trade war. The ZEW institute’s expectations index fell sharply to -14 in April from 51.6 the previous month, highlighting the growing uncertainty surrounding global trade dynamics.
Pound mixed after slower inflation
George Vessey – Lead FX & Macro Strategist
The pound remains strong versus the US dollar but under pressure against the euro after lower-than-expected UK inflation data provided temporary relief for the Bank of England (BoE), which is preparing for the economic fallout of Trump’s tariffs.
Headline inflation came in at 2.6%, while services inflation – a key indicator for BoE policymakers – declined more than anticipated, falling to 4.7% in March from 5% in February. However the dip in inflation may only be short-lived. Rising household bills and higher business costs are expected to drive inflation higher from April onwards. Thus, the BoE faces a challenging task as it balances a weakening jobs market against the likelihood of rising inflation later this year, partially fueled by escalating living costs.
The pound has gained ground versus the dollar, eying $1.33, but remains on the back foot against the euro. As a reserve currency, sterling is part of the broader devaluation of the dollar. However, the euro benefits from higher liquidity and significant repatriation of financial assets into the Eurozone, supported by its large trade surplus with the US.
Overall, sterling’s 2.8% monthly gain against the dollar reflects dollar weakness rather than inherent pound strength. The pound has lost ground against six of its G10 peers, gaining only against three. A genuine sterling rally would show broader strength, particularly against the euro. Instead, sterling has underperformed the euro, amidst elevated volatility, mirroring its behaviour during the pandemic’s initial wave. As volatility eases, the pound could recover ground versus the common currency, supported by the UK’s relative resilience to tariffs and stabilized demand-side data.
Gold is up 7% in the last week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 14-17
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.
