Written by the Market Insights Team
A favorable U-turn for the Loonie?
Kevin Ford – FX & Global Macro Strategist
Turning our focus to the tariff saga, in his latest presidential memorandum, Trump announced an investigation to determine the reciprocal tariffs the US should impose on all trading partners. It appears the US will customize import taxes for each country based not only on the tariffs those countries charge on American goods but also on other barriers, such as value-added taxes, FX rates, subsidies, and regulations.
Several factors have given the Loonie a boost. First, Trump set an April 1st deadline for the initial planning to be completed. Commerce Secretary Howard Lutnick, who will be in charge, mentioned that the measures could go into effect any time after that. Déjà vu. Is this Trump’s transactional version in a bid for negotiation? Or is he really committed to follow through? Who knows. Overall, this suggests a potential delay of the postponed 25% tariffs on Canada and Mexico, and the steel and aluminum tariffs that are supposed to take effect on March 12th.
Second, the memorandum highlights various products, including ethanol from Brazil, agricultural goods and motorcycles from India, and shellfish and cars from the European Union. Two specific mentions of Canada caught the market by surprise: first, the digital service tax, which reportedly takes around $500 million annually from American companies. Second, the USMCA, which the memo praises Trump for replacing the “outdated and unfair NAFTA, delivering one of the largest wins for American workers”. Huge surprise. Is this a change of mind in the regional trade war he initiated? Does this mean he will at least go to the negotiating table to review the USMCA deal? Who knows.
As we’ve mentioned, Trump 2.0 brings uncertainty and chaos. However, this unexpected U-turn is welcomed by the Loonie, trading at its lowest level of 2025 so far. Shorts, which have been at historic highs, might have to wait for their moment.
This week’s fundamentals have also provided a glimmer of hope for the Loonie. US PPI data helped ease concerns about reigniting inflation, as some of its components that inform the PCE suggest a lower core PCE reading.
Tariff fatigue, hidden PPI optimism
Boris Kovacevic – Global Macro Strategist
Investors were in for some choppy trading in yesterday’s session with both inflation data and headlines on the trade front causing some price discovery across asset classes. The US president ordered a review of reciprocal tariffs, aiming to counter trade imbalances through country-specific levies. The final results are expected by April 1, raising concerns over potential retaliatory measures and prolonged trade uncertainty.
Meanwhile, January’s PPI came in higher than forecast, briefly fueling inflation concerns. However, components feeding into the Fed’s preferred PCE index showed declines in key areas like health-care services and airfares, keeping focus on the upcoming February 28 PCE release. US government bond yields across the curve fell by almost the exact magnitude they had risen after the CPI beat. Equities pushed higher.
The US dollar extended its decline for a third consecutive day, weakening against all G10 currencies on Thursday. This reflects two key dynamics: (1) investors remain highly sensitive to inflation data as they assess the trajectory of price pressures, and (2) FX markets are showing signs of fatigue when it comes to tariff-related headlines.
While Trump’s trade rhetoric and tariff developments will continue to be major market drivers, investors are becoming more selective in their reactions. Given Trump’s history of shifting positions on key trade issues, markets are now taking a more measured approach rather than overreacting to every headline.
Euro up 1.3% this week
George Vessey – Lead FX & Macro Strategist
The euro has risen for three days straight versus the US dollar, extending gains above $1.04 and marking a fresh February high, reinforcing its breakout above its 20-day moving average. Following multiple failed attempts to sustain gains earlier in the week, the pair now appears to have made a decisive move, shifting the short-term bias to the upside.
The twists and turns of the tariff narrative are keeping currency traders busy. But the delayed start to tariffs has allowed the euro to gain ground this week, which was turbocharged by the constructive development of the Russia-Ukraine conflict, despite European and Ukrainian officials supposedly being excluded from negotiations so far. However, bullish euro momentum may start showing sign of exhaustion if the pair fails to close the week above $1.0450. The outlook of the common currency remains vulnerable due to weak Eurozone economic performance and firm expectations that the European Central Bank (ECB) will extend the monetary easing cycle as inflationary pressures are on track to return sustainably to the 2% target by the year.
From a technical perspective, $1.05 emerges as the next key resistance level. On the downside, the 20- and 50-day moving averages, might now act as supports, but should the pair drop back below $1.0350, the risk of a deeper decline will grow, especially given the multitude of negative drivers hanging over the euro still.
Digging into the GDP detail
George Vessey – Lead FX & Macro Strategist
The pound’s positive reaction to the upside surprise in UK GDP didn’t last long, as the bigger takeaway from the GDP data is the UK economy is still stuck in a low growth trap, which is a headache for the Treasury and the Bank of England (BoE). That said, GBP/USD has held above its 50-day moving average resistance barrier and above $1.25, thanks to USD weakness on positive tariff and geopolitical news.
The UK appears to be mid-table for growth among G7 nations at the end of last year, beating its European rivals and avoiding a technical recession. The economy was supported by growth in the services sector, and in construction, however the manufacturing recession continues. But digging into the detail, the main driver of the 0.1% growth in the final quarter of 2024 was due to a surge in inventories – companies stockpiling raw materials and parts. These figures are extremely volatile, whereas household consumption, exports, and business investment, which tell us more about the health of the economy, were all flat or negative. In fact, business investment contracted by 3.2% and the production sector shrank for a fifth consecutive period, both signs of underlying weakness that could weigh on hiring and wage growth. This could also reinforce the disinflationary process that can keep the BoE on its easing path – a tailwind for gilts, but a drag on sterling.
The BoE expects the economy’s weakness to spill over into 2025, and last week halved its growth forecast for this year to 0.7%. Doves on the committee are growing increasingly concerned that a growth slowdown requires bigger rate cuts. Next week’s UK inflation report will provide further clues. Though not relevant for the January print, upside risks are growing for the coming months due to the significant rally in natural gas prices coupled with changes to UK energy and water bills.
Euro and pound up over 1% versus USD
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 10-14
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.
