Dollar fall surprised the market, not us
Boris Kovacevic – Global Macro Strategist
The US dollar weakened yesterday against the euro, even as US inflation came in hotter than expected and Treasury yields climbed across the curve. Equities ended the day in red but pared back more than half of their intra-day losses. Consumer prices surprised to the upside across multiple dimensions with the monthly figure coming in at 0.5% and the core print at 0.4%.
Both were expected at 0.3%. Headline inflation is now back at 3% for the first time since June 2024. This prompted Fed Chair Jerome Powell to say that the recent data showed that there is more work to do to bring down inflation. Markets reacted to the upside surprise to the Chair’s comments with a pullback in Fed rate cut expectations, now pricing in just a single cut for the year.
However, the dollar failed to capitalize on the shift, confirming its asymmetric reaction function. Instead, geopolitical optimism took center stage. Reports emerged that President Trump may be actively working on a peace deal with Ukrainian President Zelenskiy and Russian President Putin.
This boosted risk sentiment, lowered oil prices, and therefore overshadowed Fed repricing, putting pressure on the Greenback. The market action aligns with our view that, for now, positive geopolitical developments hold greater sway over FX markets than concerns about the Fed delaying rate cuts. If this trend continues, the dollar could remain vulnerable despite resilient US data.
Eggs and super-core climb, premiers push back
Kevin Ford – FX & Global Macro Strategist
As mentioned previously, yesterday’s US CPI data was more significant for the markets than for the Federal Reserve (Fed). It is unanimously expected that the Fed will pause again in their March meeting. By the May meeting, the Fed will have ample macro data to assess, along with updates on the ever-evolving US trade policy.
However, the markets did not take kindly to January’s inflation data. Both headline and, more importantly, core CPI exceeded estimates. Non-housing service inflation, also known as ‘super-core,’ rose by nearly 0.8% for the month, potentially indicating wage pressure affecting prices. And while other components, such as rent inflation, may continue to put downward pressure on the headline figure, ‘eggflation’ has returned with prices up 50%, becoming a political issue beyond its economic impact.
Today’s US PPI release, along with a few more CPI, PCE, and payroll readings, will contribute to the Fed’s May decision. For now, after yesterday’s report, the market expects only one rate cut at the December Fed meeting.
The USD/CAD depreciated on the news, trading as high as 1.434 before easing back towards the 1.43 level.
While we focused on fundamentals, US-Canada diplomatic relations have been active. In a historic move, all 13 Canadian premiers gathered in Washington to present a united front against tariffs and advocate for a regional, unified approach to global trade policy, especially with China. While they might not bring it home, the hope is that leveraging the “China card” could bolster their case against tariffs, joining a chorus of voices urging Washington to reconsider.
Meanwhile, in Ottawa, the political atmosphere is tense as businesses nationwide urge Trudeau to recall parliament, facing mounting pressure from opposition parties. With the next election approaching, Trudeau is strategizing on challenging the Conservatives amid intense lobbying and political maneuvers. This dynamic situation could bring off-calendar news that may inject further clarity—and potential volatility—into the FX market.
The US PPI will be the most important calendar-based data to review, while December’s manufacturing sales in Canada also hold significance for the big-picture.
Euro higher on external impetus
Boris Kovacevic – Global Macro Strategist
The euro strengthened, defying a backdrop of rising US bond yields and scaled-back Fed rate cut expectations. While US inflation exceeded forecasts, boosting Treasury yields and leading investors to price in just one Fed cut this year, the dollar weakened amid positive geopolitical developments. Reports that President Trump may negotiate a peace deal with Ukrainian President Zelenskiy and Russian President Putin shifted market sentiment, reinforcing our thesis that geopolitical optimism currently outweighs Fed-related concerns.
In Europe, ECB policymaker Joachim Nagel added to the euro’s resilience by advocating for a measured approach to monetary easing. Speaking in London, the Bundesbank president dismissed the idea of targeting a theoretical “neutral” interest rate, instead emphasizing caution in the ECB’s rate-cutting trajectory. This aligns with our view that while the ECB is set to lower rates further, expectations of aggressive easing may be overstated. With markets recalibrating Fed cut expectations and the ECB signaling a deliberate approach, euro sentiment remains supported.
For now, investors appear more focused on geopolitical tailwinds than on narrowing nominal rate differentials. It is important to note that US market-based inflation expectations have been trending higher for a while now, with some tenors (5-year) hitting their highest level in years. This is theoretically dragging down the real rate differential between the US and Europe.
Pound rises above $1.25 after UK GDP beat
George Vessey – Lead FX & Macro Strategist
Sterling dropped sharply versus the US dollar after the US inflation report was published but recouped those losses as risk appetite improved given promising geopolitical news on ending the war in Ukraine. The euro and central eastern European currencies were the top performers on the day as a result, with GBP/EUR losing its grip on the €1.20 handle. Safe havens, like the Japanese yen, tumbled, with GBP/JPY now up almost 3% week-to-date.
Meanwhile, GBP/USD has overcome its 50-day moving average located at $1.2475. A close above this level today should give it a better a shot at breaking towards $1.26-27. Apart from stretched USD positioning and valuation though, there remains a plethora of positive-USD drivers at present, limiting sterling’s ability to advance. Indeed, FX options traders are taking steps to protect themselves against a potential drop in the pound. GBP/USD 1-month risk reversals are two standard deviations lower than their 1-year average. Simply put, traders are much more worried about the pound falling over the next month than they have been on average over the past year. Meanwhile, 1-month implied volatility, the markets forecast of potential price movements, has stabilised after hitting 2-year highs in January, but it’s still in the 80th percentile of observations over the last year.
On the macro front though, UK GDP data this morning surprised to the upside, which has seen sterling extend its gains. Preliminary fourth quarter GDP unexpectedly grew 0.1% on a quarterly basis versus an estimate of -0.1%. Meanwhile, December’s industrial production was slightly better than expected at -1.9% on an annual basis, compared with an estimate of -2.1%. The UK economy is showing resilience, and this should keep the pound supported over the short term as traders re-price expectations surrounding the central bank’s rate trajectory. Traders are now pricing in 55 basis points of easing from over 60 at yesterday’s close.
We are conscious that the UK is not immune to global growth headwinds amidst a slowdown in trade due to tariffs though. Moreover, despite the balanced relationship in goods trade with the US, the UK runs a significant trade surplus in services, meaning this sector is potentially at risk of tariffs that extend beyond the trade in goods (though such tariffs are much harder to implement).
CAD holding steady
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 10-14
All times are in ET
Have a question? [email protected]
*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.
