- Choppy markets. Markets experienced volatility with inflation data and trade headlines driving price action. Despite uncertainty, equities surged on Valentine’s Day while the USD weakened.
- Trump’s tariff tango. Investors remain cautious as Trump’s shifting trade policies continue to impact sentiment. Hopes of a Ukraine peace deal boosted risk appetite, weighed on oil, and overshadowed Fed repricing.
- CPI on the rise. Headline CPI beat expectations at 3%, leading the Fed to signal more work is needed to control inflation. Markets adjusted by scaling back rate cut bets, pricing in just one cut for the year.
- PPI softens worries. While PPI was higher than forecast, components feeding into the Fed’s preferred PCE index showed declines. As a result, bond yields erased their CPI-driven spike, and equities pushed higher.
- USD struggles. The US dollar fell for the third straight day and weakened against all G10 currencies. Improved global risk appetite, potential trade de-escalation, and a weaker PPI overshadowed inflation fears.
- GBP rides risk wave: Sterling strengthened against both JPY and USD as risk sentiment improved. Stronger GDP data helped ease BoE rate cut expectations, but UK inflation data this coming week will be key.
- Week Ahead. The RBA and RBNZ rate decisions, UK and Canada inflation data, and US housing starts will set the tone. FOMC minutes midweek could reinforce the Fed’s cautious stance, influencing rate expectations.
Global Macro
Equities in full bloom, dollar shown no love
Investors were in for some choppy trading this week with both inflation data and headlines on the trade front causing some price discovery across asset classes. There remains incredibly high uncertainty on both fronts, but investors are turning a blind eye to the underlying risks for now with equities in full bloom on Valentine’s day as investors show the dollar no love.
Markets love-hate relationship with Trump. The benefits from the recent postponement of tariffs on Mexican and Canadian still reverberate through markets. However, the US president ordered a review of reciprocal tariffs, aiming to counter trade imbalances through country-specific levies. This is raising concerns over potential retaliatory measures and prolonged trade uncertainty. Still, the former headline dominates the price action. While Trump’s trade rhetoric and tariff developments will continue to be major market drivers, investors are becoming more selective in their reactions. Additionally, 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 further pressure on the Greenback.
Higher CPI…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.
…overshadowed by weaker PPI. 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.
Market conclusion. Leanings towards the positives. A mistake?
(1)Investors remain highly sensitive to inflation data as they assess the trajectory of price pressures as shown by the higher weighting of a secondary data point such as PPI versus the CPI number.
(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.
(3)Investors are on edge due to the high policy uncertainty and given that some of the risks are priced in, positive news seem to outweigh negative ones. This was shown following both the inflation data and tariff news.
Week ahead
Antipodean rate cuts and UK data dump
Tuesday. Markets will be closely watching central bank decisions, inflation data, and key economic indicators this week, with a focus on their impact on central bank expectations. The week kicks off with the RBA’s cash rate decision, where the central bank is expected to cut rates to 4.1%. Given recent signs of easing inflation, investors will be looking for any dovish hints that could pressure the AUD. In the UK, the unemployment rate and claimant count data will provide insights into the labor market, while Germany’s ZEW Economic Sentiment Survey will gauge investor confidence in the Eurozone. Later in the day, Canada’s CPI print will be crucial for the CAD, as markets assess whether the Bank of Canada could continue to cut rates in the coming months.
Wednesday. The spotlight will shift to the RBNZ’s rate decision on Wednesday, with expectations for a 25bps cut to 3.8%. If the central bank signals further easing, the NZD could face renewed pressure. The UK’s CPI release (expected at 2.5%) will be critical for GBP, as a higher-than-expected print could push back Bank of England rate cut expectations. Meanwhile, in the US, housing starts data will offer fresh insights into the strength of the real estate market. Midweek, the FOMC meeting minutes will take center stage, with markets looking for clues on how the Fed views inflation risks and potential rate cuts. If the tone remains cautious, it could reinforce higher-for-longer rate expectations, supporting the USD and Treasury yields.
Thursday, Friday. As the week progresses, economic indicators in the US will remain in focus. The Leading Index on Thursday will provide a gauge of recession risks, and if the downturn continues, it could weigh on broader market sentiment. Friday will be packed with key data releases, starting with the UK’s retail sales, where weak consumer spending could put pressure on the GBP.
FX Views
Dollar dumped whilst euro’s stealing hearts
USD Feeling unloved. The US dollar index has fallen for four weeks out of the last five, is down over 2% and trading at an 8-week low. Despite US inflation coming in hot, markets are cheering the potential for a ceasefire in Ukraine and the delay in Trump’s reciprocal tariffs. Improved global risk appetite is weighing on safe haven currencies – hence the dollar’s gains against the yen. But the world’s reserve currency in under pressure versus its pro-cyclical peers, with both the euro and pound over 1% higher this week. The trend could have legs given Trump’s history of shifting positions on key trade issues, meaning markets are now taking a more measured approach rather than overreacting to every headline. Traders have trimmed bullish wagers on the dollar for a fifth straight day, which are now the lowest since Trump took office. 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.
EUR Reduced war risk premium. Despite the plethora of risks hanging over the euro, traders appear more focussed on geopolitical tailwinds from the prospects of a ceasefire in Ukraine boosting European FX. EUR/USD is up over 1% this week and recording a fresh month high beyond $1.0450. Fatigue over trade tariff headlines has also been a boon for pro-cyclical FX like the euro. Yet, while the common currency has managed to hold above key technical levels lately, the move looks hard to chase from here given the uncertainty of tariffs coming Europe’s way and the German election next week. Escalating trade risks and diverging central bank policies could keep EUR/USD upside limited to $1.05-$1.0550. Looking at one-month implied vol versus past-year average in the G10 currencies, the euro trades at a higher nominal premium, which suggests traders deem the euro more at risk from tariff escalation and politics. Looking ahead to the upcoming week, consumer and business sentiment surveys are the main data releases from the bloc, whilst a surprise German election result will likely raise EUR volatility.
GBP Riding the risk wave. Sterling is riding the risk-on wave, appreciating over 2% against JPY over the past week and over 1% versus the USD, extending beyond $1.25 having been as low as $1.2250 earlier this month. GBP/EUR has remained relatively flat though due to Ukraine-related tailwinds for the common currency. That said, rate differentials favour GBP over EUR, and the UK’s upside GDP surprise saw traders pare back BoE easing bets for this year, which supports the pound’s yield advantage. Meanwhile, as GBP/USD has overcome its 50-day moving average located at $1.2475, we see the short-term upside target around $1.26-27. However, traders are still more worried about the pound falling over the next month than they have been on average over the past year. Plus, 1-month implied volatility remains in the 80th percentile of observations over the last year. This reflects fears of elevated volatility due to tariff uncertainty and although the UK may be less exposed than major peers, it is not immune, nor is the pound given its sensitivity to global risk appetite. On the domestic front, UK inflation figures loom this coming week. An upside surprise should support the pound, whilst a downside surprise could weaken it – based on the impact it will have on BoE policy expectations.
CHF Geopolitics versus rates outlook. The Swiss franc has only appreciated against 20% of its global peers month-to-date. Its safe haven status means it’s sensitive to changes in global risk aversion. Risk appetite has improved lately due to signs of tariff fatigue in FX but also thanks to the news of a potential peace deal between Russia and Ukraine. This saw EUR/CHF rise 1% in a week and re-test its 200-day moving average near 0.95. However, the franc found some support after data showed that despite headline inflation having slowed to its lowest in almost four years, core inflation came in above estimates. Markets, are not longer pricing in two rate cuts by the SNB this year as a result. This repricing could support the franc in the short term. CHF is also seen as a favoured safe haven currency if trade war risks ramp up. Surging option volumes show traders are increasing exposure to Swissie, along with a sudden shift in the risk reversal skew favouring CHF upside. Moreover, leveraged punters are still running net short positions which could trigger a short squeeze – accelerating any franc appreciation.
CAD New 2025 low. The USD/CAD hit a new 2025 low, trading as low as 1.4183, as the new set of tariffs proposed by President Trump point to a potential delay in the 25% tariffs imposed earlier this month. The macro-calendar also gave the Loonie a late boost as CPI/PPI data confirms overall macro backdrop.
The Loonie traded within a narrow 197 pips range for the week, with a high of 1.4380. The pair remains below the 50-day SMA at 1.4348 after a week-long consolidation that saw it drop through the 1.426/70 support area (Jan 20th and Feb 5th lows). In the absence of negative tariff news, the pair could break 1.42 and move towards 1.418 and the 100-day SMA at 1.4104 as the next key support levels. Key short-term resistance is at 1.4307, with fear levels above 1.445.
The domestic economic calendar brings relevant data, with the CPI on the spotlight next Tuesday, expected to be at 1.9% YoY. Industrial product price and retail sales will come end of next week. In the US, manufacturing PMI and housing data will be on focus.
AUD Technical breakout faces key moving average test. Australian consumer sentiment remained subdued at 92.2 in February, showing households are still cautious despite easing inflation pressures. The persistently weak readings in major household purchase intentions (90.9) suggest consumer spending is unlikely to surge, providing comfort to the RBA on inflation risks. AUD/USD has triggered fresh pattern-based buy signals following early week volatility, with price action testing crucial resistance at the 0.6318 50-day moving average, which represents the lower bound of a significant resistance cluster. This level serves as a key bifurcation point – a break above could signal further upside momentum, while failure here might trigger a reversal. Focus shifts to the RBA rate decision as the primary event risk, while Australian employment change and unemployment rate data will provide crucial inputs for currency direction, particularly given the central bank’s emphasis on labor market conditions in policy deliberations.
CNY Yuan weakens despite inflation uptick. China’s January CPI rose 0.5% y/y, marking a five-month high driven by holiday spending effects, though PPI remained in deflation territory (-2.3% y/y) for the 28th consecutive month, highlighting persistent deflationary pressures in the broader economy. USDCNH exhibits growing bullish momentum after breaking above the 50-day SMA (7.2865), and while the current move appears corrective rather than trend-changing, the pair could extend toward key resistance at 7.3682. A breakthrough this level would shift the medium-term outlook positive, opening potential for a move to 7.4888. The 5-year loan prime rate announcement will be crucial for near-term direction, with any adjustment potentially catalyzing significant movement in the yuan.
JPY Testing key technical level of 152. Japanese producer prices accelerated for a fifth month, reaching 4.2% y/y in January – the highest since June 2023, with BoJ Governor Ueda’s acknowledgment of persistent food price pressures suggesting growing sensitivity to inflation risks. USD/JPY’s correction from the 158.88 January high has extended beyond the 152.555-153.03 target zone. The bearish bias remains intact while price stays below the 154.26 of the 50-day MA support level, with the key support of 200-day MA of 152.20 likely next. A heavy data calendar includes GDP, industrial production, trade balance and national core CPI, which could provide fresh impetus for price action, particularly as markets gauge the timing of potential BoJ policy adjustments.
MXN Narrow trading range. It was a low volatility week for the Peso, hovering around the 20.5 level in the absence of new tariff developments. The Peso traded as high as 20.7 at the start of the week amid concerns about new steel and aluminum tariffs but eased during the week to as low as 20.41, as the tariffs are expected to begin on March 12th. The Peso is currently sitting just above its 50-day SMA, and a move towards its 100-day SMA at 20.22 might provide tactical buy opportunities.
Next week, focus will be on 4Q24 GDP data on Friday and retail sales on Thursday, both major macro data points to assess the health of the Mexican economy.
Other news steering the Peso:
• Inflation eased in January, with some persistent areas, especially in services and energy.
• Inflation returned to within Banxico’s 2%-4% target range; expected to end the year at 3.8%, near the 3.9% consensus but above Banxico’s 3.3% estimate.
• Banxico implemented a 50bp cut in February, despite avoiding a 25% tariff threat.
• The Board focuses more on economic underperformance and disinflation than financial volatility.
• Potential for further cuts in H1; year-end policy rate forecast at 8.25%, below the 8.5% consensus.
• The Mexican peso remains stable, but risk events could trigger sell-offs.
• The extension of the USMCA is seen as a key anchor for the peso.
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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.
