Written by the Market Insights Team
The euro looks vulnerable to further losses against the US dollar as geopolitical risks keep the single currency under strain. EUR/USD is up 1% so far this month on delayed tariff rollouts and hopes of a ceasefire in Ukraine, but questions over European security and uncertainty over the upcoming German election remain headwinds. Meanwhile, the pound is flirting with a 2-month peak versus the US dollar as UK wage growth accelerates to an 8-month high, leading to a scaling back of Bank of England rate cutting bets.
Dollar’s dual path: strong near-term, uncertain long-term
George Vessey – Lead FX & Macro Strategist
Economic growth differentials play a significant role in FX. Although the US dollar was hit last week after Friday’s soft US January retail sales questioned the strength of US activity, the US economy is still projected to grow by 2.3% in the first quarter of 2025. This far outpaces other advanced economies, and coupled with US inflation remaining above 2%, suggests the Fed may keep policy rates on hold for longer, supporting US yields and the dollar.
The US dollar index is down just over 3% from its early January high and is approaching oversold conditions based on its daily relative strength index, though remains afloat the key 30 threshold, which defines this. But how much more could the dollar weaken in such an uncertain geopolitical climate? The delay to tariffs has boosted risk sentiment, but the foundations laid for ‘reciprocal’ tariffs mean that tariffs will likely be coming in the second quarter. Thus, at this stage, we see the latest bout of dollar weakness as a minor correction as opposed to a long-term trend change, and lean towards another leg higher over the coming months.
Over the long-term is more uncertain though. The persistent US trade deficit and potential trade policy changes could come back to haunt the dollar. Moreover, if last week’s abysmal retail sales are a taste of things to come, the dollar’s “US exceptionalism” tailwind will peter out. Additionally, stretched valuation and positioning indicates limited room for further appreciation – the dollar is currently two standard deviations above its 50-year average.
Too soon to call trend change in euro
George Vessey – Lead FX & Macro Strategist
After recording its second best week of the year last week, the euro’s bounce from near $1.01 to $1.05 versus the US dollar looks likely to fizzle out. EUR/USD has broken out of its descending trend channel, in place since last October, but is flashing overbought on the daily chart. Moreover, European equities opened the week more cautiously amid rising tensions between the US and Europe over Ukraine and tariffs.
European leaders held an emergency meeting in Paris on Monday to discuss Ukraine and security, raising concerns that governments may borrow more to fund military costs. Germany’s 10-year bond yield jumped to 2.5% – a new month high as more government spending is seen as potentially leading to higher inflation and rising bond yields. Negotiations between the US and Russia over the Ukraine war are scheduled to begin on Tuesday. If successful, oil prices could fall further, helping the euro. However, while moves towards a ceasefire have been supporting risk appetite and the euro, the prospect of increased US isolationism and risks to Europe’s security are not positive for the common currency. Meanwhile, on the monetary policy front, the European Central Bank is expected to cut interest rates by 25 basis points at each of the next three meetings, with the deposit rate possibly falling below 2% by 2026. Though this should be another headwind for the euro, we’ve highlighted that with US inflation on the rise, the real rate differential might actually favour more EUR/USD upside.
However, the macro picture, and uncertain tariff, political and geopolitical situations mean that the upside on EUR/USD could be limited for now. More impetus on the domestic front and weakness in US activity data is needed for additional advances to enable traction towards $1.06. German ZEW sentiment surveys will be closely monitored today, with the expectations index expected to advance to a 6-month high.
Pound climbs as UK wage growth accelerates
George Vessey – Lead FX & Macro Strategist
Sterling is flirting with its highest level in two months versus the USD after UK jobs data this morning showed a bigger rise in wage growth than expected – a fresh 8-month high. 10-year gilt yields have jumped as the data adds to pressure on the Bank of England (BoE) as it attempts to hold inflation down.
The three-month average weekly earnings y/y reading was at 6.0% versus 5.9% expected in December, and up from 5.6% in November. Growth in pay, excluding bonuses, rose for a third consecutive time, and was stronger in the private sector (6.2%). This is the BoE’s closely watched metric as they blame it for the stickiness of services inflation. After taking account of inflation, real pay growth also increased slightly. Meanwhile, the unemployment rate was unchanged at 4.4%, confounding expectations for a marginal increase to 4.5%, while vacancies continued to fall in latest quarter, albeit more slowly. Overall, the figures are likely to entrench caution among BoE policymakers trying to balance Britain’s sluggish growth and signs of job cuts against sticky price and wage pressures.
BoE easing expectations have been pared back slightly as a result. Against the euro, the pound has broken out of a narrow short-term trading range and may look to extend its break above €1.21, especially given the political uncertainties facing Europe right now. However, we’d look to fade the rise against the dollar soon given its in overbought territory, though the 100-day moving average at $1.2666 might be tested in the interim.
Pound in top 5% of 7-day range vs. euro and dollar
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 17-21
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.
