Written by the Market Insights Team
Investors betting on the double put
Boris Kovacevic – Global Macro Strategist
A lot of thought has been given to the concepts of the Trump and Fed “double put” in recent discussions on Wall Street. The Idea that widening credit spreads, falling equity markets or balance sheet disruptions would cause both Trump and the Fed independently to pivot away from their somewhat hawkish tariff rhetoric and monetary policy.
This assumption has gotten more fuel yesterday with the release of the FOMC meetings. Policy makers warned that relieving the stress on bank balance sheets would be important as the debt ceiling and long-term Treasury refinancing is still unresolved. This is why the Fed discussed further slowing or even pausing its current balance sheet run-off. US equity markets pushed to record highs against the backdrop of yields falling across the board.
However, equity investors are ignoring rising inflation rates and geopolitical uncertainty which will likely mean that policy rates will be higher for longer with options markets now pricing in a single rate cut for 2025. We have seen that stock markets can continue rising as long as the macro data and company earnings continue to deliver. Risk assets do seem to be priced for perfection with rich valuations and broad complacency as highlighted by falling volatility rates.
The dollar pushed higher for a second day despite the toxic mix of falling yields and rising equities. Safe-haven demand was on display due to President Trump’s escalating words towards the Ukrainian President, calling Volodymyr Zelenskiy a dictator. The Greenback is stuck between a Fed on pause (fully priced in), tariff uncertainty (daily back-and-forth in pricing) and mixed macro data (inflation rising, economic momentum slowing). This makes the dynamic on FX markets volatile, and news driven.
Euro without a life of its own
Boris Kovacevic – Global Macro Strategist
The euro remains in the palm of US President Donald Trump as his daily commentary continued to drive the common currency and sentiment around it. Trump has made it clear to Zelenskiy—either make peace with Russia quickly or risk losing Ukraine altogether. By sidelining Kyiv (and Brussels) in negotiations and shifting US policy away from its previous support, he’s signaling a major pivot in diplomacy. With US-Russia talks already underway, the future of Europe and its foreign policy seems uncertain.
This geopolitical development overshadowed hawkish comments from ECB Board Member Isabel Schnabel, which called for caution and a rethink to rate cuts amidst tariff threats and rising inflation rates. German bond yields pushed higher across the board with the 10-year Bund reaching a 3-week high at 2.55%. Today’s price action will be driven by the three scheduled Fed officials, US jobless claims, the Philly Fed Index and European consumer confidence data. EUR/USD will need to stay above the $1.04 mark to have a chance at retesting $1.05 this week.
Pound reverses from multi-month highs
George Vessey – Lead FX & Macro Strategist
Sterling’s positive knee-jerk reaction to the hot UK inflation report on Wednesday lost traction as the day went on. GBP/USD notched a fresh 2-month high of $1.2640 before reversing back under $1.26, whilst GBP/EUR hit a 1-month high near €1.21 before running out of steam. Going forward, UK retail sales and flash PMI data will be key trading points for sterling on Friday morning.
Overall, the UK inflation print, and hot wage growth data further support our view for a Bank of England (BoE) hold in March and a resumption of cuts from May. Meanwhile, leading indicators project inflation will remain elevated in the UK and growth could surprise to the upside. While these surprises should not derail further gradual rate cuts, it will keep the BoE in the slow lane. However, the softer-than-expected services print, and progress on underlying services metrics, should mean that the broader view of a gradual disinflationary process from here is little changed. Traders have partially scaled back BoE easing bets for this year from 65 basis points to 50 – i.e. still fully pricing in two rate cuts by year-end – less than the BoE’s own forecast of one cut per quarter.
Aside from rate differentials supporting the pound, its sensitivity to global risk appetite will keep traders on their toes amidst ongoing geopolitical uncertainties, though as we’ve highlighted before – the UK is (currently) out of Trump’s direct firing line when it comes to tariffs, which we think gives sterling an edge over the euro.
Dollar finds a bid again
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 17 – 22
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.
