GBP: BoE holds, hawkish tone lifts the pound
The Bank of England voted unanimously to keep interest rates on hold at 3.75% yesterday, marking the first decision without any dissent in four and a half years. The entrenched hawkish stance underscores the high level of sensitivity the Bank holds toward the inflation outlook. Markets reacted sharply, with gilts and sterling edging higher, while bets for hikes in 2026 climbed to almost 75 bps by year-end. There is a two-pronged justification here – a cyclical and structural: on the former, the Bank expected a sharp drop in inflation pre-conflict – expected to reach 2% by April – mostly tied to 2024 budget tax increase base effect adjustments, as well as policy changes aimed at reducing energy bills at the 2025 budget. The sharp hawkish defensive raised today is justified at a moment when an external shock of great magnitude muddles the expected outlook.
Secondly, the more structural reasoning comes down to the UK’s economic exposure to energy prices, the UK faces greater vulnerability than peer markets, say US, eurozone and Switzerland. Firstly of all, brent crude is the primary benchmark for oil pricing in the Atlantic Basin and is closely linked to North Sea production. Since the UK sits at the center of this pricing ecosystem, wholesale fuel prices track Brent very closely. Also, the UK has a largely more liberalised market than say the eurozone, where a greater share of fixed tax layer helps contain sharp price spikes. Switzerland has a much stronger franc and a more diversified energy mix to fend off energy spikes, while the US has its own extensive production capacity – buffers the UK appears to have. Inevitably, the MPC assigns a greater weight to the energy input in forecasting inflation, hence the more radical hawkish posture adopted.
Sterling strengthened across the board, but the sharp hawkish repricing that pre‑dated the policy meeting meant much of the fuel had already been exhausted. The meeting nonetheless validated markets’ highly speculative hawkish bias, providing some support for the pound. In a similar tune to the dollar, while we expect sterling to find support from a yield‑advantage angle in the short to medium term, a prolonged conflict scenario that hits growth expectations and keeps pressure on yields would weigh more heavily on the currency via the sentiment channel. A now more muted fiscal risk premium could re‑ignite as we approach the Autumn 2026 budget.
EUR: Euro jumps as ECB recalibrates
The euro staged its strongest rally since January yesterday, rising more than 1% against the US dollar and unwinding last week’s losses. The move was driven by a sharp pullback in oil prices and a hawkish shift in ECB communication, which together eased some of the immediate pressure on EUR/USD. But the recovery sits on fragile foundations, and the broader narrative remains dominated by the energy shock.
The ECB left policy rates unchanged, keeping the deposit rate at 2.00%, as widely expected. What mattered was the tone. President Lagarde delivered a measured assessment of the inflation risks stemming from higher energy prices, signalling that the Governing Council is not rushing toward a rate hike. Yet the reappearance of the phrase “monitor closely” was a clear signal that the ECB has moved to a higher state of alert. The Council now sees inflation risks skewed to the upside, and the bar for a policy response has fallen meaningfully.
With the Middle East conflict dragging on and energy flows increasingly disrupted, the ECB’s baseline assumption of a temporary shock looks increasingly optimistic. Policymakers acknowledge that energy prices are likely to remain higher for longer, and several Council members have indicated they would be prepared to raise rates as early as the April meeting if inflation drifts too far above target or if second‑round effects begin to emerge. Markets have taken the hint: traders are now pricing roughly 16bp of tightening for April and more than two quarter‑point hikes by 2026.
For the euro, this repricing matters. The currency’s rebound reflects a view that the ECB may need to tighten sooner than previously assumed, improving the relative appeal of euro‑denominated assets. But the underlying macro backdrop remains challenging. Europe is far more exposed to the terms‑of‑trade shock than the US, and EUR/USD continues to trade as a function of energy volatility rather than domestic fundamentals.
The ECB’s hawkish tilt may support the euro tactically, but sustained upside requires the energy shock to fade. Until then, EUR/USD remains vulnerable to renewed downside if geopolitical risks intensify or oil prices resume their climb.
CAD: Retail sales rebound in January
Canadian retail rebounded in January, climbing 1.1% to reach $70.7 billion, but fell short of the 1.5% increase that market surveys had anticipated. The primary driver of this month’s growth was the automotive sector, with new car and other motor vehicle dealers seeing significant gains, even as sales at gas stations experienced a slight dip. When excluding autos, retail sales still grew by 0.8%, though this figure also missed the forecasted 1.2% expectation.
Beyond the auto sector, core retail sales showed resilience, rising by 0.9% thanks to stronger performance from general merchandise and sporting goods retailers. Geographically, the retail boost was widespread, with all provinces reporting increases across the board, led most notably by a strong 3.5% surge in Alberta. E-commerce also continued its steady growth to account for 6.2% of total retail trade, and early advance indicators suggest this positive spending momentum likely carried over into February.
This week, the Bank of Canada kept its overnight rate at 2.25%, where it has sat since October, signaling caution as growth cools and slack persists. The tone around domestic demand has clearly softened relative to January, with the Bank characterizing growth as weaker than it had previously expected. That shift reflects a run of slower data: momentum that faded sharply after Q3, a labor market that has lost earlier traction, and signs that excess supply is persisting rather than narrowing. With demand softening, financial conditions tightening, and the economy operating below capacity, a sustained rise in energy prices is more likely to be interpreted through the lens of pressure on consumers and potential demand destruction than through the income boost from Canada’s commodity exposure. Against this backdrop, the USD/CAD has moved up this week from 1.365 to 1.372 on erratic trading, and likely to maintain the trading range of 1.35 to 1.37 seen over the last two months. 1.38 is a short-term ceiling if worsening domestic outlook prevails over terms of trade.
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Calendar: March 16 – 20
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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.
