Written by the Market Insights Team
Dollar down on weak retail sales
Boris Kovacevic – Global Macro Strategist
Equity investors were in for some choppy trading last week with both inflation data and headlines on trade politics 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, trading near record levels, as investors show the US dollar no love. Markets can rise against the backdrop of elevated policy uncertainty as long as economic momentum and company earnings holds up. This was the lesson the 2016-2017 period taught us.
The benefits from the recent postponement of tariffs on Mexico and Canada still reverberate through markets. Additionally, reports emerged that President Trump may be actively working on a peace deal with Ukrainian President Zelensky and Russian President Putin. This boosted risk sentiment, lowered oil prices, and therefore overshadowed Fed repricing, putting further pressure on the Greenback.
The higher than expected CPI print last week was completely negated by the downside surprise on the PPI figure, meaning that inflation was a net-neutral factor for markets. However, the horrendous retail sales report that came out just before the weekend did weaken the dollar further and helped equities extend their gains as the probability of a Fed hike this year shrunk from 9% to 3%.
The 0.9% drop exceeded the expected 0.1% drawdown and was the largest fall in about a year. The weakness was broad based and was able to push down the Atlanta Fed US GDP nowcast for Q1 from 2.95% to 2.3%. The US Dollar Index (DXY) traded at a yearly low and has fallen by 3% from its 2025 high.
Euro briefly touches $1.05
Boris Kovacevic – Global Macro Strategist
The geopolitical and trade related news flow treated the euro surprisingly well last week. Bears and short sellers had been stunned as the currency briefly reached the $1.05 mark for just the second time this year. EUR/USD had its best week in three as the potential of a peace treaty between Russian and Ukraine continues to increase due to President Trump’s involvement. Furthermore, angst over an imminent introduction of tariffs on European cars has evaporated as the US seemingly postponed such a move to April 2nd. This would make sense chronologically as the report from the Department of Commerce on reciprocal tariffs would be finished by April 1st.
The European Union (and the euro) are not out of the woods yet though. President Trump has criticized the use of value-added taxes (VAT) in over 160 countries, arguing that they unfairly benefit foreign exporters over US businesses and act as tariffs. This thinking could become a problem given that regions such as the EU will by no means change their VAT system due to their dependence on this revenue stream, limiting the room for negotiations.
So far, we have been right in calling for a slight rebound in the euro due to rising real rate-differentials (driven by higher US inflation expectations) and the priced in Fed pause. However, the macro picture and uncertain tariff situation mean that the upside on EUR/USD could be limited for now. More impetus on the domestic front is needed for additional advances beyond $1.06.
Pound poised for UK data dump
George Vessey – Lead FX & Macro Strategist
The British pound appreciated against its safe haven peers last week as it rode the risk wave thanks to tariff fatigue and rising hopes of a ceasefire in Ukraine which sent oil prices plunging. GBP/USD catapulted three cents from around $1.23 to over $1.26, whilst GBP/JPY rallied over 2% in a week. GBP/EUR has remained relatively flat though due to the geopolitical tailwinds for the common currency as well.
However, it may be that provisional details around the Ukraine ceasefire deal could be negative for Europe’s security and the war premium is low meaning the rally in European FX might be limited from here. Meanwhile, the shift in market focus towards trade risks is leading to increased recognition of the UK’s greater resilience to direct tariffs than the Eurozone, which is another reason why GBP/EUR should remain supported above the €1.20 handle. Moreover, rate differentials favour GBP over EUR, and the UK’s upside GDP surprise last week saw traders pare back BoE easing bets for this year, which supports the pound’s yield advantage. More activity-related data releases due this week include employment on Tuesday, and flash PMIs and retail sales on Friday. Inflation data on Wednesday will also be key for the BoE and the pound, with a base effects-driven rebound widely expected. Most attention will be on the services inflation print though, which has been sticky above 4% for almost three years and is forecast to jump back above 5%. The key dilemma for UK rates traders is whether to price in two cuts in the remainder of the year, or three.
The combination of sticky carry advantage and tariff resilience implies an improved near-term outlook for the pound versus the euro. 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, though the pair is flirting with overbought territory according to the daily relative strength index, indicating a looming pullback or at least a period of consolidation.
Dollar index drops 1.5% in seven days
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.
