Written by the Market Insights Team
Questioning US exceptionalism
Boris Kovacevic – Global Macro Strategist
Signs that the US economy is slowing are mounting. We have recently pointed to the sharp deceleration of the economic surprise index as an indication of downward pressures starting to build. Data released just before the weekend seems to confirm that suspicion. Housing, consumer, and services data all surprised to the downside on Friday, leading both equities and bond yields sharply lower. A weaker US economy should be dollar-negative as well in the medium term. However, an immediate increase in global recession probabilities led to some immediate safe-haven flows supporting the Greenback.
Looking at the data in question, US existing home sales fell 4.9% to an annualized rate of 4.08 million, the sharpest decline in seven months. The University of Michigan’s consumer sentiment index was revised sharply lower to 64.7 in February 2025 from a preliminary 67.8, marking the lowest level since November 2023. This decline was unanimous across various demographic groups. Finally, the US Composite PMI dropped sharply to 50.4 in February 2025 from 52.7 in January, indicating near-stagnation in the private sector and marking the slowest business expansion since September 2023.
Investors likely also reacted somewhat belated to the report published by the South China Morning Post late Thursday about a research team in China having found a new coronavirus that could risk animal-to-human transmission. Also, taking some chips off the table before the weekend has become the new trading idea on Wall Street given the political uncertainty during the first months of the new administration.
US Equities benchmarks shed between 1.6% and 2.2% of their value on Friday, the largest daily drop this year so far. Bond yields fell across the curve with options pricing now indicating two cuts from the Fed in 2025 as investors base case. The US Dollar Index remained steady but continues to trade near the lowest level since mid-December. This week will be shaped by a lot of secondary data points culminating in the highlight of the PCE release on Friday.
Euro higher following German election
Boris Kovacevic – Global Macro Strategist
The euro has risen against the dollar in recent weeks due to three factors. Waning US economic momentum, stabilizing European data, hawkish ECB signals, and easing geopolitical tensions. The euro has experienced a notable appreciation against the dollar throughout February, with EUR/USD climbing from approximately $1.0220 in early February to just below $1.05 as of today.
First, we highlight converging economic momentum as a driver. This upward movement is largely attributed to diminishing economic optimism in the US, where recent data indicates a slowdown in economic momentum. In contrast, European macroeconomic indicators suggest a stabilization, with some sectors showing signs of recovery. Second, contributing to the euro’s strength are hawkish remarks from European Central Bank (ECB) officials that have led to an uptick in German bond yields, reflecting market anticipation of a potential shift in ECB monetary policy. Lastly, reports of a possible peace agreement in Ukraine have exerted downward pressure on European gas prices, alleviating energy cost concerns and providing further support to the euro and pound.
The German election over the weekend is being digested by investors as we speak. Germany’s political landscape is set for a shake-up as Friedrich Merz’s Conservatives emerge victorious, defeating Chancellor Olaf Scholz’s Social Democrats. Merz aims to form a government swiftly, emphasizing the urgency of avoiding prolonged coalition talks. The new leadership faces an uphill battle to revive Germany’s sluggish economy and navigate shifting global dynamics, including the potential return of Donald Trump to the White House. Market reaction has been positive, with the euro and European equities gaining this morning.
Uncertainty about the UK economy
Boris Kovacevic – Global Macro Strategist
Sterling managed to secure a third consecutive weekly gain against the dollar, despite paring some of its advances in late-afternoon trading on Friday. The initial rally was fueled by weaker-than-expected US data, which sent shockwaves through global markets, boosting safe-haven assets like the dollar and Treasuries. The pound remained somewhat resilient, reflecting a UK economy that, despite lingering uncertainties, appears to have more momentum than initially thought.
Recent data releases showed strength in key areas, with wage growth, inflation, and retail sales all coming in higher than expected. These figures suggest that domestic demand remains firm, providing some support for the currency. However, Friday’s disappointing PMI numbers painted a more nuanced picture. The UK manufacturing PMI dropped from 48.3 to 46.4, marking its fifth consecutive month in contraction territory. Meanwhile, private sector activity overall remained subdued, with firms citing budget cuts as a key headwind to growth. This divergence in data leaves markets uncertain about the true state of the UK economy and its resilience heading into the second quarter.
Looking ahead, the UK economic calendar is relatively light, with the only notable domestic release being the House Price Index on Thursday. Instead, markets will turn their attention to speeches from Bank of England officials throughout the week, hoping for any hints on future monetary policy direction. However, the biggest catalysts for sterling will likely come from external factors. Geopolitical developments, alongside key US inflation data, will be the primary drivers of GBP/USD’s movement. The critical question remains whether the pound can hold above the key $1.26 level or if renewed risk aversion and stronger US economic signals will push it lower.
Dollar held steady before the weekend
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 24 -28
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.
