Fed, ECB, and UK Policy in Focus.

• USD Outlook: The Fed’s hawkish message quickly faded after Powell’s press conference, leaving markets pricing in two 25bp cuts in 2024, with US economic data and trade tariffs now in focus.
• Tariff Risks: The Bank of Canada suggests tariffs could be a significant market mover, with 6% of USD/CAD’s recent rally attributed to risk premium pricing.
• ECB Meeting: The ECB is set to cut rates by 25bp today, but Lagarde’s tone will determine whether EUR/USD moves toward the 1.0345/55 range amid downside risks.
• UK Fiscal Policy: The UK government is pushing for pro-growth policies ahead of the OBR review, but fiscal tightening in March remains a risk for sterling.
• BoE & Gilt Market: The BoE’s new liquidity tool aims to stabilize gilts, but sterling could remain vulnerable with a potential 100bp rate-cut cycle this year.

USD: Fed’s Hawkish Tone Fizzles Out
As covered in yesterday’s FOMC review, the dollar initially saw modest gains following what appeared to be a hawkish FOMC statement. However, remarks from Chair Jay Powell during the press conference quickly softened the market’s interpretation, causing both USD rates and the dollar to retreat. Traders are now pricing in two 25bp rate cuts in 2024—one in June and another in December—while keeping an eye on upcoming US economic data and potential trade tariff developments for further direction.

Market participants with a dovish stance on the Fed will be looking for softer core PCE inflation data tomorrow, possibly as low as 0.1% MoM, as well as significant downward revisions to US payrolls next month, which could reshape perceptions of labor market strength.

Meanwhile, the Bank of Canada’s latest Monetary Policy Report highlighted tariffs as a potential game-changer. The central bank estimated that 6% of the 7% rise in USD/CAD since October is attributed to a risk premium, with markets awaiting tariff-related updates—either this weekend or in April—following a review by the Commerce Department and US Treasury.

Elsewhere, Nvidia has struggled to recover from Monday’s sharp sell-off following DeepSeek’s developments. The consensus seems to be that while DeepSeek’s progress could enhance productivity, it may negatively impact AI-driven tech and energy firms that have concentrated AI-related profits. In early European trading, S&P 500 futures are showing modest gains after a mixed earnings session from Microsoft, Tesla, and Meta.

For today, focus will be on a solid US Q4 GDP release, likely driven by strong consumer spending. A robust print could reinforce the US exceptionalism narrative and push the DXY index toward the 108.20–108.50 range, depending on ECB developments.

EUR: ECB’s Dovish Tilt Could Weigh on EUR/USD
It’s a packed day for European markets, with GDP releases and the ECB meeting taking center stage. France has already reported a weaker-than-expected Q4 GDP contraction of -0.1% QoQ, primarily due to weak consumption and business investment—both sensitive to trade tariff concerns, as highlighted by the IMF. German and Italian GDP figures are due at 10CET, followed by the eurozone’s overall release at 11CET, where expectations stand at 0.1% QoQ, though downside risks remain.

The ECB rate decision at 1415CET is widely expected to deliver a 25bp deposit rate cut to 2.75%, but attention will be on President Christine Lagarde’s press conference. Market sentiment could shift based on whether policymakers suggest rates could move below the neutral level, estimated at around 2.25%. The ECB’s easing cycle was priced near 1.50% in early December but now stands at 2.06%. Our eurozone team forecasts further cuts to 1.75% in Q2, implying potential downside for short-dated EUR rates and the euro.

EUR/USD movements will hinge on developments in Europe today, with risks skewed toward a decline to the 1.0345/55 zone if Lagarde strikes a particularly dovish tone.

GBP: UK Fiscal and Gilt Markets in the Spotlight
The UK fiscal landscape remains a key driver for asset markets. Chancellor Rachel Reeves aims to shift the narrative from tax hikes to economic growth, as reflected in major policy announcements in Oxford. These measures could also be an attempt to influence the Office of Budget Responsibility (OBR) as it assesses the government’s fiscal outlook ahead of its March review. The OBR still holds relatively strong UK growth forecasts through 2030, and the government is keen to prevent downward revisions that could worsen the fiscal picture. Some fiscal tightening—likely in the form of future spending cuts—is expected in March.

These efforts also seek to stabilize the UK gilt market. The Bank of England’s new Contingent Negative Rate Facility (CNRF), announced Tuesday, aims to provide emergency liquidity to Non-Bank Financial Institutions (NBFIs) in the event of market distress. While welcomed by the industry, the CNRF appears less generous than the Fed’s Bank Term Funding Program, which offered one-year loans against eligible collateral without haircuts. The BoE’s tool, in contrast, activates only in a crisis and lends funds for a shorter duration of one to two weeks.

While these measures have supported sterling’s trade-weighted index, helping it recover about 1% from earlier lows, risks remain. Fiscal consolidation in March and an expected drop in services inflation in Q2 could drive a 100bp BoE rate-cutting cycle this year—greater than the 68bp currently priced in by markets. We maintain our year-end GBP/USD and EUR/GBP forecasts at 1.19/20 and 0.85, respectively.