USD, EUR & GBP in the Spotlight.

• USD struggles as weak data and trade uncertainty weigh, but upcoming tariff deadlines and inflation figures could provide support.
• Geopolitics remain in focus, with potential US-Mexico-Canada trade tensions and Ukraine’s Zelenskyy offering to step down for NATO membership.
• German election results offer stability, helping the euro, but US tariffs and ECB policy could drag EUR/USD lower.
• UK fiscal concerns grow, as a smaller-than-expected budget surplus increases pressure on Chancellor Reeves ahead of the Spring Statement.
• GBP/USD faces downside risks, with no major data this week, leaving BoE speakers as the main drivers.

USD: Juggling Trade Tensions & Economic Data

Last week, the dollar struggled as weak data and expectations of short-lived US tariffs took their toll. While President Trump’s trade measures seem temporary, the broader direction of US protectionism remains crucial. With the deadline for delayed tariffs on Mexico and Canada fast approaching, market focus will shift back to North America. Canada is already feeling the strain of US metal tariffs, but a last-minute Trump deal after hawkish rhetoric would follow a familiar pattern. Until clarity emerges, CAD and MXN could face downside risks.

The dollar has become increasingly sensitive to economic data, with key reports on this week’s agenda. While today’s regional Fed indices will likely be ignored, tomorrow’s Conference Board consumer sentiment report is pivotal. Early 2025 data and corporate earnings suggest a weakening consumer outlook. Later this week, a downward revision in Q4 personal consumption is expected (from 4.2% to 4.1%), alongside personal income, spending figures, and the Fed’s preferred inflation measure (core PCE). A potential rise in core PCE from 0.2% to 0.3% could influence rate expectations.

No clear directional trend is expected for the dollar this week. Softening US data encourages profit-taking on long USD positions, while geopolitical factors—such as Ukrainian President Zelenskyy’s offer to step down for NATO membership—add uncertainty. Meanwhile, the Mexico-Canada tariff deadline and inflation data could offer some support to the greenback.

EUR: Stability in German Politics Lifts Sentiment

Germany’s election results largely matched expectations, with the CDU/CSU securing 29%, the far-right AfD at 21%, and the SPD at 16%. While the CDU/CSU performed slightly worse than predicted, the fact that two smaller parties (BSW and FDP) failed to reach the parliamentary threshold means a CDU/CSU-SPD coalition is viable. Markets have responded positively, seeing a two-party government as more stable after the previous three-party struggles.

While coalition negotiations could bring short-term volatility, US trade policy and geopolitical developments will likely be the main drivers for EUR/USD. German Ifo surveys are out today, while Eurozone flash CPI estimates start arriving later this week.

Despite the upbeat election reaction, we remain cautious on EUR/USD moving above 1.050. US tariffs on the EU remain a threat, and the European Central Bank’s dovish stance suggests a potential drop below 1.04 in the coming weeks.

GBP: BoE Speeches Take Center Stage

The UK posted a £15.4bn public sector surplus in January, falling short of the £20bn forecast. This shortfall increases the likelihood that Chancellor Rachel Reeves will need to scale back spending or raise taxes in her Spring Statement on 26 March. The rising gilt yields have already eroded much of the fiscal headroom anticipated last autumn.

Sterling could struggle as the budget announcement looms, with lower government spending possibly pushing the Bank of England toward additional rate cuts. Although the pound is less directly affected by US tariffs than the euro, broad-based US protectionism could still weigh on GBP. We expect GBP/USD to dip below 1.25 in March.

With no major UK data releases this week, attention turns to Bank of England speakers. Today, doves Swati Dhingra and Dave Ramsden, along with hawkish Clare Lombardelli, will provide insights. Tomorrow, Chief Economist Huw Pill takes the stage.