USD Holds, EUR Faces Tariff Risks, GBP Under Pressure.

  • USD Holding Pattern: DXY remains above 104.00, supported by market stability and expectations of selective tariffs. Stagflation risks could boost the dollar further.

  • EUR Tariff Risks Underpriced: Markets may not fully account for the euro’s exposure to US trade policies, with a EUR/USD drop to 1.05 expected by Q2.

  • GBP Under Pressure: Fiscal tightening and monetary easing create a bearish outlook for sterling, with GBP/USD at risk of falling to 1.2800.

  • Bond Market Sensitivity: UK gilt issuance forecasts between £302-320bn could impact sterling, with higher issuance likely triggering a sell-off.

  • Czech Koruna Holding Strong: Despite expectations of a final rate cut in May, the koruna remains resilient in European FX markets.

USD: Steady Amid Uncertainty
The DXY dollar index is finding support just below 104.00, bolstered by some stability in US asset markets. The S&P 500 has recovered roughly 40% of this year’s losses, partly due to speculation that Washington’s upcoming tariffs on April 2 might be more selective or lenient. While the situation remains fluid, policymakers are likely watching declining US consumer confidence closely, as it could signal broader economic concerns if consumers opt to save rather than spend.

Next week’s tariff decision should also be viewed in the broader context of potential shifts in global trade policy. A key expectation is that initial tariff-driven dollar strength would provide a cushion for US consumers. If tariffs aggressively target the EU and China—both major trade surplus holders with the US—the greenback could see further gains.

For now, the dollar is likely to trade within a tight range, with support from Federal Reserve officials signaling no urgency for rate cuts. In a scenario where the US economy faces stagflation, the dollar could strengthen further against risk-sensitive currencies. Expect DXY to hover between 104.00 and 104.50, with potential upside if a weaker pound drags down European currencies.

EUR: Tariff Threats Not Fully Priced In
After a turbulent start to the month, EUR/USD is stabilizing, with one-month volatility easing from 9% to 7% and one-week volatility falling below 8% from over 11%. Improved sentiment in US asset markets and recalibrated expectations for fiscal stimulus in the eurozone have contributed to this calm. Notably, despite recent market swings, expectations for the European Central Bank’s terminal rate remain steady in the 1.75-2.00% range.

However, markets may be underestimating the euro’s vulnerability to next week’s tariff announcement. The EU, particularly Germany, maintains a significant trade surplus with the US and is likely to be a primary target of Washington’s trade reset, alongside China. We forecast EUR/USD at 1.05 by the end of Q2 due to these risks.

EUR/USD finds support at 1.0765/70 but could slip to 1.0730 if the pound weakens following today’s UK Spring Statement. Meanwhile, in Eastern Europe, the Czech National Bank is expected to keep rates at 3.75% today before potentially delivering a final cut in May. The Czech koruna has been resilient and is likely to maintain its recent strength.

GBP: Fiscal Tightening and Monetary Easing Weigh on Sterling
UK Chancellor Rachel Reeves is set to deliver her Spring Statement at 13CET, with the focus on expected spending cuts aimed at meeting the country’s fiscal rules. Reports suggest around £15bn in cuts across welfare and other departments. Additionally, the Office for Budget Responsibility (OBR) is expected to revise growth forecasts downward.

The key risk for the Chancellor lies in the bond market’s reaction. If spending cuts are too backloaded or if the government pushes the limits with its gilt issuance plans, sterling could face renewed pressure. Earlier this year, a similar scenario led to a sharp sell-off in gilts and the pound. Current market expectations peg gilt supply for FY25/26 at around £302-304bn, though some estimates stretch as high as £320bn. If the latter materializes—likely confirmed around 13:30CET—sterling could take a hit.

At the same time, markets may be underestimating the Bank of England’s easing trajectory. While pricing suggests just 40bp of cuts this year, we see scope for three 25bp reductions. The combination of tighter fiscal policy and looser monetary policy is a bearish signal for GBP. GBP/USD looks vulnerable to 1.2860 and potentially 1.2800 today.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.