Dollar Holds, Euro Stalls, Sterling Faces Risks.

• USD: Despite softer CPI, Treasury yields rose, keeping the dollar supported; looming US government shutdown adds downside risk.
• Equities & USD: The usual inverse relationship is fading, with both US stocks and the dollar moving based on economic sentiment.
• EUR: Gains hinge on geopolitical developments, but a Russia-Ukraine truce is largely priced in; ECB’s inflation stance is shifting.
• GBP: Sterling faces downside risks ahead of the March 26 Budget, with upcoming UK data releases influencing short-term moves.
• Market Outlook: USD may stabilize for now, EUR likely to drift lower, and GBP remains vulnerable to domestic fiscal concerns.

USD: Risk Sentiment on Edge

Despite softer-than-expected core CPI data (0.2% MoM), the bond market reacted counterintuitively, with Fed terminal rate pricing creeping higher and Treasuries selling off. This suggests skepticism toward the disinflation narrative, particularly ahead of potential tariff impacts.

The dollar tracked Treasury yields higher but remains down against most G10 peers this week. The usual inverse correlation between the USD and equities has weakened, as US stocks now reflect broader economic sentiment rather than just dollar moves. With European equities also sliding, the dollar may avoid isolated pressure.

All eyes are on today’s PPI release, which feeds into the Fed’s preferred inflation gauge, core PCE. Given the market’s unexpected reaction to CPI, it’s unclear whether a softer PPI print would trigger a USD correction.

Adding to risk-off sentiment is the looming threat of a US government shutdown. Senate Democrats plan to block a stopgap bill, proposing instead an interim funding plan until April 11—merely delaying uncertainty rather than resolving it. While the FX market remains in flux, this political risk could weigh on the dollar in the longer term.

For now, no strong directional call on the USD. Stabilization is likely, but upside risks remain in the coming weeks.

EUR: Limited Upside for Now

The euro slipped below 1.090, and further gains may hinge on Russia formally agreeing to a 30-day truce with Ukraine. However, since a peace deal is already priced in, any rally might be short-lived, with broader geopolitical and economic implications taking precedence.

On the macro front, eurozone industrial production data for January is unlikely to move markets, though ECB commentary remains of interest. ECB President Christine Lagarde noted that global trade dynamics make it “impossible” to ensure 2% inflation consistently—possibly signaling a more flexible approach to inflation targets.

Markets are also watching Germany, where a multi-party agreement on defense and infrastructure spending is expected soon. If confirmed, it could provide a small euro boost, though much of the impact is already factored in.

For March, we still see EUR/USD more likely drifting toward 1.080 than rallying to 1.10.

GBP: Pre-Budget Jitters

A recent UK economic report suggests that even if UK-EU ties improve, it won’t immediately unlock fiscal flexibility, as any adjustments by the OBR would be spread over years.

Sterling faces downside risks ahead of the UK Budget on March 26, which could unsettle an already fragile gilt market influenced by EU bond movements. Before that, key data releases include January’s GDP figures tomorrow and February’s jobs report next Thursday, just before the Bank of England’s rate decision. A rate hold is widely expected (with only a 5% chance of a cut), but dovish signals will be necessary to maintain market expectations for a move in May or June.

Despite near-term USD-related volatility, we maintain a bearish stance on GBP/USD, with any upside likely to be short-lived.