Dollar on Edge: Tax Cuts, Tariffs, and Market Moves.

  • USD Support: The dollar found stability after the House passed a budget bill, paving the way for tax cuts and raising the debt ceiling.
  • Tariff Tensions Return: Trade disputes will resurface next week, with USD/CAD acting as the key FX market indicator for tariff concerns.
  • Euro Sentiment Lifted: Optimism over a Ukraine mineral deal provides near-term support, but resistance in EUR/USD remains firm at 1.0530-1.0550.
  • Sterling Caution: GBP/USD faces downside risks despite upcoming political goodwill between the UK and US.
  • Fed Watch: Market expectations for rate cuts continue to evolve, with Friday’s core PCE deflator release set to be a key data point.

USD: Holding Ground Before Tariff Turbulence

The dollar, which had been under pressure following weak consumer confidence data, found some support overnight after the House passed a budget blueprint bill. While the bill does not specify changes to spending or revenue, it sets the stage for approximately $4 trillion in tax cuts, offset by a proposed $2 trillion reduction in Medicaid spending. Additionally, it seeks to raise the debt ceiling by $4 trillion, postponing the risk of a government shutdown. In response, US 10-year Treasury yields have edged 5 basis points above recent lows, and USD/JPY has stabilized just below 149.

For now, market attention has shifted back to tax cuts, giving the dollar a temporary reprieve before trade concerns return. The tariff debate is set to intensify next week as the March 4 deadline for levies on Canada and Mexico approaches. Notably, these tariffs relate to border security rather than steel and aluminum imports (expected March 12) or reciprocal measures (likely in April).

USD/CAD has emerged as the FX market’s barometer for trade tensions. This is evident in the options market, where the one-month skew for USD calls and CAD puts remains high at 1.7% volatility in favor of CAD puts, close to the January peak of 2.00%. Investors remain wary that Canada may not be able to negotiate away the tariff risk.

Today’s US data calendar is light, featuring January New Home Sales (potentially affected by bad weather) and a speech from the Fed’s Raphael Bostic. Market sentiment around rate cuts remains fluid, with traders now pricing in Fed Funds dropping to 3.50% by the end of 2026, surpassing expectations of two 25bp cuts this year. Friday’s core PCE deflator release (expected at 0.3% MoM) will be a key driver in shaping rate expectations.

We continue to expect DXY to find support in the 106.00-106.30 range and anticipate a rebound above 108 as trade tensions escalate in the coming weeks.

EUR: Ukraine Deal Lifts Sentiment, but Uncertainty Remains

European currencies remain well-supported, buoyed by optimism surrounding a Ukraine mineral agreement that is being interpreted as a potential step toward a US security guarantee. While details remain scarce, some are drawing comparisons to the Lend-Lease agreements of World War II, where the US provided military aid in exchange for strategic military benefits. A full-fledged security commitment from the US would likely give the euro further support, though recent shifts in US foreign policy make this uncertain.

EUR/USD continues to test the 1.05 level, but we view this as the upper boundary for the quarter. Resistance in the 1.0530-1.0550 range is expected to hold, with renewed focus on trade disputes likely to push EUR/USD back towards 1.04 or lower.

Already today, German consumer confidence data showed a slight decline for March, with additional consumer and business sentiment reports due across Europe in the coming days. A move below 1.0450 would help ease some of the upside pressure on EUR/USD.

GBP: Steady for Now, But Risks Skew Lower

Sterling may begin to underperform in March, though patience is required. This week, UK Prime Minister Starmer is set to meet with former US President Trump in Washington, likely generating positive headlines following the UK’s commitment to increasing defense spending by 2027. The UK is seen as relatively resilient in a trade war, with EUR/GBP risks still leaning lower in the short term.

Despite this, we maintain a bearish view on GBP/USD, doubting its ability to sustain gains in the high 1.26 range.

*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.