USD Faces Correction as Geopolitics Take Center Stage.

• USD Faces Correction Risks – Despite a high US inflation print, the dollar weakened after reports of a Trump-Putin call discussing peace in Ukraine, improving global confidence.
• Energy and China Boost Risk Sentiment – Falling crude and gas prices, coupled with optimism around Chinese tech stocks and policy support, weigh on USD strength.
• Tariffs Remain a Key Risk – Markets await Trump’s next tariff orders, which could impact FX markets depending on which countries are targeted.
• EUR Gains Despite Rate Spreads – EUR/USD rebounded on peace optimism and tariff negotiations but faces headwinds from strong US rates.
• UK GDP Data Deceptive – An inventory-driven boost masks weak economic fundamentals, pressuring the Treasury and weighing on GBP sentiment.

USD: Correction Risks Unless Tariffs Are Imposed

On a typical day, a higher-than-expected US inflation report would strengthen the dollar and pressure risk assets. However, yesterday’s FX market reaction was short-lived. News of a 90-minute Trump-Putin call discussing an end to the Ukraine conflict shifted market sentiment, overriding concerns about US isolationism and European security. US Defense Secretary Pete Hesgeth clarified that American troops wouldn’t be involved in any Ukraine peacekeeping force, and NATO’s Article 5 wouldn’t apply.

Instead, markets focused on improved regional confidence and easing global energy disruptions. This led to a drop in crude oil and European natural gas prices—positive for global growth but mildly negative for the dollar. Meanwhile, optimism is brewing in Chinese markets, where tech stocks are rebounding, and expectations are rising for policy support in early March. Consequently, USD/CNY slipped below 7.30.

While these factors support global growth, the lingering risk of tariffs tempers optimism. Trump is set to sign new executive orders today, with markets watching whether they target India, Brazil, and Korea and if they include backdated clauses for negotiation. Separately, traders will monitor US initial jobless claims and PPI data, as any upside surprise could support the dollar. For now, DXY seems poised to move toward 107.00/30, with downside risk to 106.35.

EUR: A Glimmer of Hope Amid Tariff Fears

Despite rising US short-term rates, EUR/USD gained momentum following the Trump-Putin headlines. The euro was already rallying on reports that European officials are negotiating with the US to avoid tariffs. A peace breakthrough in Ukraine could lower energy costs and spur investment, potentially leading to a “new Marshall Plan.”

However, the threat of tariffs looms large, dampening confidence. While speculators are reducing euro short positions, wide US rate spreads continue to favor the dollar. As a result, EUR/USD’s rebound is expected to be slow, with resistance around 1.0500/0530 and an outside risk of 1.0575. Meanwhile, EUR/CHF could extend its gains, which would be welcomed by the Swiss National Bank as it faces pressure from local exporters and expects Swiss inflation to drop to 0.2% YoY in Q2.

GBP: GDP Numbers Mask Underlying Weakness

UK GDP figures appeared better than expected, but economist James Smith warns the data is misleading. The fourth-quarter outperformance was driven by a volatile inventory surge rather than strong fundamentals. Consumption remained flat, business investment declined despite earlier gains, and net trade was weak.

This lackluster economic picture increases pressure on the Treasury to find savings, especially as the OBR is likely to revise down its optimistic 2% growth forecast for 2025. While EUR/GBP dipped 20 pips on the data, a reassessment could see sterling surrendering gains. Heading into Q2, the outlook for GBP remains weak, with EUR/GBP expected to find support around 0.8300/8350.