USD Under Pressure: Trade Wars, Fed Cuts & Fragile Fortunes.
USD under pressure from trade war fallout, slowing growth, and a 4% current account deficit; Fed expected to cut rates by 110bps in 2025.
Market stress rising, with widening credit spreads and concerns over hidden financial risks—watch the cross-currency basis swap for signs of USD funding strain.
EUR holds up as a defensive, surplus-backed currency but remains capped by trade war exposure; ECB easing path seems nearly priced in.
GBP vulnerable, hit by weak services data and tariff anxiety; risk-sensitive and trading in a reactive, choppy pattern.
Defensive FX favored—JPY and CHF likely to outperform, while EM and commodity currencies bear the brunt of global economic uncertainty.
USD: Too Much Baggage
Weekend headlines and media interviews confirm that President Trump remains committed to reshaping the global trade system—no matter the fallout. Asian equities have tumbled 6–10%, and the resulting global trade tensions are dragging down interest rates worldwide. The Federal Reserve is now firmly in the spotlight, with markets pricing in 110bps of rate cuts this year and a 3.00% terminal rate by next year. Fed Chair Powell kept his cards close to his chest on Friday, though he acknowledged that tariffs could prove “significantly larger than expected.”
Despite Powell’s warning about persistent inflation, markets are focused on deteriorating growth and falling long-term inflation expectations (as shown in the USD 5Y5Y inflation swap). Global growth forecasts are being revised lower across the board, contributing to a fragile outlook.
In the FX world, the sharp equity sell-off is fuelling a flight to safety. Liquidity matters, but so does the current account balance—and with the US running a 4% deficit, the dollar is exposed. While there’s no clear “sell America” shift yet, signs of strain are creeping in: US 5-year CDS widened by 5bp last week, and all eyes are on this week’s $119bn in Treasury auctions. Weak demand there could hurt the dollar.
Markets are also watching for signs that political chaos might spill into financial stress. US high-yield credit spreads are widening, and concerns are rising about hidden risks. Keep an eye on the EUR/USD 3-month cross-currency basis swap—if it widens sharply in favour of the dollar, it could signal dollar funding stress and prompt Fed action.
Expect defensive currencies like the JPY and CHF to outperform, while EM and commodity currencies get hit hardest. The dollar may sit somewhere in between, but it remains vulnerable.
This week, key US data includes February’s CPI and PPI (Thursday and Friday), NFIB business optimism (Tuesday), and the FOMC minutes (Wednesday). Higher inflation numbers may perversely hurt the dollar if they signal weaker real consumption. The DXY, with its heavy euro weighting, remains soft and could dip to 100 if the Fed turns more dovish or global sentiment sours on the US. One wild card: dollar funding stress.
EUR: Caught in the Middle
After briefly hitting 1.1140, EUR/USD has eased, though it remains in demand. The euro benefits from its role as a liquid alternative to the dollar and from the eurozone’s 3% current account surplus. On the downside, Europe’s trade-heavy economy is vulnerable in a global slowdown. Trade leaders meet in Luxembourg today, and Europe’s response to US tariffs will likely be more measured than China’s aggressive 34% move last Friday.
Meanwhile, China fixed the USD/CNY a bit higher overnight—if that fixing goes beyond 7.20 this week, it could spook markets into thinking Beijing is preparing to devalue the yuan (likely an overreaction).
Back in Europe, the ECB’s rate-cut expectations have bottomed near 1.50%. With EUR/USD 2-year swap differentials narrowing to October levels, support around 1.09 should hold. Resistance near 1.11/1.12 remains strong, and any breakout would likely require bad US news.
GBP: Fragile Stability
The Pound-to-Canadian Dollar (GBP/CAD) rate lost momentum late last week as markets digested Trump’s ‘Liberation Day’ trade announcement. The Pound started the week flat, with little UK data to drive direction.
By Tuesday, markets were waiting to see if the UK would be exempt from new US tariffs—but once it became clear it wouldn’t, GBP weakened. Sterling wobbled further on Wednesday ahead of Trump’s announcement, which eventually confirmed only a 10% tariff on UK goods. That helped stabilise the Pound briefly.
However, Thursday’s release of weak UK services PMI figures—below expectations—rekindled fears of a Q1 economic slowdown and dragged the Pound lower. On Friday, GBP had a mixed performance: gaining against riskier currencies in a downbeat global mood but falling against safe-haven pairs like JPY and CHF. Risk sensitivity is clearly on the rise.