Another week, another rollercoaster for the markets, driven yet again by Trump’s unpredictable trade policies and the continued fallout from geopolitical uncertainty. If you were hoping for some stability—think again.
The U.S. administration has been throwing tariffs around like confetti, with Canada and the EU the latest targets. At one point, the U.S. threatened to double tariffs on Canadian steel and aluminum to 50%, only to backtrack just hours later. Then, in a retaliatory move against EU threats to tax American whiskey, Trump slapped a massive 200% tariff on European alcohol imports.
This kind of policy inconsistency makes it nearly impossible for businesses to plan ahead, let alone for investors to price risk effectively. It’s already having an impact—consumer confidence in the U.S. has dropped sharply, with the latest University of Michigan sentiment reading falling to 57.9—the lowest since late 2022. The real question is: will this translate into lower consumer spending? If so, the ripple effects on the economy could be significant.
Short-Term Pain or Just More Chaos?
The White House appears to be betting on a strategy of short-term pain for long-term gain, with Commerce Secretary Lutnick hinting that the administration expects to “own the economy” by Q4. If that’s the case, we may see a bumpy road ahead, with a slowdown in growth before any potential recovery.
The big problem? It’s a lot easier to create an economic downturn than it is to fix one. If tariffs push inflation higher and trade relationships deteriorate, the administration could find itself in a much weaker position than anticipated.
Inflation Eases—But For How Long?
One silver lining last week was that inflation in the U.S. cooled slightly more than expected. Headline CPI came in at 2.8% YoY, with core inflation at 3.1%—the slowest pace since early 2021.
While this is good news for the Fed, it doesn’t drastically change the outlook. The biggest wildcard remains tariffs, which could reignite inflationary pressures, making it harder for the Fed to justify cutting rates anytime soon. The April 2nd round of tariffs could be a game-changer, so markets will be watching closely.
A Difficult Balancing Act for Central Banks
Beyond the U.S., other central banks are already adjusting to the economic uncertainty. The Bank of Canada (BoC) cut rates by 25bps to 2.75% last week, as expected.
The BoC is in a tough spot, trying to shield the economy from trade war risks while also managing domestic challenges. Political uncertainty in Canada is adding another layer of complexity, and with elections potentially coming sooner rather than later, further rate cuts could be on the table.
Meanwhile, the UK is still struggling to gain traction. January GDP unexpectedly contracted by 0.1%, reinforcing concerns that the economy is barely keeping its head above water. The weak data doesn’t come as a huge surprise—high taxes from last autumn’s budget are biting, and inflation remains a challenge. Yet, Chancellor Reeves appears keen to shift the blame onto Trump’s trade policies—a convenient distraction, but not the real issue.
Across Europe, there was some rare political progress, as Germany finally agreed on a €500 billion defense fund after weeks of negotiations. This marks a step towards fiscal stability, though it’s ironic to hear incoming Chancellor Merz championing “fiscal discipline” while adding 11% of GDP to Germany’s debt pile.
Market Reaction – Risk-Off Mode Continues
The uncertainty surrounding U.S. policy, slowing global growth, and fragile investor sentiment made last week a rough one for risk assets.
Wall Street took another hit, with the S&P 500 officially entering correction territory, down more than 10% from its February highs. The index also slipped below its 200-day moving average—historically a bearish signal. Right now, it’s hard to justify buying the dip, with economic risks still mounting.
Meanwhile, safe havens are thriving. U.S. Treasury demand remains strong, with 2-year yields rising above 4% again, while 10-year yields at 4.30% look like a solid long-term play.
But the big winner is gold, which hit $3,000 per ounce for the first time ever on Friday. Though some profit-taking followed, the overall trend remains bullish, with geopolitical uncertainty driving central banks and investors into gold as a hedge.
Interestingly, gold’s traditional correlation with real yields has broken down since the Ukraine war began. The reason? Emerging market central banks are shifting reserves away from the U.S. Dollar—a trend unlikely to reverse anytime soon.
Dollar on the Defensive
Despite all of this uncertainty, the Dollar continued to weaken last week.
The DXY index fell back below 104, reinforcing the view that any USD rallies are selling opportunities. EUR/USD hit fresh YTD highs at 1.0947, while GBP/USD remains close to 1.29. A break of 1.10 for the Euro and 1.30 for Sterling seems like a matter of time, though GBP’s fragile economic backdrop could limit its upside.
A Data-Packed Week Ahead
This week is one of the busiest of the year, with five major G10 central bank decisions packed into a 36-hour window from Wednesday to Thursday.
- Bank of Japan (BoJ): Expected to hold rates at 0.50%, but may signal another hike as soon as May.
- Federal Reserve (FOMC): No rate change expected, but Powell will likely reinforce a cautious stance on rate cuts.
- Swiss National Bank (SNB): Expected to cut rates by 25bps to 0.25%, likely marking the last cut of this cycle.
- Riksbank (Sweden): Holding rates at 2.25%, as inflation remains sticky.
- Bank of England (BoE): Expected to hold at 4.50%, with an 8-1 vote, as Dhingra pushes for a 25bps cut. The BoE remains on track for more easing later this year.
Beyond central banks, key data releases include:
- U.S. Retail Sales (Monday): A weak number would intensify recession concerns.
- UK & Australia Jobs Reports: The UK labor market data remains unreliable due to ONS collection issues.
- Corporate Earnings: Micron (semiconductors) and FedEx (shipping) will offer insights into global trade conditions.
Final Thoughts
With so many moving parts, this week is set to be a volatile one for currency markets.
💵 USD traders: Watch for retail sales data and FOMC guidance, but expect short-term Dollar weakness to persist.
💶 EUR traders: Focus on German fiscal policy and ECB expectations, as the Euro remains well-supported.
💷 GBP traders: BoE rate guidance and UK economic data will drive Sterling’s next move.
With political risk and economic uncertainty at play, timing FX transactions wisely is crucial. If you need insights on navigating this market, reach out for guidance.