Dollar Recovery Might Gain Traction
- Mar 13
- 3 min read
GBP : Bearish outlook with UK budget looming
The possible reset in UK-EU relations and its effects on British finances are the subject of a note published by ING's UK economist. The main conclusion is that, even though reentering the single market or fortifying economic links would spur growth, it is unlikely to result in a sizable amount of fiscal freedom. This is due to the fact that any changes made to the OBR's projections would probably be implemented gradually over a number of years. The UK Budget, which is scheduled for March 26th, is still viewed with caution by most since it has the potential to upset the already shaky gilt market, especially in light of the impact of EU bonds. Sterling may face negative risks in the run-up to this event.
Just hours before the Bank of England makes its rate decision, the UK will first disclose its January GDP data tomorrow, and then its February jobs data on Thursday. Markets are pricing only a 5% likelihood of a cut, so a hold is generally predicted. However, since easing is anticipated in May or June, the BoE will probably need to send some dovish signals to maintain the current Sonia curve pricing. Although short-term swings influenced by US macro events could possibly send the pair momentarily above $1.3000, most people still have a pessimistic view of the GBP/USD exchange rate.
EUR : Heading in the right direction
Following a temporary decline below $1.0900, the Euro's next upward move might depend on Russia formally approving a 30-day ceasefire with Ukraine. However, since a peace agreement is essentially priced in and the parameters of the truce would need to be evaluated for their wider impact on Ukraine and the EU, this might not offer a substantial or long-lasting boost. The January industrial production statistics for the Eurozone released today is not expected to have a significant impact on the market. The remarks made by ECB officials after last week's rate drop are also of importance. Global trade developments, according to ECB President Christine Lagarde yesterday, make it "impossible" for the ECB to consistently guarantee 2% inflation.This begs the question of whether the inflation target has to be reconsidered, even though a more accommodating approach is currently being used in practice. According to the general agreement, the only thing preventing rates from being lowered to or below 2% in Germany is the possibility of a fiscal stimulus.
A formal multi-party agreement on Germany's defense and infrastructure expenditure is another item that markets are keeping an eye on. The Green party has hinted that an agreement with Friedrich Merz, the next chancellor, would be finalized by the end of the week. Although much of it is already priced in, this could somewhat boost the Euro once confirmed.
USD : Risk sentiment remains gloomy
Yesterday's lower-than-expected core CPI data (0.2% MoM) caused the bond market to react in an unexpected way, with Treasuries declining across the curve and the Fed's terminal rate price pushing higher. This would indicate a reluctance to completely embrace the disinflation story until the effects of tariffs are evident.
The dollar is still down compared to most of its G10 counterparts since the beginning of the week, despite following UST yields upward. Since US stocks have been trading more in line with sentiment about domestic activity, the usual negative correlation between the USD and equity markets has diminished in recent weeks.The main query is whether future stock market drops would only affect US equities or will they also affect European stocks. The latter is what futures indicate today, so there might not be much idiosyncratic pressure on the dollar.
Today's major US data release is the PPI report for February. Markets will be keenly monitoring the Fed's favored core PCE metric, which is derived from many core PPI components. But it's uncertain if a softer print today would lead to a dollar decline given yesterday's surprising response to CPI data. Although expectations may have slightly decreased following the announcement of the CPI, consensus predicts a 0.3% MoM core PPI increase.
Sen. Democrats indicated they would block the package intended to prevent a government shutdown in the United States, which seems to be weighing down sentiment this morning. Stock futures would respond negatively because the suggested alternative, a short-term funding plan until April 11th, would only postpone a significant market risk. Given the current high correlation between the US economic outlook and the USD, this risk could become a negative factor for the USD, even though it hasn't had a noticeable effect on FX markets yet, which are still adjusting following recent turbulence. There may be a stabilisation period. The majority, however, still see upside risks for the dollar in the upcoming weeks.
