February 12, 2025

“Some dollar weakness yesterday might suggest that markets are becoming more confident in big trade wars being avoided, but investors are anticipating some supportive macro data this afternoon with a sticky 2.9% CPI inflation print.”

Sam Cornford – Head of Trading

USD

The dollar took a breather yesterday and the likes of GBP, EUR, and SEK all gained over 0.5% without any obvious catalyst. The market has been adjusting its bets on monetary policy easing over the past day or so, with expectations pared back more in Europe than in the US, but the greenback suffered more than would be implied by the squeeze in its rate advantage. That underperformance suggests that the softening in the dollar has been at least partly driven by a contraction in the tariff risk that is priced in by markets. The trade story lingers in the background and could feasibly blow up at any time, but for now, the dollar Trump trade has started to look exhausted as he has validated the idea that tariffs are primarily a negotiation tool.

Powell’s testimony in Washington yesterday came with few surprises and he reiterated that he would not rush to cut rates further and that the economy is in a good place. He faces the House for some more questions on day two today. The main event, however, is the CPI inflation report for January. Both the core and the headline measures are expected at 0.3% month-on-month (nearly 4% annualised) – a figure that is too high for the Fed to continue cutting in the long run. A downside surprise could give traders the confidence to take the dollar lower again today.

GBP

Sterling made some solid gains after a slow start yesterday. It is now nearly 1% higher than the low notched after the BoE’s Catherine Mann argued that weakening employment would soften inflation this year. The blow was softened by her explanation that she did not want to ‘cut, cut, cut’, but rather send a message that rates were heading lower. The BoE’s Greene speaks this afternoon, and the data calendar picks up tomorrow morning with a GDP report for Q4, when the consensus reckons the UK economy took one step towards a recession with a 0.1% contraction – not an ideal headline for a government whose stated mission is economic growth.

EUR

Weakness in the broad dollar and some improved risk appetite appeared to be behind the euro’s 0.5% strengthening yesterday. While there was little good news on the trade side, with the EU firmly threatening retaliation to Trump’s metal tariffs, the euro has shed some of its sensitivity to these headlines and arguably the situation was entirely unsurprising. Interestingly, when Biden entered the White House, the EU only agreed to freeze its retaliatory tariffs from the last Trump administration to March 2025 – it could simply opt to let that freeze expire. Potentially a bit of strength can be attributed to optimism about a resolution to the conflict in Ukraine, after Moscow returned a US prisoner yesterday in a ‘show of good faith’.

Markets

US equities were flat yesterday amid mixed earnings. Coca-Cola rose nearly 5% on a strong revenue beat, while Tesla sank 6% after it emerged that a Musk-led consortium offered $97bn for OpenAI. Gold prices hit a fresh record high above $2,900 yesterday as the broader metal complex rallied.

Main Economic Events (All Times CET)

2:30pm: US CPI Inflation
4:00pm: Fed Chair Powell testifies to the House

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