February 13, 2025

“The market had expected US inflation to be the main event yesterday, and at the time the dollar was rallying at a good pace, but news of negotiations towards a peace deal in Ukraine led the pound and the euro much higher. A growth beat this morning has helped in the UK, too, although the picture remains quite bleak for Starmer’s government.”

Tim Hallinan – Trading Director

USD

The dollar was well on its way to ending sharply higher yesterday, after an upside inflation surprise at 3.0% pared back pricing for Fed rate cuts to just the one this year – until a Trump-Putin call boosted hopes for a ceasefire in Ukraine and rallied European FX. The two leaders agreed to have negotiations start immediately, and Zelenskyy is eyeing this weekend’s Munich Security Conference for a deal to be reached. The key benefit for the European economy from a Ukraine ceasefire is related to energy. Remember that the energy crisis in 2022 played a huge role in amplifying the inflationary shocks that are lingering to this day, and the hit to Europe’s terms of trade took EUR/USD below parity in the November. In other news, the White House is still debating how to introduce reciprocal tariffs, and the announcement yesterday that they were considering exemptions in sectors like autos and pharmaceuticals likely helped risk conditions too. The focus today is on unemployment claims and PPI inflation.

GBP

It would be strange to call the UK’s stagnant 0.1% growth in Q4 good news, particularly while the OBR’s initial forecasts are wiping out Reeves’ headroom for March, but it was better than the -0.1% contraction expected, and that lifted sterling above the 1.25 mark for a time this morning. A last-minute surge to 0.4% in December managed to drag the quarterly figure into positive territory – just – and tame the near-term recession risks. But the details have dulled the impact for the pound, which is handing back some gains given that private consumption flatlined and business investment slumped. Nevertheless, the market has trimmed its pricing for BoE cuts slightly – something that BoE Chief Economist Pill supported in a Reuters interview where he called for the Bank to move cautiously this year.

EUR

The prospect of an end to the geopolitical conflict in Ukraine this year is a clear positive for the euro, and it can rally further if a deal is ultimately signed. EUR/USD was sharply lower following the US inflation report, before the combination of some softer tariffs news and promises of a Russia-Ukraine deal dragged European FX higher. The end of the war would go a long way in resolving some of the eurozone economy’s major issues, including weak confidence and high energy prices. Geopolitical risk is likely to be the main driver for the euro over the coming days. Elsewhere in Europe, a Swiss CPI print for January fell to 0.4% year-on-year, driven by falling energy costs but confirming the need for the SNB to ease policy further as inflation hovers in the lower portion of the 0-2% target range.

Markets

US stocks struggled yesterday as an upside inflation surprise led to a paring back of rate cut expectations from the Fed this year, but a relief rally has taken hold for global equities this morning after a Trump-Putin call raised hopes of a resolution in Ukraine. Japan’s Nikkei 225 surged 1.3% in the Asian session, and futures are pointing towards a near 1% rise in the likes of the Stoxx 50, the CAC 40, and the DAX at the open this morning.

Main Economic Events (All Times CET)

8:00am: UK Q4 GDP
8:30am: Swiss CPI Inflation
2:30pm: US PPI Inflation & Unemployment Claims

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