February 14, 2025

“The FX market is juggling a lot of themes at the moment and that is driving some significant intraday swings. Overall, we are looking at a weaker dollar as risk appetite improves, and the focus today is on US retail sales and news on a deal for Ukraine.”

Sam Cornford – Head of Trading

USD

The market has not known whether it is coming or going this week, and FX has been swung back and forth as investors attempt to interpret and price each of a flood of headlines. The net result has been some dollar weakness, with the greenback consolidating around a near two-month low this morning because: a) after initially spooking markets, Trump’s plans on reciprocal tariffs were ultimately unspecific and left room for negotiation; b) despite PPI inflation beating expectations, the components that feed into the Fed-preferred core PCE gauge were soft; and c) optimism about a deal for Ukraine has grown heading into the Munich Security Conference, which begins today. The factsheet presented on reciprocal tariffs yesterday laments the ‘lack of reciprocity’ from its neighbours and argues that it ‘contributes to our large and persistent annual trade deficit’ – some strong words. But the market had assumed that these would come much sooner than the April deadline for the first trade reports, and instead the announcement read as part of the preparation. Today’s retail sales data is likely to get lost in the headlines coming out of Munich, and investors will be fixated on the situation in Ukraine.

GBP

Sterling has gained 2% against the dollar since Tuesday and has touched a year-to-date high this morning. The move has far less to do with any improvement in the UK’s fundamentals than it does with cooling tariff fears, a potential ceasefire in Ukraine, and an outlook for a softer core PCE in the US. It is hard to argue that yesterday’s 0.1% GDP growth was the good news that sterling needed, and GBP/EUR is flat on the week. Expect these external dynamics to remain in control today, ahead of wage growth and CPI inflation figures next week.

EUR

The euro is knocking on the door of 1.05 this morning as markets have priced in some extra relief on trade and the geopolitical backdrop. The delay in the implementation of the first EU-specific tariffs gives policymakers some extra time to figure out a response and – most importantly – to work out a deal. Reuters has suggested this week that EU leaders favour negotiating with Trump to avoid a trade war. The other side of the story is of course Ukraine, and while it makes sense to be relieved about the conflict and energy disruption, there are reasons to be nervous about how the Trump administration is going about it – i.e. cutting Europe out of the negotiations to an extent. Secretary of Defence Hegseth said yesterday that the US is no longer the primary guarantor of security in Europe. It has been in agreement for some time that the EU would need to become more self-sufficient militarily to ensure its security, but big increases in military expenditure are difficult in a time where countries like France are paralysed with huge fiscal deficits already.

Markets

Yesterday’s PPI report was positive for stocks, despite coming in hotter than expected, as the PCE-relevant components were quite a bit softer. The S&P 500 climbed 1%, taking its year-to-date gains to 4%. The DAX surged over 2% and the Euro Stoxx 50 by 1.8%, meanwhile, as optimism about Ukraine increased ahead of this weekend’s Munich security conference.

Main Economic Events (All Times CET)

2:30pm: US Retail Sales
3:15pm: US Industrial Production

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