February 18, 2025

“Strong UK wage growth and a cautious first move from the Reserve Bank of Australia have boosted GBP and AUD today, but it is the dollar outperforming this week as its correction stalls. There is a lot for markets to digest today, both on the data side and within geopolitics as US and Russian officials begin talks in Saudi Arabia.”

Sam Cornford – Head of Trading

USD

The dollar has consolidated this week and is drifting slightly higher this morning ahead of US-Russia talks in Saudi Arabia. Little of note came out of talks between European leaders in Paris yesterday beyond the suggestion for some joint EU defence spending, so it is all eyes on the discussions in the Middle East. Much has already been priced in, but there is some extra space for the dollar to weaken on falling geopolitical risk, though we are unlikely to see any major progress from these initial talks. It is yet unclear when Trump and Putin will meet themselves, and there is a risk that negotiations fall through at the early stages. That would be a clear dollar positive.  Also on the US calendar is a joint interview with Trump and Elon Musk that airs on Fox News tonight, and in Canada the focus will be on a January CPI inflation print. The Aussie dollar is outperforming most of the G10 this morning, after the RBA delivered its first rate cut of the cycle with a cautious tone, once again scolding markets for pricing in so much easing this year.

GBP

The pound has trimmed its earlier losses this morning after a stronger-than-expected reacceleration in wage growth last quarter. Job losses were minimal and UK wages grew 6.0% in the three months to December, beating the 5.9% consensus estimate and reminding the Bank of England that the job is not yet done on squeezing out remaining inflationary pressures within the labour market. 6% gains in earnings during a period of negative productivity growth is self-evidently inflationary and incompatible with 2% inflation in the long run. That said, this is broadly what the BoE had projected a few weeks ago, and if the suggestion from Catherine Mann is true that we may be approaching a ‘non-linear’ downward adjustment in employment ahead of the employers’ NI and minimum wage rises, we can expect a rather brisk cooling throughout this year. Tomorrow’s CPI data is expected to rise from 2.5% to 2.8% and services inflation – the BoE’s main gauge of underlying price pressures – is set to jump from 4.4% to 5.1%. Volatility within components like airfares and hotels tends to drive some significant variation in services prices, and that led to an overly large drop in December, but that would be a strong print nevertheless.

EUR

The euro has edged lower in the early part of the week as markets await a catalyst, either on the macro side or on geopolitics. The ZEW survey is the main piece of data out today and German investors are expected to have become more optimistic on the future for Europe’s largest economy. Until Friday’s PMIs, however, it is the Ukraine story that should drive the euro’s fate. Markets will want to see whether their optimism on a ceasefire is still justified once the US and Russia have dug into talks today. The fact that neither Ukraine nor the EU are at the table in Riyadh might prevent traders from pushing the euro too high for now, with concern rising that Trump might take a damaging or unsustainable deal that leaves European capitals out in the cold.

Markets

The prospect of higher military spending from Europe meant that a rally in defence stocks fuelled a surge in European equities to a record high yesterday, and another peak is expected at the open this morning. Germany’s DAX is now up 15% this year.

Main Economic Events (All Times CET)

4:30am: Reserve Bank of Australia Policy Decision
8:00am: UK Wage Growth
11:00am: ZEW Economic Survey
2:30pm: Canada CPI

To learn more about Ballinger Group, please visit our website or our LinkedIn page.