Morning Report
February 19, 2025
“Trump hit the wires with some further tariff threats overnight, which the markets brushed off this time. The focus instead has been on US-Russia relations and the prospect of peace in Ukraine – European currencies are still benefitting from the talks, but this has been negated by the EU and Ukraine’s exclusion so far.”
Tim Hallinan – Trading Director
USD
The dollar is a touch higher this week, but markets are largely in a holding pattern as they wait for some concrete news on Ukraine, or the next macro signal. While word is that Russia held firm on its demands and offered no concessions yet, the Trump administration agreed to further talks after an initial discussion in Riyadh yesterday. That was not enough for the market to price any further optimism into European FX, and instead a growing concern is of Europe being squeezed out of the international security order. Back on the trade story, Trump promised tariffs of ‘25% or higher’ on autos, semiconductors, and pharmaceuticals come 2nd April. But the effect on the dollar this time was marginal, with the market showing some clear signs of desensitisation, as each threat is for some time in the future and most think that negotiation and concessions can avert the worst impacts. That could yet prove to be a mistake, in which case the dollar would have a prime opportunity to trace back to its peaks in Q2.
The focus today is on the meeting minutes from the Fed’s January rate decision. Chair Powell has been clear on several occasions since that meeting that the economy is in a good place and that the Fed is on hold for a considerable period. Expect that to be the underlying theme in the minutes, too – the market impact is likely to depend on any thoughts around the impact of Trump’s torrent of new economic policies.
GBP
The pound is relatively firm this morning after inflation accelerated more than expected to 3.0% in January, but the report is not quite as scary as it looks for the Bank of England. While a beat on the 2.8% consensus, it was an uptick in food prices behind the surprise, and the BoE’s favourite gauge of underlying inflationary pressure – services inflation – printed slightly below expectations at 5.0%. Although a jump from the 4.4% figure from December, most had concluded that it was the familiarly volatile components, and particularly airfares, that flattered that specific report. In short, the disinflation narrative is still broadly intact. Gov Bailey warned just yesterday that there would be a ‘hump’ in inflation that policymakers would look through in the near term, so BoE pricing is relatively unchanged. The combination of yesterday’s strong wage growth print and today’s firm CPI data have helped to push sterling above the 1.26 barrier against the dollar, however, and GBP/EUR has moved above 1.20.
EUR
The euro weakened off around 0.4% yesterday, tracking the G10 lower as concerns grew about Europe’s exclusion in talks about Ukraine. The German ZEW investor sentiment survey leapt above expectations from 10.3 to 26.0, mostly because Sunday’s election is in their sights and there is some hope that at least modest reforms to the debt brake can spur some extra investment. Developments around the Ukraine situation are likely to be dominant for EUR/USD in the coming days, and on the macro side the focus is largely on Friday’s PMIs.
Markets
The major stock indexes squeezed out some small gains yesterday as investors’ eyes were trained on US-Russia talks on the Ukraine war. The S&P 500 ended the session at a new record closing high after rising 0.24%.
Main Economic Events (All Times CET)
8:00am: UK CPI
8:00pm: Federal Reserve FOMC Meeting Minutes
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