February 20, 2025

“After steadily rising through the week, the dollar is a touch softer this morning, particularly against the likes of the yen and the Australian and New Zealand dollars. Front-page headlines on Ukraine, European defence, and US trade policy are dominating FX, and the data focus for today is consumer confidence in the eurozone and jobless claims in the US.”

Sam Cornford – Head of Trading

USD

There were a couple of themes keeping the dollar well supported yesterday. The first is rising tensions between Trump and Zelenskyy, with the former referring to the Ukrainian leader as a ‘dictator’ and blaming him for the war in a Truth Social post yesterday. Zelenskyy had accused Trump of living in a Russian ‘disinformation space’ earlier in the day. Potentially this means both that a) the chances are increasing that Trump hands Putin dangerous giveaways in a peace deal, and b) European countries will feel extra pressure to ramp up defence spending and expand already wide deficits. Neither is a good thing for European FX. At the same time, the FOMC meeting minutes emphasised that the US economy is solid, and that Fed would need some extra evidence of further disinflation before it would be comfortable cutting rates again – something echoed in yesterday’s speech from the Fed’s Jefferson.

Asian FX is outperforming today. The yen surged around 1% before paring some gains, thanks to the BoJ’s comfort with rising yields and rising hopes for another hike as soon as June. The yuan, meanwhile, is benefitting from Trump’s expressed desire for a wide-ranging deal with China. The main event on the US calendar today is unemployment claims, and then we will look to the PMIs tomorrow.

GBP

The pound is trading relatively firm with another attempt above 1.26 this morning. Yesterday’s upside inflation surprise had no lasting effect for sterling, as markets quickly sussed out that the uptick had little to do with the components that the Bank of England is watching most closely. The market has moved to price in only two further rate cuts in 2025 in recent days, although the pound has struggled to benefit from rising gilt yields, given that extra fiscal spending on defence is also key reason for the move. If long end rates continue to rise, Reeves’ dwindling headroom ahead of the spring fiscal event next month could come back to bite for GBP.

EUR

The euro continued to soften in yesterday’s session. Some of the Ukraine peace premium, which helped to bring EUR/USD above 1.05 last week, faded again yesterday as Trump launched attacks at the Ukrainian leader. At the same time, the US’ decision to shun the EU in the initial talks and to pull back its security guarantee for the continent have meant that a recurring conversation this week has been around the extra spending required to revamp European militaries. Whether the necessary borrowing comes from joint bond issuance or from individual nations, the concern is that already-wide fiscal deficits would need to widen further, particularly in countries like France and Italy. As markets anticipate this extra issuance, that has lifted yields and improved rate differentials to the US – something that would usually be positive for the euro – but EUR/USD has moved lower instead, because it is for the wrong reasons. The focus today is on a consumer confidence figure this afternoon.

Markets

US stocks squeezed out some gains yesterday, with the S&P 500 hitting another record high, while European indexes suffered their worst day of the year so far after Trump announced further tariffs and as geopolitical tensions intensified. The hit to risk sentiment helped lift gold to another record high.

Main Economic Events (All Times CET)

1:30am: Australian Employment Change
2:30pm: US Unemployment Claims
4:00pm: Eurozone Consumer Confidence

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