Morning Report
February 21, 2025
“The dollar had been strengthening all week, but it shed its gains yesterday as markets pulled back on the Trump and US exceptionalism trades. Today it is all about the PMIs, where the UK will hope to extend its streak of positive data this week.”
Tim Hallinan – Trading Director
USD
The market was in the mood to sell dollars yesterday, sending the greenback down sharply across the board. There was no one obvious catalyst to point towards for the adjustment, although the prospect of a wide-ranging deal between US and China has certainly breathed new life into the idea that the worst fears around tariffs and trade wars will never materialise (Ballinger spoke about this in Bloomberg yesterday). It is difficult to call for a sustained dollar depreciation while there are still so many unknowns and such big opportunity for black swan events to throw the FX market into disarray. And it is very difficult to imagine that we return to anywhere near where the dollar was trading back in the summer before the election and the upturn in the US data surprises. But Trump’s trade threats are beginning to fall on deaf ears, and that has pulled the dollar index down 3.5% since its mid-January peak.
Today, the focus is on this afternoon’s PMI figures, which the consensus expects to improve slightly from 52.7 to 53.2. Talks with Russia and with China are likely to capture some attention, too, with Bessent speaking to his Chinese counterpart today.
GBP
After months of frankly depressing data headlines, a sequence of positive surprises has built the pound up to a fresh year-to-date high this morning. Today it was retail sales with a huge beat of 1.7% growth in January – up from a -0.3% decline in December – that easily cleared the 0.5% survey estimate. After wage growth and inflation, that is the third sterling-positive piece of data this week. Add on a weakening dollar, and 1.27 is now within reach. Remember the gilt ‘crisis’ in January, when UK assets sold off in anticipation of a fiscal dilemma for Reeves? GBP/USD is now up 4.8% from that trough on 13th January. Let’s see if the PMI index today can keep that going – so far, disappointing French data has pulled the pound down from its peak.
EUR
A critical few days are coming up for the euro. The rebound in EUR/USD over the past day or two is a dollar story and has little to do with the eurozone itself, so the PMI index today and the German elections on Sunday are an opportunity for domestic developments to take over. French and German PMI prints have been mixed so far this morning, with the French economy unexpectedly sinking to its worst contractionary state since 2023 (44.5), led by a drop in the services index (48.2 to 44.5), all of which has partly been offset by a marginal beat on the German composite PMI (51.0). Markets have added to ECB easing bets as a result and pricing is pointing to rates returning to 2.00% as soon July potentially. Barring any surprises at the elections, the CDU/CSU should gain the biggest vote share and Friedrich Merz should be the next chancellor – the question is with whom he has to form a governing coalition. The best-case scenario for the euro is one where a government is formed quickly, and politicians act fast to start modestly reforming the debt brake to unlock some investment. The worst-case would be a long, drawn-out period of uncertainty (in 2017 it took nearly 200 days to form a government) that reignites concerns about a political stalemate in the Bundestag.
Markets
US and European stocks halted their winning streak yesterday. A 6.5% loss in Walmart shares followed some disappointing earnings, which helped to drag the S&P 500 down by around 0.4%, while Germany’s DAX is down over 2% over the last two sessions.
Main Economic Events (All Times CET)
10:00am: Eurozone PMIs
10:30am: UK PMIs
3:45pm: US PMIs
4:00pm: US UoM Consumer Sentiment
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