February 24, 2025

“Yesterday’s German election has injected some significant volatility for the euro this morning, which has fallen over 0.5% from where it peaked after the open. There is a lot going on this week, and the focus will be on US and eurozone inflation, looming tariff deadlines, and US growth.”

Sam Cornford – Head of Trading

USD

The dollar struggled last week as tariff fears continued to ebb, and the data began to support the idea that Trump’s high-velocity policy changes are hurting consumption in the first quarter. The US services sector has collapsed into contraction for the first time since January 2023 this month, according to Friday’s PMI report that related this directly to the growing uncertainty surrounding the pace of change within the federal government. The DOGE team gave an example of exactly the sort of action worrying businesses at the weekend, with US federal employees receiving an ultimatum either to justify the work completed in the past week or to resign. The Fed-favoured core PCE inflation gauge is the main piece of data due this week, while tariffs, US-China relations, and Russia-Ukraine negotiations will continue to contribute to the noise. The 25% blanket tariffs on Mexico and Canada are due to be reinstated next week after the initial 30-day reprieve – few in the market are expecting these to actually come into place, but negotiations will be nervy.

GBP

Sterling has largely tracked the euro’s rollercoaster ride this morning and touched hit a two-month high ahead of some Bank of England speakers today. The data calendar is empty this week, so the focus is going to be on policymakers’ assessment of the economic outlook. Deputy Governor Lombardelli and arch-dove Dhingra both speak today, followed by Chief Economist Pill on Tuesday and Ramsden on Friday. We should get some contrasting views here, given that Swati Dhingra has voted for 50bp rate cuts this year while the likes of Pill have tilted more towards the hawkish side.

EUR

The euro’s post-election boost has faded quickly this morning, and it could not sustain a move above 1.05. The CDU/CSU won the biggest vote share in Germany at 29%, as expected, followed by far-right AfD at 21% and the SPD at 16%. That outgoing Chancellor Scholz’s SPD won its weakest vote share in its history while the pariah AfD party doubled its share tells you pretty much everything you need to know about the stagnant economic situation in Germany. However, the result has broadly aligned with expectations, and the euro’s initial rally probably came from the fact that: a) the AfD did not outperform and force a reckoning in coalition talks, and b) the failure of the FDP and the BSW to make the 5% threshold means that the CDU/CSU and the SPD collectively have enough seats to form a two-way coalition, which might be more stable than cobbling together the smaller parties. Merz is going to be Chancellor, and he wants a government by Easter – the key then for the euro is whether the CDU can come around to amending the debt brake for some defence and infrastructure spending.

Markets

US stocks unwound a week’s worth of gains last Friday, with the S&P 500 and the Nasdaq 100 both dropping around 2% on the back of some softer data. The picture in Europe this morning is relatively mixed but Germany’s DAX is up nearly 0.5% following yesterday’s election.

Main Economic Events (All Times CET)

10:00am: German ifo Business Climate

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