February 26, 2025

“A weak US consumer confidence print joined the list of disappointing US data yesterday, and the debate is growing as to whether the US economic exceptionalism that powered the recent dollar rally is weakening. Meanwhile, the market is still dealing with a flurry of political headlines as a tax cut bill flies through Congress.”

Sam Cornford – Head of Trading

USD

The dollar weakened off yesterday as a weak consumer confidence print kept the momentum going on the belief that the US economy is slowing. The index fell to the lowest since June last year, and it was dragged down primarily on expectations for the future rather than the current situation. The market has relied only on the softer data so far (PMIs, retail sales, housing, regional surveys etc), but the consistency of the downside surprises is encouraging investors to seriously consider whether the US exceptionalism is fading. That has sent the 10-year yield down 25bps this month, and two rate cuts are now priced in for 2025, up from just one several weeks ago. The greenback and US yields have recovered slightly this morning, however, thanks to a $4.5tn tax cutting plan that passed through the House last night. And USD/CAD is naturally doing well with each day closer to Monday’s tariff deadline without signs of another deal. Today the data calendar is relatively light and limited to some mortgage application and new home sales data, though we do also get a speech from the Fed’s Bostic this evening.

GBP

The pound has been choppy this week but is trading relatively flat overall. There have been few catalysts on the domestic side, so it has primarily been external developments driving sterling over the past couple of days. The notable headline from yesterday was an announcement by PM Starmer that UK defence spending could be increased from 2.3% to 2.5% by 2027, funded by cuts to foreign aid, and to 3.0% by the next parliament. The timing of the announcement is obviously related to his trip to visit Trump in the US later in the week, but it mirrors a reckoning across Europe that the US security guarantee has weakened and that the continent must take defence more seriously.

EUR

While the environment has generally been supportive for the euro this week, it is struggling to break through the 1.05 barrier for any sustained period. There is some broad dollar weakness stemming from the weaker data, but the euro’s fundamentals remain weak and there is high uncertainty around the tariff risks, global growth, and higher fiscal spending in Europe. Ukraine’s agreement to share mineral revenue with the US is probably a good step towards peace, as the US now has skin in the game, though it is still difficult to gauge the extent to which Trump is really on Zelenskyy’s side. On the data side, German consumer confidence data has been weaker than expected this morning, and the market is looking ahead to country CPI data over the next few days.

Markets

The downward momentum continued for risk assets yesterday, with the US’ Magnificent 7 leading the losses. They are now down 13% from their high back in December. The year-to-date gain on the Nasdaq is now only 0.36%, compared to the 11% gains in the Euro Stoxx 50.

Main Economic Events (All Times CET)

8:00am: German GfK Consumer Confidence
4:00pm: US New Home Sales

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