February 28, 2025

“Some explosive moves followed Trump’s social media posts yesterday as markets rushed to price back in the risk of a US trade war with Canada, Mexico, China, and the EU. Officials have until Tuesday to try and push back the tariffs for a second time, so FX will be moving according to headlines on negotiations. US core PCE inflation is also key today.”

Sam Cornford – Head of Trading

USD

Things change quickly in FX these days. Many have spoken about the market’s fatigue in responding to each and every tariff headline, but that is not what was on display yesterday. Instead, when Trump posted on Truth Social to assure markets that the 25% blanket tariffs on Canada and Mexico would arrive on Tuesday, the dollar soared across the board. He also threw in an extra 10% on China for good measure, which is likely to draw a stronger response than the last round of retaliation. We had thought that the complacency about tariffs that built up through February left the FX market vulnerable to a big correction if calling Trump’s bluff turned out to be the wrong move. As always, however, it is better to take Trump seriously and not literally, and there is still plenty of time for some more last-minute deals to be hashed out. That leaves two-sided risks, and the dollar can easily pull back or extend its gains depending on how negotiations progress.

Unsurprisingly, it was the least liquid and most risk-sensitive G10 currencies that suffered the most, with AUD, NZD, and SEK all dropping 1% or more on the day, while EUR and CAD were closed behind. The safe havens (JPY, CHF) benefitted on the crosses and so did the pound, which traders have picked out as an outperformer in a global trade war scenario. Today, the focus is on whether any last-minute deals can be made and the January core PCE inflation report, where the consensus is for a 2.6% y/y print.

GBP

Despite being hammered against the dollar, sterling has outperformed the rest G10 over the past two days. The pound has become something of a safe haven when it comes to tariffs – remember that Britain is way down Trump’s list for tariffs, both simply because he likes the UK and because US data shows a much more balanced trading relationship. A particularly friendly news conference from Trump and Starmer only fuelled this idea further yesterday, with the UK and US set to revive talks on a trade deal and Trump expressing his affection for Britain (‘a wonderful country’). That is in sharp contrast to the EU, of course, and GBP/EUR is now at its highest since mid-December. A more-hawkish-than-expected speech from the BoE’s Ramsden has also helped this morning after he said that disinflation was not happening quite as quickly as he had hoped.

EUR

EUR/USD got hit hard yesterday. Just a few days ago, it appeared to be priced as if the tariff risk had evaporated – something Trump has been keen to rectify this week, it seems. There is time for the tariff story to evolve further ahead of Tuesday, and a rebound is on the cards if Trump once again fails to follow through on his threats. Turning to the data, French inflation sank to a four-year low of 0.9% this month and the German print will be in focus this afternoon alongside some inflation expectations surveys. So far, the data is not giving any doubt around there being another 25bps rate cut next Thursday.

Markets

The major equity indexes were a sea of red yesterday as AI darling Nvidia extended its losses since January to 20% and Trump put a hard date on following through with his tariffs against Canada, Mexico, and China. The Nasdaq closed almost 3% lower and the Euro Stoxx 50 sank 1%. The story was the same in Asia, too, with Japan’s Nikkei plunging 3% and China’s CSI 300 dropping 2%.

Main Economic Events (All Times CET)

2:00pm: German CPI Inflation
2:30pm: Canadian GDP
2:30pm: Us Core PCE Inflation

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