March 03, 2025

“The market is reacting to a lot of drama over the weekend. Tomorrow’s deadline on Trump’s enormous tariffs for Canada, Mexico, and China, will likely trigger a big reaction in FX. A deal is good for the likes of EUR, CAD, and CNY, while USD, GBP, and CHF are among those set to outperform if the trade barriers do go up.”

Tim Hallinan – Trading Director

USD

There are three major themes to drive the dollar this week: tariffs, Ukraine, and the macro data. The tariff story could be the biggest mover, particularly for CAD, MXN, and CNY, and if Trump does follow through on the duties tomorrow that he promised again last Thursday. For now, the market is still leaning towards a last-minute deal – USD/CAD is still some 2% off its peak in early February. Commerce Secretary Lutnick supported this idea yesterday by calling it a ‘fluid situation’ and saying that it would be Trump deciding whether the full tariffs go ahead or not. If they do, however, expect a sharp spike in the dollar. Turning to Ukraine, everyone reading this will have caught the chaos that erupted in the Oval Office on Friday. It is a new obstacle to peace (and therefore good for safe havens), but Zelenskyy then went to London over the weekend, where European leaders agreed to draw up a peace plan to present to the US. He has also since said that he is ready to sign the mineral agreement, although behind closed doors this time.

Through all of this, the market will be scanning the data for clues on how much the US economy is slowing. The ISM PMIs begin with the manufacturing index tomorrow, and the highlight is Friday’s non-farm payrolls report. The consensus is for 160k, and if we get a big downside surprise in the hard data to complement the surveys of late, the dollar will struggle to hold on to its heights.

GBP

Sterling is in a relatively favourable position heading into a week that will likely be defined by external developments. The pound outperformed most of its peers as tariff fears blew up last week, and it could do so again tomorrow if Trump follows through with his threats on Canada and Mexico. Trump told Starmer last week that ‘we could very well end up with a real trade deal where the tariffs wouldn’t be necessary’. No big data events this week, but BoE Governor Bailey will be quizzed by the Treasury Committee on Wednesday. A strong set of inflation and wage data last month mean that we could see a more hawkish stance from the MPC.

EUR

The euro has settled around the 1.04 mark after plunging last Thursday. It fell again after the heated exchange in the Oval Office, but the meetings in Europe and Zelenskyy’s support for the minerals deal has helped it to recover slightly this morning. Eurozone CPI is due this morning and is expected to drop back to 2.3% after some generally soft prints from Spain, Italy, France, and Germany last week. The expected drop in the core measure from 2.7% to 2.5% would be welcomed by policymakers at the ECB meeting on Thursday, where the debate will ramp up on whether policy can still honestly be named ‘restrictive’, and what that means for the outlook going forward. In the meantime, tariffs and Ukraine will dominate.

Markets

Stocks recovered strongly on Friday after suffering heavily from Trump’s tariff threats and an unenthused reaction to Nvidia earnings. Gold slipped towards the end of last week in a rather confusing move considering the extra market nervousness.

Main Economic Events (All Times CET)

10:30am: UK Mortgage Approvals
11:0am: Eurozone CPI
4:00pm: US ISM Manufacturing PMI

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