March 05, 2025

“Multi-trillion euro spending plans in Europe have propelled the euro to four-month highs this week, having risen 3%. Today, the focus will be on a potential US economic slowdown with the ADP and ISM services data, alongside some possible trade deals for Canada and Mexico.”

Tim Hallinan – Trading Director

USD

The dollar index slid to a near four-month low overnight as European leaders signed some historic fiscal spending agreements, US growth concerns kept markets nervy, and the Trump administration floated the possibility for tariff deals. The greenback is now 4.6% weaker than its peak in mid-January. More on the euro rally below but suffice to say that there has been a game-changing shift in how European leaders are looking at fiscal spending, in response to the US’ now unfriendly attitude towards guaranteeing security across the Atlantic. On tariffs, Commerce Secretary Lutnick has suggested that we could see tariffs against Mexico and Canada fall as soon as today, although it is unlikely that they disappear altogether. It once again exemplifies a willingness to negotiate rather than to have tariffs as the end goal, though the market is not pricing in too much relief on this given that Trump assured Congress last night that he is ‘just getting started’ and that more are coming on April 2.

We get some more clues on the state of the US economy today. ADP non-farms is a notoriously poor predictor of Friday’s payrolls figure, but it tends to generate a reaction, and nervy investors might be inclined to ditch the dollar if it is particularly weak. The ISM services PMI will be more important later this afternoon.

GBP

The pound has ridden broad dollar weakness and a boom in sentiment in Europe to above the 1.28 mark for the first time since December. Good news from the EU is good news for the UK, which tends to drag up GBP/USD too, although we have seen a near 1% drop in GBP/EUR. The focus today for the UK is on the Monetary Policy Report Hearings, where a parliamentary committee will quiz Bailey, Pill, Greene, and Taylor on the recent policy decisions. Taylor has stood out as particularly dovish since he joined the MPC, but the shift in Ramsden’s recent speech to a more cautious stance is probably a good indication as to the more careful stance we will hear from the others.

EUR

The euro has rocketed an incredibly 3% so far this week. The big news yesterday included the European Commission’s decision to unlock hundreds of billions in extra defence spending that nations can use without bring on an Excessive Deficit Procedure, and an historic agreement between the German parties on debt brake reform and a €500bn infrastructure fund. This is all in response to the geopolitical turmoil that has ensued since Trump’s inauguration – the German deal would mean that defence spending above 1% of GDP would be exempt from the debt brake, meaning that policymakers could theoretically issue an unlimited amount of debt to use for the military. German 10-year Bund yields jumped the most in a single day for two years as a result. It is too early to get excited about Germany becoming an engine of growth again and revitalising the eurozone, especially given that a trade war is heading its way. But certainly this is an enormous shift for the German economy that could give it a long overdue uplift. Interestingly, ECB expectations have remained relatively static.

Markets

The equity markets were a sea of red yesterday as Trump launched a trade war and markets continued to be concerned about a slowdown in US economic activity. The Nasdaq is now down 9% since its record high from December. In Europe, the Stoxx 50 sank 2.8% and the German DAX plunged 3.5%, but futures are pointing to a strong open for both this morning after an historic German spending agreement.

Main Economic Events (All Times CET)

8:30am: Swiss CPI
2:15pm: US ADP Non-Fam Payrolls
4:00pm: US ISM Services PMI & Durable Goods Orders

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