March 13, 2025

“US inflation fell more than expected, but the markets are looking ahead at the incoming policy shocks rather than behind at the previous trajectory. That is complicating the relationship between the data and the moves in FX – PPI this afternoon should be interesting.”

Tim Hallinan – Trading Director

USD

A tame inflation report did little to boost the mood yesterday, and surprisingly the dollar is on the rebound. The 2.8% print was a slight undershoot on the 2.9% consensus, and the details suggested a positive trend for further Fed cuts later this year. That was not the market’s interpretation, however, and instead yields rose as cut expectations were trimmed. The reasoning appears to be that the markets are reflecting the notion that the effects of the current US policy uncertainty and tariff threats are not going to feed through for some time – what happened to prices in February tells us very little about the sequence of shocks that are likely to define the macro environment through this year. The Bank of Canada mirrored that attitude as it cut to 2.75% yesterday despite strong Q4 growth, citing the ‘pervasive uncertainty created by continuously changing US tariff threats’ and the incoming threat to activity.

The key data today is US PPI inflation, which should help investors to piece together a strong estimate for core PCE later in the month (this is the inflation measure the Fed prefers). The estimate here is for 0.3% m/m on the core PPI print, though the market’s reaction function is relatively unclear right now.

GBP

Sterling’s low profile in the context of Trump’s tariff policies helped it to gain against both the dollar and the euro yesterday. The steel and aluminium tariffs put into place yesterday dampened the mood in Europe, and the pound has often been something of a haven in this scenario because of its more balanced trade relationship with the US. Tomorrow’s GDP number will be a key catalyst, however, ahead of next week’s Bank of England decision. The survey estimate is looking for 0.1% month-on-month growth in January, down from 0.4% in December.

EUR

The euro has slipped back to below the 1.09 mark over the last day as tariff worries weigh and the dollar retraces some losses. The EU has already promised to target €26bn in US goods in retaliation to the metal tariffs, targeting those which will hurt Trump allies and red states the most: whiskey, motorcycles, and even soybeans to hurt the House Speaker’s home state of Louisiana. Meanwhile, we are still waiting to hear on the conclusion from negotiations with Germany’s Greens on the infrastructure and defence spending bill that was slated to be complete by the end of this week. And Russia has laid out some unseen demands for it to agree to the US-proposed ceasefire in Ukraine, which officials have suggested are very similar to what has been heard before: Ukraine’s neutrality, recognition of Moscow’s occupied territory, and addressing NATO’s eastward expansion. The euro needs both of these to go its way to move closer to 1.10.

Markets

The softer US CPI figures lent some support to risk assets yesterday, but the rebound in equities looks like it may be short-lived. Europe is lower at the option and Nasdaq futures are down nearly 1%.

Main Economic Events (All Times CET)

1:30pm: US PPI Inflation & Unemployment Claims

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