Tariff Delays and Peace Talks Lift Markets, Weigh on Dollar
The market continues to feel the positive effects of the recent postponement of tariffs on Mexico and Canada. Adding to the risk-on sentiment, reports surfaced that President Trump is actively working on a peace deal between Ukrainian President Zelensky and Russian President Putin. This optimism drove oil prices lower and overshadowed shifts in Federal Reserve expectations, putting additional pressure on the US dollar.
Meanwhile, last week’s inflation data had a mixed impact. The higher-than-expected CPI print was offset by a weaker PPI figure, leaving inflation as a net-neutral factor for markets. However, the sharply disappointing retail sales report just before the weekend further weakened the dollar, while equities extended their rally. As a result, the probability of a Fed rate hike this year fell from 9% to 3%. Market volatility remains high, with uncertainty persisting on both inflation and trade policy fronts.
British Pound Rides Risk Rally but Faces Key Data Tests
The British pound strengthened against safe-haven currencies last week, benefiting from easing trade tensions and renewed hopes for a Ukraine ceasefire, which sent oil prices tumbling. GBP/USD surged from around $1.23 to over $1.26, while GBP/JPY climbed more than 2% in a week. However, GBP/EUR remained relatively stable as geopolitical tailwinds also supported the euro.
Looking ahead, the impact of a potential Ukraine ceasefire could be mixed—if the deal raises security concerns for Europe, the war premium on the euro may stay low, capping further FX gains. Meanwhile, growing market focus on trade risks highlights the UK’s relative resilience to direct tariffs compared to the Eurozone, helping GBP/EUR hold above €1.20. Additionally, rate differentials continue to favour the pound, with last week’s UK GDP surprise leading traders to scale back expectations for BoE rate cuts.
Key economic data this week will test the pound’s strength. Employment figures on Tuesday, flash PMIs and retail sales on Friday, and inflation data on Wednesday will be closely watched. In particular, services inflation, which has remained stubbornly above 4% for nearly three years, is expected to jump back above 5%. The key question for UK rate markets remains whether to price in two or three BoE rate cuts for the rest of the year.
Euro Finds Respite Amid Trade and Geopolitical Shifts
The euro defied expectations last week, rallying against the dollar as geopolitical and trade developments turned unexpectedly supportive. EUR/USD briefly touched $1.05—only the second time this year—marking its strongest weekly performance in three weeks. Hopes for a peace treaty between Russia and Ukraine gained traction, partly due to President Trump’s diplomatic involvement. Meanwhile, fears of imminent US tariffs on European cars subsided, with reports suggesting a delay until at least April 2nd, aligning with the expected completion of a Department of Commerce review on reciprocal tariffs.
However, risks remain for the eurozone. President Trump has taken aim at value-added taxes (VAT), arguing they function as disguised tariffs that disadvantage US businesses. Given that VAT is a critical revenue source for the EU, the scope for negotiation is minimal, potentially setting the stage for renewed trade tensions.
While our expectation of a modest euro rebound has played out, supported by rising real rate differentials and a priced-in Fed pause, broader macro uncertainties and tariff risks could cap further gains. Without stronger domestic catalysts, EUR/USD may struggle to break past $1.06 in the near term.
