Equity markets are faltering, and demand for safe-haven currencies is on the rise as investors navigate the shocks stemming from trade policy, geopolitics, and political uncertainty. The euro has retreated from one-month highs against the US dollar, though it remains 1% up year-to-date. Meanwhile, the pound has gained 2% against the dollar this month and is edging closer to the €1.21 level against the euro – a key resistance mark for the past eight years.
Equities unsettled, currencies steady
Uncertainty continues to mount regarding the timing and scale of tariffs to be introduced by the US administration following President Donald Trump’s cabinet meeting on Wednesday. Trump announced that the 25% tariffs on Mexico and Canada would take effect on 2 April, rather than the previously anticipated 4 March date. It remains unclear whether he was affording the countries additional time or simply confused the dates with another initiative. Either way, the inconsistencies have fuelled investor scepticism regarding his policy agenda.
Equity markets have been shaken by the ongoing uncertainty surrounding tariffs, with US stocks now erasing the initial post-election rally. However, currency markets appear more composed, with realised volatility in G10 FX declining recently. Beyond tariff concerns, fears over slowing US economic growth have intensified, prompting a risk-averse market sentiment. A combination of weaker growth and disinflationary pressures is likely to encourage further interest rate cuts by the Federal Reserve (Fed), with markets now pricing in two 25 basis point cuts this year, up from expectations of just one cut two weeks ago.
In the commodities sector, oil prices have fallen to multi-month lows, losing approximately 4% this month. Trump’s aggressive trade measures have exacerbated market anxiety at a time when oil traders were already concerned about tepid demand in China. Furthermore, optimism regarding a potential Russia-Ukraine peace deal has weighed on prices, as the lifting of Russian sanctions could boost global oil supply. As a result, commodity-linked currencies such as the Australian and Canadian dollars remain under pressure.
Tariff threats losing impact on the euro
The euro has pulled back from a one-month high of $1.0528, while Germany’s 10-year bond yield has dropped to 2.44%, nearing a one-week low, amid doubts over a swift increase in European defence spending and its financing through bond issuance. Meanwhile, economic data indicates that German consumer sentiment unexpectedly weakened heading into March.
President Trump has issued another round of tariff threats, but their impact on the euro has been relatively muted. EUR/USD continues to test the $1.05 level, yet the 100-day moving average positioned just above this threshold remains a strong resistance point. The euro dipped only 50 pips following Trump’s latest trade-related remarks, in which he stated his intention to impose a 25% tariff on European Union goods, without clarifying whether this would apply to all exports from the bloc or specific sectors.
Meanwhile, Germany’s incoming chancellor, Friedrich Merz, has ruled out an immediate reform of the country’s borrowing limits and suggested it was too soon to determine whether the outgoing parliament would approve a substantial increase in military expenditure. Investors will closely monitor trade and fiscal policy developments. On the macroeconomic front, Spanish inflation data due today could provide insights into the broader Eurozone inflation outlook ahead of next week’s European Central Bank (ECB) meeting. Markets anticipate another 25 basis point rate cut and a total of 82 basis points of ECB easing this year. The spread between US and German 10-year yields closed at 181 basis points on Wednesday, its narrowest since October, marking its most significant monthly contraction since May. This has helped support the euro’s modest rebound over the past month.
Sterling’s double-edged sword
Due to relatively higher interest rates in the UK compared to other G10 economies, the pound’s elevated carry status increases its sensitivity to equity market fluctuations. A modest recovery in equities helped sterling inch higher against the euro and US dollar on Wednesday, with GBP/EUR hovering just below the €1.20 level. Month-to-date, GBP/EUR has risen by over 1% but remains flat on the year, while GBP/USD has climbed over 2% and is nearing its highest level in two months.
However, sterling’s yield advantage is both a blessing and a curse. In risk-on environments, where investors are more willing to take on risk for greater returns, the pound typically appreciates. Conversely, in deteriorating global risk conditions, sterling becomes more vulnerable. This sensitivity is exacerbated by the UK’s worsening net international investment position and persistent current account deficit, which make the currency reliant on foreign capital inflows. Should equity markets experience a more substantial downturn, sterling is likely to suffer as well. Several warning signs are emerging, including bearish investor sentiment surveys and a surge in demand for hedging against a stock market correction.
One way to assess potential market volatility is through one-month implied-realised volatility spreads in the FX space. This measure indicates whether markets expect future volatility to surpass historical levels. Currently, traders are paying a premium for protection in safe-haven currencies such as the Japanese yen and Swiss franc, as they seek to hedge against possible shocks arising from trade policy, geopolitical tensions, and political uncertainty.
