Dollar Balancing Tariffs, Weaker Growth
Once again, trade and geopolitical developments overshadowed what appeared to be a significant day for US macroeconomic updates. Data on durable goods, home sales, jobless claims, and GDP presented mixed signals regarding the state of the world's largest economy. GDP grew at an annualised rate of 2.3%, while unemployment claims reached a two-month high and declined for the second consecutive month. Overall, the data continues to indicate weakening economic momentum, and the dollar would likely have depreciated under these circumstances were it not for the latest tariff announcements.
Markets reacted to fresh tariff measures announced by the US President. Donald Trump confirmed that the 25% tariffs on Canada and Mexico would proceed, while also hinting at the possibility of new tariffs on China as early as March. This news bolstered the dollar against the Canadian dollar and Mexican peso. However, the Greenback’s strength extended to most major currencies as well.
Beyond trade, Trump’s refusal to commit to a security backstop in Ukraine added another layer of geopolitical uncertainty. During his meeting with UK Prime Minister Keir Starmer, he reiterated that the priority should be securing a peace agreement between Russia and Ukraine rather than discussing long-term military commitments.
Nevertheless, conviction in a sustained dollar rally is waning, as tariff fatigue and growth concerns begin to dampen sentiment. Traders remain cautious despite heightened trade uncertainty and a lack of policy clarity. For now, foreign exchange markets continue to be driven by trade headlines, with the dollar benefiting from renewed tariff speculation—yet the long-term outlook remains uncertain.
The US dollar index is likely to finish the week higher, a feat it has only managed once in the past seven weeks. The final obstacle to overcome is the US Personal Consumption Expenditures (PCE) report due today. The core figure could show a slowdown on a month-on-month basis; however, personal spending is expected to remain robust.
Euro Back on the Defensive
Fresh trade tensions are exerting pressure on the euro, as President Trump confirmed 25% tariffs on Canada and Mexico and hinted at new measures against China. While the EU has not been directly targeted, the risk of further escalation weighs on market sentiment, particularly given Trump’s ongoing criticism of European trade policies and VAT systems.
While the dollar initially strengthened following the tariff news, belief in sustained US dollar strength is diminishing, as the economic repercussions of higher trade barriers may outweigh short-term inflationary effects. For the euro, uncertainty continues to limit its upside, with EUR/USD hovering below $1.0400 as traders evaluate whether tariffs will remain a US-focused issue or broaden further.
Meanwhile, the European Central Bank (ECB) remains confident that monetary policy is still restrictive. However, debate over future rate cuts is intensifying, as reflected in the meeting minutes released yesterday. A 25-basis-point cut next week to 2.5% is widely expected, yet policymakers remain divided. Some express concerns about persistent services inflation and trade risks, while others fear weak growth and missing the 2% inflation target. The neutral rate remains a contentious issue, with policymakers questioning its reliability as a policy guide. While disinflation remains on track, wage growth and energy-related risks necessitate a cautious approach.
Risk-Sensitive or Safe-Haven Sterling?
As discussed in yesterday’s report, the pound’s high-yielding status is a double-edged sword. When market sentiment is positive, sterling tends to appreciate, but in deteriorating global risk conditions, it becomes more vulnerable. Consequently, the latest bout of tariff concerns has pushed GBP/USD down from $1.27 to $1.2570 within 24 hours. GBP/USD has erased its weekly gains and more, while several key moving averages continue to present resistance to the upside.
Although the pound has weakened against the US dollar, some analysts suggest that the FX market is viewing sterling as a tariff safe haven, based on confidence that the UK is less economically exposed to tariffs than major exporters such as the EU. This is evidenced by sterling’s appreciation against all G10 currencies this week except the US dollar and Swiss franc. Should GBP/EUR close the week above €1.21, it would mark the highest weekly closing price in nearly three years. However, a broader look at sterling’s performance shows that it appreciated against fewer than 50% of its global peers yesterday, contradicting the notion of sterling as a safe haven. Furthermore, sterling’s vulnerability to global risk aversion—due to its dependence on foreign capital inflows—would likely limit any haven appeal.
Nevertheless, the meeting between US President Donald Trump and UK Prime Minister Keir Starmer appeared constructive, with hopes of a trade deal boosting the likelihood of the UK avoiding tariffs. The UK is one of the few countries with a neutral trade relationship with the US in goods, making it unlikely that Trump would impose tariffs. However, even if the UK does evade direct tariffs, a global trade slowdown would still impact the UK economy, weighing on the pro-cyclical pound.
