Market Volatility Rises Amid Geopolitical Tensions and Economic Uncertainty
Global markets faced renewed pressure last week as tensions flared between President Trump and Ukrainian President Zelenskiy during a meeting in the Oval Office. Their disagreements over the war in Ukraine led to the abrupt cancellation of a planned joint press conference, signalling that a peace agreement remains distant. Meanwhile, ongoing geopolitical uncertainty and tariff concerns have weighed heavily on risk assets, adding to investor unease.
Compounding these worries, doubts about the strength of the U.S. economy have intensified. Weaker-than-expected macroeconomic data and a surge in imports ahead of impending tariffs have driven growth expectations sharply lower. The Atlanta Fed Nowcast for Q1 plummeted from 2.3% to 1.5%, a decline typically seen during periods of economic distress. Inflation data released on Friday met expectations, with the PCE index rising 0.3% month-over-month in January. However, personal spending fell by 0.2%, marking its first decline in nearly two years.
Despite worsening economic indicators, the U.S. dollar extended its rally for a third consecutive session, buoyed primarily by geopolitical instability rather than strong fundamentals. Investor expectations for Federal Reserve rate cuts have shifted dramatically, with markets now pricing in three cuts for 2025 instead of just one. This sentiment is reflected in Treasury yields, as the 2-year yield dipped below 4% for the first time since October, aligning with the recent drop in the U.S. surprise index. This week’s labour market data will serve as a crucial test for both the U.S. economy and the dollar.
Tariff decisions on Mexico, Canada, and China are set to be confirmed on Tuesday, potentially shaping global foreign exchange trends for the week and beyond.
The March 4th announcement is expected to see the U.S. President move forward with 25% tariffs on Mexico and Canada, directly impacting those economies, along with a 10% tariff on China. If these measures proceed, the message for the Eurozone will be clear: the European Union is likely next in line for similar trade penalties. As a result, the euro could face additional pressure in the coming days.
Euro Faces Pressure Amid Geopolitical Uncertainty and Policy Challenges
Geopolitical uncertainty continues to weigh on the euro, dampening market sentiment despite signs of gradual improvement in European economic conditions. While the U.S. economic outlook is deteriorating, leading investors to price in three Federal Reserve rate cuts, the European Central Bank (ECB) faces a more complicated policy landscape as inflation picks up again.
However, recent currency movements have been driven more by political tensions than economic data. The ongoing rift between Trump and Zelenskiy, along with fading hopes for a near-term peace agreement, has pushed the euro lower for the second consecutive week, bringing it back below the $1.04 level. Those anticipating a decisive market reaction from Thursday’s ECB meeting may be left disappointed.
With a 25-basis point rate cut already fully priced in, the focus will shift to the ECB’s forward guidance. Yet, with ongoing geopolitical risks and trade uncertainties, policymakers are likely to tread cautiously. Today’s Eurozone inflation report is expected to show some easing in price pressures, but the euro’s next major move may depend on broader political or economic developments. A significant surprise in Friday’s U.S. labour market report would likely be needed to push the currency meaningfully above $1.05 or below $1.03.
GBP/USD Retreats Amid Geopolitical Uncertainty but Holds Firm Against Euro
After briefly climbing to a two-month high above $1.27 last week, GBP/USD has retreated toward the $1.26 level as geopolitical tensions resurface. The tense White House meeting between Trump and Zelenskiy has cast doubt on a potential U.S.-brokered ceasefire between Ukraine and Russia, weighing on risk-sensitive assets like the pound. While sterling has weakened against safe-haven currencies, it remains resilient against the euro, with GBP/EUR closing the month above €1.21 for the first time since 2016.
The UK’s reliance on foreign capital inflows, due to its persistent current account deficit and worsening net international investment position, makes sterling vulnerable to shifts in risk sentiment. A sharp decline in equity markets could put additional pressure on the pound. However, Britain remains a lower priority for Trump’s tariff policies, both due to the relatively balanced UK-U.S. trade relationship and his generally favourable stance toward the UK. As a result, sterling is seen as somewhat insulated from tariff risks, with FX options markets showing less bearish positioning on GBP compared to other G10 currencies.
This week, the key upside risk for sterling lies in potential policy shifts from the White House. If Trump delays or reverses planned tariff increases on Mexico and Canada set for Tuesday, broader risk sentiment could improve, supporting the pound. Additionally, disappointing U.S. economic data—particularly Friday’s labour market report—could further bolster GBP/USD, potentially pushing it back above the $1.27 level.
