Dollar firms, Aussie steady after RBA's 'hawkish' rate cut

British Pound

Reuters: Sterling held steady and traded at just below its highest level in two months, as investors looked towards employment and inflation data later in the week. The pound rose around 1.4% last week as currencies recovered against the dollar due to fading expectations that U.S. President Donald Trump will sharply ramp up tariffs in the early days of his administration. Stronger-than-expected growth data also lifted the UK currency.

Sterling was last flat at $1.2591, after rising above $1.26 on Friday to its highest since mid-December. The euro was down 0.23% against the pound at 83.19 pence. Economic data will be key for the pound this week, after the Bank of England cut interest rates this month but said it remained cautious about price pressures. Analysts polled by Reuters expect data on Tuesday to show average earnings growth ticked up in December while unemployment rose to 4.5%, from 4.4% in November. Data on Wednesday is expected to show inflation increased to 2.8% year-on-year in January from 2.5% a month earlier.

"Sterling's focus this week will be on jobs data, CPI and a speech from Bank of England Governor, Andrew Bailey, tomorrow morning," said Chris Turner, global head of markets at ING. "We continue to doubt that GBP/USD can sustain gains over $1.26 and expect it to be trading back at $1.24 by the end of March." Investors were also keeping an eye on developments around the war in Ukraine after Trump shocked European capitals by initiating talks about a potential peace with Russia's Vladimir Putin last week. British Prime Minister Keir Starmer this weekend became the first European leader to say he is ready to put peacekeeping troops in Ukraine. UK sovereign bond yields rose as prices fell on Monday, with investors betting any peace deal would require higher government spending and therefore more borrowing.

US Dollar

Reuters: The dollar firmed on Tuesday as traders weighed tariff worries and the path to U.S. rate cuts, while the Australian dollar held steady near two-month highs after the Reserve Bank of Australia delivered an expected rate cut but cautioned on further easing. The RBA cut its cash rate by 25 basis points to 4.10% on Tuesday in its first easing since the 2020 pandemic, but was cautious about prospects of further policy easing. That left the Australian dollar steady at $0.6351 after an initial burst of choppiness following the decision. The Aussie touched a two-month high of $0.6374 on Monday and is up 2.4% in February on easing trade war worries.

Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities, said the RBA's statement struck the right balance without boxing in the central bank to delivering a follow-up cut. "That said we retain our forecast for cuts in May and August." Swaps imply just a 20% probability for a follow-up cut in April, although a move in May is still almost fully priced in. Speaking at a media conference, Australia's top central banker Michele Bullock said market pricing for two more quarter-point cuts this year was ambitious and policy makers were more cautious about the outlook. Kerry Craig, global market strategist at J.P. Morgan Asset Management said the RBA's move looks more like an "insurance" cut, which keeps it in step with global central banks, rather than the start of an aggressive easing cycle. "This easing cycle will certainly not be a sprint to the end, but rather a slow walk on the path towards lower rates and further cuts ahead."

Investor focus this week will be on Wednesday's release of minutes of the Federal Reserve's meeting in January to gauge how policymakers have sought to weigh the risk of a broader tariff war in the wake of President Donald Trump's trade policies. Data last week showed U.S. consumer prices increased at the fastest pace in nearly 18 months in January, reinforcing the Fed's message that it was in no rush to resume cutting rates amid growing economic worries. "Trade policy uncertainty is at a record high ... and given that the labour market is solid, there is no compelling case to cut rates imminently," ANZ strategists said in a note. "An extended pause during the first half of this year looks justified and will give the Fed time to assess the impact of trade measures on inflation."

ANZ now expects rate cuts to resume in the second half of 2025, with a further 75 bps of easing anticipated. Markets though are not as optimistic, with traders pricing in 40 bps of cuts for this year. In Asia, the yen was on the back foot after its recent gains as strong growth data bolstered odds of the Bank of Japan raising interest rates again this year, with July seen as a live meeting. The yen was last at 152.165 to the dollar, down 0.4% on the day. Japan's solid October-December GDP data on Monday, coupled with recent inflation numbers, have helped lift the yen. It is up nearly 4% against the dollar so far in 2025.

The dollar index , which measures the greenback against six other major currencies, was 0.27% higher at 107.01, still not far from the two-month low of 106.56 it touched on Friday. The euro was 0.27% lower at $1.045475, while sterling eased 0.2% at $1.2593 as traders braced for talks in Saudi Arabia later on Tuesday aimed at ending the Ukraine war. The New Zealand dollar fell 0.55% to $0.57195 ahead of the Reserve Bank of New Zealand meeting on Wednesday, where the central bank is widely expected to cut rates by 50 bps.

South African Rand

Reuters: South Africa's rand weakened on Monday, ahead of Finance Minister Enoch Godongwana's budget speech this week, which will provide insights on the state of Africa's most industrialised economy. At 1503 GMT, the rand traded at 18.4275 against the U.S. dollar , about 0.4% softer than its previous close. Analysts said all eyes will be on the budget presentation to parliament on Wednesday, which will lay out the government's spending priorities, revenue collection measures and updated economic forecasts for the year.

Analysts polled by Reuters said South Africa's budget deficit forecasts will be wider than those in its October estimates for the next three years. On the stock market, the Top-40, opens new tab index closed about 0.3% lower. South Africa's benchmark 2030 government bond was also weaker, with the yield up 5 basis points at 9.145%.

Global Markets

Reuters: European futures hit record peaks on Tuesday as defence stocks soared on expectations of a spending bump, while Hong Kong shares were on the verge of three-year highs as investors cheered business leaders' meeting with President Xi Jinping. Australia's central bank began its rate cutting cycle, as expected, and the Australian dollar found support at $0.6350 as the cut came with caution on further easing. S&P 500 futures were up 0.2% and European futures added 0.1%. Japan's Nikkei, opens new tab rose 0.5% with bank and defence-related shares taking their cues from Europe's rally.

On Monday, the pan-European STOXX 600 index closed 0.5% higher as a gauge of defence and aerospace stocks surged 4.6% to lifetime peaks, having already more than doubled in value since Russia invaded Ukraine three years ago. Investors expect earnings in the industry to continue to rise strongly, reckoning a long era of modest defence budgets has ended and a rush to buy arms is beginning. "If European defence spending gets anywhere near Trump's 5% of GDP target, European defence companies like Rheinmetall, SAAB, BAE Systems, Thyssenkrupp, and Thales can extend considerably their overnight gains," said Tony Sycamore, analyst at IG Markets in Sydney. The euro hovered around $1.0455 in the Asia session, though Sycamore said a sustained break of $1.0530 would open the way to $1.06 and beyond ahead of Germany's weekend election.

Russian and U.S. officials are scheduled to meet for bilateral talks on Tuesday in Saudi Arabia. Ukraine's President Volodymyr Zelenskiy has said the country would not recognise any decisions made in deliberations where they were not present. U.S. markets re-open later on Tuesday following a holiday. In China, markets have been buoyed by Monday's rare meeting between Xi and business leaders. Hong Kong's Hang Seng touched its highest since October and an index of tech shares hit a three-year high before some selling kicked in. The tech index is up more than 25% for the year to date, turbocharged by gains in artificial intelligence stocks.

"I believe that China will be the winner in the AI race, just like electric cars," said Britney Lam, who is running a family office, LAM Group, based on China's access to data, energy, talent and computer chips. Shares in Baidu steadied following their slide on Monday after the founder of the search engine giant was not spotted at the meeting. The company reports earnings later in the day. Alibaba's stock rose 2% after founder Jack Ma was shown on television shaking hands with Xi.

BHP shares ticked 0.4% higher after the global miner logged its lowest first-half profit in six years, but said it saw signs of economic recovery in China. The rest of the week is filled with data, including February flash business activity indicators across the globe while in Europe, markets also have their eye on German elections this weekend. The yen steadied at 152.06 after the previous day's solid growth data bolstered chances of a rate hike in Japan in coming months. The pound traded at around $1.2597 , just below its highest level in two months, as investors looked towards employment and inflation data later in the week.

In commodity markets, gold came off Friday's record highs at $2,913 an ounce having rallied for seven weeks straight. Oil producer group OPEC+ is considering pushing back a series of monthly supply increases due to begin in April despite calls from Trump to lower prices, Bloomberg News reported on Monday, citing delegates. Brent held overnight gains at $75.39 a barrel.

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