The Dollar's Rebound Could Have Momentum

Impact on GBP: Risks tilted to the downside ahead of the Budget event

ING's UK economist has released a note discussing the potential reset in UK-EU relations and its impact on British finances. The key takeaway is that while rejoining the single market (or strengthening economic ties) could support growth, it is unlikely to create significant fiscal space. This is because any revision to the OBR’s forecasts would likely be phased in over several years.

Looking ahead, most remain cautious about the upcoming 26th March UK Budget, which could unsettle an already fragile gilt market, particularly given spillover effects from EU bonds. There could be downside risks for Sterling in the lead-up to this event.

Before then, the UK will release January GDP data tomorrow, followed by February jobs figures next Thursday—just hours before the Bank of England’s rate decision. A hold is widely expected (with markets pricing only a 5% chance of a cut), but given expectations for easing in May or June, the BoE will likely need to deliver some dovish signals to sustain current Sonia curve pricing.

Overall, most maintain a bearish bias on GBP/USD, though near-term fluctuations driven by US macro developments could still push the pair temporarily above $1.3000.

No Major Data

Impact on EUR: Many positives are already priced in

After EUR/USD briefly dipping below $1.0900, the Euro’s next move higher may hinge on Russia’s official approval of a 30-day truce with Ukraine. However, this may not provide a significant or lasting boost, as a peace deal is largely priced in, and the terms of the truce would need to be assessed for their broader impact on Ukraine and the EU.

On the macro front, today’s Eurozone industrial production data for January is unlikely to be a market mover. There is also interest in ECB officials' comments following last week’s rate cut. Yesterday, ECB President Christine Lagarde stated that global trade developments make it “impossible” for the ECB to guarantee 2% inflation at all times. This raises the question of whether the inflation target needs a rethink—though in practice, a more flexible approach is already being applied. General consensus believes , only the prospect of a fiscal boost in Germany has kept rates from being cut to or below 2%.

Markets are also watching for an official multi-party agreement on defence and infrastructure spending in Germany. The Green party recently indicated that a deal with Chancellor-to-be Friedrich Merz could be finalised by the end of the week. Once confirmed, this may give the Euro a slight lift, though much of it is already priced in.

For the rest of March, most maintain the view that EUR/USD is more likely to retreat toward $1.0800 than stage another rally to $1.1000.

No Major Data

Impact on USD: Risk sentiment remains subdued today

The bond market reacted counterintuitively to yesterday’s cooler-than-expected core CPI data (0.2% MoM), with the Fed’s terminal rate pricing edging higher and Treasuries weakening across the curve. This could reflect some hesitation to fully buy into the disinflation narrative before the impact of tariffs becomes apparent.

The Dollar followed UST yields higher but remains down against most G10 peers since the start of the week. The typical negative correlation between the USD and equity markets has faded in recent weeks, as US stocks have been trading more in line with domestic activity sentiment. The key question is whether further equity declines will be confined to the US or extend to European stocks. Futures suggest the latter today, meaning the Dollar may not face much idiosyncratic pressure.

The key US data release today is February’s PPI report. Many core PPI components feed into the Fed’s preferred core PCE measure, so markets will be watching closely. However, after yesterday’s unexpected reaction to CPI data, it is unclear whether a softer print today would trigger a Dollar correction. Consensus expects a 0.3% MoM core PPI increase, though expectations may have shifted slightly lower after the CPI release.

This morning, sentiment appears weighed down by the increased risk of a US government shutdown after Senate Democrats signalled they would block the bill aimed at preventing it. The proposed alternative—a short-term funding plan until 11 April—would merely delay a key market risk, hence the negative reaction in stock futures. While this risk has not yet had a clear impact on FX markets, which are still adjusting after recent volatility, it could turn into a USD-negative factor given the current strong link between the US economic outlook and the Dollar.

A period of stabilisation could be likely. However, in the coming weeks, most continue to see upside risks for the greenback.

Data:

12:30 - Core PPI m/m, PPI m/m & Unemployment Claims

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