EUR/USD Optimism Starts To Wane
GBP/USD loses momentum
GBP/USD has declined toward $1.2925 in early European trading on Friday, as the Pound weakens following the release of UK growth data. Market focus will now turn to the preliminary Michigan Consumer Sentiment report for March, due later in the day.
UK economic data published by the Office for National Statistics (ONS) showed a 0.1% contraction in GDP for January, missing expectations of 0.1% growth. Additionally, UK industrial production fell 0.9% month-on-month, a sharper decline than the 0.5% recorded previously and below the market forecast of -0.1%. This weaker-than-expected data has put pressure on the Pound.
The Bank of England is expected to keep interest rates unchanged at 4.5% in next week’s Monetary Policy Committee meeting, maintaining a "gradual and cautious" approach to policy easing. In February, the central bank lowered interest rates by 25 basis points due to concerns over economic growth.
Meanwhile, signs of easing US inflation could support expectations for a Federal Reserve rate cut in June, potentially helping to limit further losses for the pair. Barclays has previously projected a single 25 basis point cut in June, and short-term interest rate futures indicate a nearly 75% probability of a quarter-point reduction by then, according to the CME FedWatch tool.
No Major Data
Some modest reappraisal of the Euro
The FX options market had been warning about last week's upside spike in EUR/USD. However, the latest indications suggest EUR/USD upside appetite is fading. Here, the one month EUR/USD risk reversal has softened quite a lot. Last week, this pricing showed a skew for Euro calls over Euro puts of +0.45%. That was the most bullish the market had been in this one month tenor since 2021. However, that skew has now dropped to -0.14% in favour of Euro puts. Helping that switch in sentiment is probably the looming threat of tariffs in early April. There seems little love lost between European and US leadership currently, and next month's reciprocal trade tariffs could see Europe hit hard.
At the same time, the market is focusing on developments in the German lower house - the Bundestag. CDU leader Friedrich Merz is trying to get the Greens on board to pass constitutional debt-brake reform and the EUR500bn infrastructure package. There could be a lot more noise to be had in these negotiations as the Greens try to secure key concessions ahead of a crucial vote next Tuesday. Any headlines that the Greens are refusing to back the bill stand to hit EUR/USD intra-day.
Tariff news and German politics is a downside risk to EUR/USD today. Soft US consumer confidence data is an upside risk. $1.0810-$1.0880 could be the EUR/USD range today.
No Major Data
Focus on consumer confidence
The DXY Dollar index has moved back above 104 as European currencies weaken slightly. Reports indicate that a US government shutdown this weekend has likely been avoided, with the Senate preparing to pass the House-approved bill. While this development might provide a modest boost to US equities, larger factors remain in focus—such as the trajectory of trade tariffs and whether weak consumer and business sentiment will impact actual economic activity. Last Friday, Federal Reserve Chair Jerome Powell noted that sentiment indicators have not been reliable predictors of consumption growth in recent years.
Attention today will be on the March consumer sentiment release at 1400GMT. Sentiment readings have declined sharply over the past two months, and another significant drop could weigh on the Dollar. However, a more substantial market reaction may come on Monday when February retail sales data is published. Consensus expects a notable rebound following January’s declines (-0.9% month-on-month headline, -0.5% core). If that recovery fails to materialise, it could pose a downside risk for the Dollar.
Meanwhile, comments from Treasury Secretary Scott Bessent regarding the Dollar attracted some interest yesterday. He described this year’s Dollar decline as a “natural adjustment” following last year’s rally. This is unlikely to signal any shift in US Treasury policy, but rather an acknowledgment of the ongoing economic transition. While Washington may prefer a weaker Dollar in the long run, a global trade war remains a supportive factor for the currency.
Data: Michigan Consumer Sentiment 14:00