Markets Remain Wary of Tariff Risks
Impact on GBP: Cable steadies above $1.2600 as market caution prevails
GBP/USD remains stable above $1.2600 this morning, supported by renewed Dollar weakness despite ongoing market caution over trade war concerns. Investors turn their attention to BoE Chief Economist Pill's speech and US Consumer Confidence data for further direction.
The Relative Strength Index (RSI) on the 4-hour chart is retreating toward 50, signalling a slowdown in bullish momentum. Additionally, GBP/USD has struggled to secure a daily close above the 100-day Simple Moving Average (SMA) at $1.2655, despite briefly trading above this level for three consecutive sessions.
On the downside, initial support is at $1.2600, followed by $1.2530 and $1.2500. If GBP/USD breaks above $1.2650- $1.2655 and confirms it as support, the next resistance levels could be seen at $1.2700- $1.2710 and $1.2750.
Early this morning, a risk-on mood pressured the Dollar, lending support to GBP/USD. However, the pair is struggling to maintain upward momentum. A cautious stance from BoE officials on inflation could support the Pound, while any indications of continued policy easing—despite stronger-than-expected UK inflation data for January—may weigh on GBP/USD.
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Impact on EUR: Negotiated wages play a limited role for the ECB
As anticipated, the Euro’s post-election rally in Germany was short-lived, as markets had not factored in a political risk premium ahead of the vote, and key downside risks to the currency persisted. Chancellor-in-waiting Friedrich Merz is reportedly in talks with the SPD for a swift agreement on EUR 200bn in defence spending, following his comments on Europe’s need for greater independence from the US. However, markets are unlikely to view defence spending as a driver of Eurozone economic growth, limiting its potential impact on the Euro.
The ECB will today release its Euro area negotiated wages data for Q4 2024. In Q3, the index rose to 5.4% year-over-year, primarily due to one-off payments, which the ECB largely disregarded. The central bank’s target is around 3%, and while a slowdown in negotiated wages may take time to materialise, other indicators, such as the Indeed wage growth tracker, which fell to 2.5% in January, suggest easing pressures. The ECB is likely to maintain its dovish stance regardless of today’s data, potentially capping any Euro gains.
EUR/USD could test $1.0500 amid some US Dollar weakness today, but the broader outlook remains bearish, with a possible return to $1.0300 in the near term.?
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Impact on USD: Dollar could face downward pressure today
The Dollar started the week on firmer footing, gaining additional support in late European trading after President Trump stated that tariffs on Canada and Mexico are still moving forward. The 25% duties, initially delayed by one month in early February, face a new deadline on Monday, March 3, to prevent a potential USMCA trade conflict. Trump may maintain pressure on tariffs until the last moment to strengthen his negotiating position, similar to February. While the baseline expectation remains that these tariffs will not be implemented, markets currently assign only a modest probability to this scenario. However, FX markets may take the risk more seriously as the week progresses.
On the data front, today's Conference Board consumer confidence report will be closely watched. The index spiked in November following the U.S. election but declined in December and January. Consensus expectations point to another decline to 102.5 from 104.1, with 100 seen as a key threshold for a market reaction. Additionally, the Richmond Fed indices will be released today, following weaker regional Fed activity readings from Chicago and Dallas on Monday.
The main upside risk for USD today would be additional hawkish tariff-related comments from Trump or other U.S. officials. Aside from that, and given the market’s tendency to downplay tariff threats, the Dollar could edge lower, particularly if consumer confidence data disappoints. A weaker reading could reinforce concerns over softening consumption and lead to some dovish repricing of Federal Reserve expectations.
No Major Data.
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