Sovereign International Daily Market Report
Risk currencies retreat amid Ukraine war fears, tariff risk
The safe-haven US dollar has posted modest gains in the past few trading sessions, reversing some of its losses from late-last week.
Highlights:
Optimism surrounding the peace negotiations between Russia and Ukraine has faded somewhat so far this week. The question is now not necessarily whether a deal will be struck, but whether or not the agreement will lead to a total removal in geopolitical risk in the longer-run - as things stand, investors are not entirely convinced, and that is keeping the rally in risk currencies at bay.
Some solid labour market figures out of the UK helped keep the pound close to its highest levels in two-months on the dollar. The euro, meanwhile, underperformed its major counterparts on Tuesday, which we see as a partly a consequence of elevated tariff fears. Further afield, the Reserve Bank of Australia cut rates for the first time in the current cycle, as expected, although it struck a hawkish note in its communications, suggesting that further easing would likely be gradual.
Next up for markets will be Wednesday FOMC meeting minutes. This will be followed by PMI numbers out of the G3 economies on Friday.
USD
Last week’s retreat in the US dollar has partly reversed so far this week, as markets take a slightly less optimistic view on the Russia-Ukraine negotiations, while keeping one eye on additional tariffs from the Trump administration. While there may be scope for a further improvement in risk appetite (and weakness in the dollar) in the event of a peace deal, we think that any move would be limited by:
a) The possibility that the deal leads to nothing more than a temporary pause in the war, and not a removal of long-term geopolitical risk.
b) The fact that the striking of an agreement already appears largely priced into the value of exchange rates.
The main focus during the rest of the week will likely be Wednesday's FOMC meeting minutes. We expect policymakers to flag a lack of confidence on inflation, while emphasising that additional Fed cuts will gradual. Friday’s PMI data from S&P will also be closely watched, with economists eying a mild pickup in business activity in February.
EUR
The euro was among the worst performing major currencies in the world on Tuesday. The EUR/USD exchange rate had edged above the threshold last week to its highest levels since late-January, although some of these gains have since evaporated amid jitters surrounding the Russia-Ukraine negotiations. We think that the retracement is evidence of just how difficult it will be for the common currency to post any meaningful advances so long as the spectre of Trump’s protectionism looms in the background. Frankly, we have little idea as to what form his tariffs towards the EU will take, whether it be blanket or sectoral. What we do know, however, is that these trade restrictions are almost certainly on the way, and that may make it difficult for a sustained reversal in sentiment towards the euro.
Without question, the most noteworthy macroeconomic release out of the Euro Area this week will be Friday’s preliminary PMI figures for February. Given the growing risk of Trump’s tariffs, which will perhaps be implemented sooner than much of the market had anticipated, these timely data points take on added importance. Economists are bracing for an uptick in the composite index - any downside surprise here would risk being greeted with a bout of euro weakness.
GBP
Sterling posted modest advances against its peers on Tuesday morning following the release of a slightly stronger-than-expected UK jobs market report. Unemployment remained unchanged at 4.4% in December, below the 4.5% estimate, and earning growth including bonuses accelerated to 6% from 5.6% (5.9% once bonuses are excluded). While the news will be no doubt welcomed by Downing Street, there remains a high degree of pessimism surrounding the state of Britain’s labour market, and we see it as inevitable that the chancellor’s business tax raid (that comes into force in April) will trigger a jump in layoffs and weaker public sector pay increases in the coming months.
The rest of the week will be action packed for GBP. We have not yet received the January CPI figures at the time of writing (these will be released at 7am GMT on Wednesday morning), but a bout of volatility in the UK currency can be expected around the release of the report. Friday’s retail sales and PMI figures should also provide us with a timely snapshot of UK consumer demand and business activity respectively.
Economic Calendar - 19/02/2025-21/02/2025
Wednesday (19/02)
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