GBP

While sterling also soared against the dollar last week, it lagged a little behind other European currencies, particularly the euro. For now traders like the idea of fiscal stimulus in Germany, whereas the UK is in the process of budget consolidation given its much higher debt. Reports suggesting that Chancellor Reeves will be forced into spending cuts in the Spring will not have gone down well with investors.

Nevertheless, we think that the pound underperformance versus the euro may reverse. The UK economy is relatively less exposed to Trump’s tariffs, as it actually runs a deficit with the US. Further, economic and business news flow has turned more positive of late, and Bank of England communications remain relatively hawkish, with most MPC members stressing that no more than “gradual” cuts are likely during the remainder of the year. We look forward to monthly GDP numbers on Friday to confirm the trend of slightly better than expected economic news.

EUR

The German stimulus package unveiled last week removes the debt brake for most defense spending and launches a 500 billion euro financing vehicle to pay for infrastructure. This “whatever it takes” moment lifted the euro above the 1.08 level, and markets no longer expect the ECB to cut rates below 2%, with a pause at the bank’s next meeting in April now looking like the base case scenario for markets.

We note that potential negatives for the euro remain. Tariff uncertainty remains significant, and the substantial weakening of American commitment to the defense of Europe cannot be counted as a long-term positive. The sharp move in EUR/USD in the past week has also left it prime for a reversal, particularly should upcoming US data suggest that fears over an imminent contraction in the world’s largest economy are perhaps slightly overdone.

USD

The February payrolls report temporarily calmed fears that the chaos emanating out of the White House will damage US growth, coming in more or less as expected, and still consistent with steady though unspectacular job creation. While this report stabilised the dollar after its dramatic weekly fall, it could not get a rebound going, as US stocks continue to underperform those of the rest of the world in an apparent no confidence vote on Trump’s policies.

This week’s nonfarm payrolls report (Friday) should validate or dispel these fears. Markets are expecting no meaningful slowdown in the report, so the dollar may be vulnerable to a negative surprise here. In the meantime, the latest services PMI data from both S&P and ISM (Wednesday) will also be closely watched, with investors to be on the lookout for signs that things may not be quite as bad as currently feared. February inflation should be the economic focus this week, but news on tariffs, the war in Ukraine or frankly any other random occurrence in Trump’s social media timeline may well overshadow it. Once again, Trump last week delayed tariffs for Canada and Mexico that fall under USMCA, in another sign that a dilution of the levies is highly likely. This can partly explain the extent of the move lower in the greenback last week.