USD

Trying to predict the next tariff news to hit the newswires is a bit of a fool’s errand, so it is perhaps more productive to focus more on the macroeconomic backdrop. Last week’s nonfarm payrolls report was, once again, consistent with a US labour market that remains strong. Companies continue to create jobs at a healthy clip, the unemployment rate is hovering around levels consistent with full employment, and the report showed a surprise uptick in wages in January – monthly earnings rose at their fastest pace since mid-2023.

All of this positive economic news, plus the looming threat of price hikes from Trump’s tariffs, makes it increasingly difficult to justify any further interest rate cuts at all from the Fed in 2025. With rates in the US remaining almost the highest in the G10, we think that it will be difficult for the dollar to sell-off in spite of its admittedly very expensive levels.

EUR

Last week’s January inflation data for the Euro Area surprised to the upside. We note that the core index first fell to 2.7% nine months ago, and has failed to improve at all since that time. As in the UK, dismal growth is more a factor of restrictions to supply than insufficient demand, and we think that the ECB will, therefore, have difficulty cutting rates much further.

Tariffs and the manufacturing recession are certainly negative factors for the common currency, but we think that current levels against the dollar largely price them in already. All eyes will now be firmly on the Trump administration, which has firmly indicated that trade restrictions aimed at the European Union are in the offing. Reports have suggested that a blanket tariff of 10% could be on the way, and it will be interesting to see to what extent this is already incorporated into the price of the euro – we would suggest, not entirely.

GBP

Weaker than expected economic data led to a very dovish MPC voting split after the Bank of England’s February meeting. All nine members of the rate-setting committee opted for lower rates last week, with two of the nine members, including hawk Catherine Mann, actually voting for a 50bp rate reduction, rather than the 25bp one delivered. The revised 2025 economic growth projection, which was slashed in half relative to the previous estimate, provides a clear indication of just how concerned the BoE is with Britain’s economy.

Sterling bounced back after an initial sell off, but it is still the worst performing G10 currency so far in 2025. We think the prospects for the pound are relatively good, however. Inflation remains sticky and wage growth remains elevated, and firmly positive in real terms. We think that markets may be overstating the degree to which the Bank of England will be able to cut rates this year, as the MPC itself stressed that ‘gradual’ cuts remain the way forward.