GBP

The UK seems to be developing into something of a safe haven amid the geopolitical storm. The meeting between Prime Minister Keir Starmer and President Trump went as well as anyone could have hoped, and the possibility of a trade agreement between the US and UK, which would avoid the imposition of trade restrictions, was floated. At any rate, Britain runs a trade deficit with the US, and has very limited dependence on external demand, so its exposure to tariffs is not at all massive.

Bank of England officials are also sounding more hawkish as inflation fails to ease further. MPC member Ramsden raised fresh concerns over the impact of another acceleration in wages on consumer prices, explicitly saying that this could slow the pace of UK rate cuts. Indeed, swap markets are now barely pricing in two additional rate reductions during the remainder of 2025, which seems reasonable to us. The net result is that sterling rode the dollar-buying storm rather well, and it outperformed every other major currency last week.

EUR

The gap that developed last year between the economic performance of the Eurozone and that in the US seems to be closing. On balance, Eurozone data continues to come in stronger than expected, admittedly this isn’t saying much, while US economic releases have largely surprised to the downside in the last couple of weeks. This mattered little last week as markets focused on the apparent unravelling of the mutual security system that has bound Europe and the US since 1945, and sent the common currency lower. We are confident that cool heads will prevail, but clearly the chances of a ceasefire have taken a hit in recent days.

The European Central Bank’s March meeting now looms. Another 25 basis point rate cut is all but certain, and the main unknown is how much further will the central bank be willing to lower rates given stubbornly high inflation. The threat of EU tariffs also continues to loom large. Trump again warned last week that these were imminent, but he has yet to provide any clear details of these restrictions, other than to issue a number of rather vague threats.

USD

Cracks are starting to appear in some of the high-frequency indicators of the US economy. Weekly jobless claims rose to the highest level in 2025 so far, although they remain low by historical standards. Consumer spending actually contracted in January. Finally, the trade deficit increased massively at the beginning of the year, as companies built up stock ahead of the incoming tariffs. Arithmetically, this implies lower GDP, and the Atlanta Fed GDPNow estimate, which provides a running gauge of US GDP growth, is now pointing to a shock annualised contraction in the first quarter of the year.

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.