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No rush to cut: Fed’s hawkish message gives the dollar a boost

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24 March 2025

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

T
he Federal Reserve threw the dollar a bone last week, as it held policy steady and warned that it would not be in a hurry to lower interest rates at upcoming meetings.

Fears surrounding the repercussions of President Trump’s erratic trade policy on the US economy have hammered the greenback so far this month. The FOMC slashed its growth forecasts on Wednesday, although it also poured cold water over the possibility of a recession, and hinted that it remains on course to lower rates at no more than a gradual pace in 2025. A great deal will, of course, depend on the impact of the tariffs on hard economic data, and the committee will no doubt be closely monitoring the fallout of Trump’s reciprocal tariffs, which are due to be unveiled next Wednesday.

In the UK, the Bank of England held interest rates steady last week. The MPC delivered a mild hawkish twist to its communications, however, as it upped its near-term growth forecast and said that inflation would peak higher than previously anticipated, which provided some modest support for the pound. Meanwhile, the Swiss National Bank lowered its policy rate by another 25 basis points, in what looks highly likely to be the final cut in the current cycle.

With the exception of upcoming tariff developments, markets will this week be focusing on the G3 business activity PMI figures for March (Monday), UK inflation figures (Wednesday) and the Fed’s preferred metric of US inflation (the PCE index) on Friday.

USD

The dollar clawed back some ground against its major counterparts last week, buoyed by a hawkish Fed and some broadly upbeat US data. As expected, the Federal Reserve held rates steady on Wednesday, while also issuing a rather sharp downgrade to its growth projections for the next three years. Yet, the FOMC appears increasingly fearful of inflationary risks, and the “dot plot” of interest rate projections suggests that officials still see just two 25 basis points rate cuts this year – as they did in December.

The main fear for investors of late has been that Trump’s unpredictable tariff proclamations would send the US economy careering into a sharp and disorderly downturn. Thus far, at least, this has not been overtly evident in the data, with reports on the labour and housing markets surprising to the upside last week. We’ll receive the preliminary PMI figures for March later today, which could go a long way in easing the market’s recession jitters. Focus will, however, be almost squarely on the unveiling of next week’s reciprocal tariffs, which bodes to be the next major event risk for financial markets.

EUR

Optimism surrounding the unveiling of Germany’s massive fiscal stimulus measures has propelled the euro to near the top of the month-to-date G10 FX performance tracker. We’ve seen a mild retracement in the common currency in the past few trading sessions, however. While Germany’s historic plans passed a key hurdle in parliament last week, it remains to be seen whether the measures will provide a meaningful boost to Euro Area growth, particularly given that most other countries in the bloc have limited room to follow suit.

This morning’s S&P PMI numbers for March will now be a key test for the euro. It will be interesting to see whether the news out of Germany is reflected in stronger sentiment among business owners, or whether the more immediate threat of US tariffs is seen as weighing on activity. Another downside surprise here could conceivably cement the case for another rate cut from the ECB in April, which is already almost 70% priced in by swaps.

GBP

As expected, the Bank of England held rates steady last week, although it delivered a mild hawkish twist in its communications. Right off the bat, the 8-1 vote was more empathic than anticipated (7-2), with Catherine Mann (who favoured a 50bp cut last time out) rejoining the hawks. Policymakers warned over the downside risks posed by President Trump’s tariffs, although they also upgraded their Q1 GDP estimate and said that UK inflation would rise higher this year than had been previously anticipated. All in all, the communications are consistent with our view for just two 25bp cuts during the rest of 2025.

Focus now quickly turns from monetary to fiscal policy, with the Labour Party set to unveil its Spring Statement on Wednesday. With the OBR’s UK growth forecast set to be slashed to bits, and the government’s fiscal headroom seemingly severely eroded, additional spending cuts on top of those reported last week appear highly likely. We are not expecting any news of further tax hikes this week, although we wouldn’t be shocked if Chancellor Reeves lays the foundations for such a strategy in the Autumn.

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