Foreign Exchange Analysis ~ 14 April 2025

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GB Pound

What happened last week?

Sterling edged higher last week as the UK economy surprised to the upside. February GDP rose 0.5% month-on-month, well above the 0.1% forecast, driven by a rebound in services output. On an annual basis, growth reached 1.4%, beating consensus expectations. However, concerns around broader market fragility persisted. The Bank of England warned that the UK’s open economy is particularly exposed to financial volatility linked to U.S. trade policy and flagged that the risk of further sharp corrections in global markets has increased. Gilt yields climbed in sympathy with U.S. Treasuries, with 30-year gilts reaching levels not seen since the late 1990s.

What to watch for in the short-term?

Focus this week turns to the UK labour market and inflation prints. Tuesday’s unemployment and earnings figures will be followed by CPI data on Wednesday. These releases will help shape short-term rate expectations as markets weigh domestic strength against international risks. Gilts and sterling remain sensitive to shifts in global sentiment.

What about the coming months?

While the BoE is still expected to ease policy through 2025, rising yields, fiscal concerns and volatility in sovereign debt markets could complicate this path. Leveraged bond market exposures and elevated issuance needs have made gilts more vulnerable to capital outflows. The pound’s trajectory may depend as much on global conditions as domestic data over the coming months.

Calendar

Tuesday 7am | Average Earnings and UK Unemployment rate

Wednesday 7am | UK CPI

US Dollar

What happened last week?

The U.S. dollar saw mixed performance amid a volatile week driven by tariff developments and inflation data. Core CPI rose just 0.1% in March, 2.8% y/y, the lowest monthly increase in nine months. Despite softer inflation, sentiment deteriorated as the University of Michigan’s index fell to 50.8, its weakest since June 2022, with 1-year inflation expectations jumping to 6.7%, the highest since 1981. Yields surged across the curve as U.S. Treasuries came under pressure, with analysts pointing to hedge fund deleveraging and unwinding of basis trades. Broader fiscal uncertainty and market volatility also led some participants to factor in an added credit premium on USD assets. While the Fed’s minutes confirmed a cautious stance, traders noted that bond market turmoil appeared to play a role in the 90-day pause on tariffs announced midweek.

What to watch for in the short-term?

Retail sales and industrial production figures due Wednesday will offer insight into consumption and output trends. Housing data follows Thursday, alongside earnings from several major banks and corporates. Treasury markets remain in focus, with further instability likely to influence Fed expectations and broader dollar sentiment.

What about the coming months?

Markets continue to price in rate cuts through 2025, with expectations for a year-end fed funds range of 3.5 to 4.0 percent. However, rising Treasury yields, forced asset sales, and fears of a shift from trade war to capital war with China have introduced new risks. A near-term inflation shock and further bond market disruption could complicate the Fed’s path and fuel additional dollar volatility.

Calendar

Wednesday 13.30pm | U.S. Retail Sales

Euro

What happened last week?

The euro traded defensively as global trade tensions weighed on sentiment. The STOXX Europe 600 fell 1.92%, led by declines in France, Italy, and Germany. Industrial output in Germany and Italy contracted in February, and Italy cut its 2024 GDP forecast to 0.6% from 1.2%. Despite isolated data gains, the broader Eurozone outlook remains fragile, particularly given its large trade surplus exposure to the U.S.

What to watch for in the short-term?

The ECB is expected to announce a 25-basis point rate cut on Thursday as March inflation moved closer to target. Markets will focus on the ECB’s press conference for guidance on managing inflation risks tied to tariffs and weaker growth. In the near term, the euro remains closely linked to dollar moves as markets digest macro divergence.

What about the coming months?

With approximately 80 basis points of ECB rate cuts priced for 2025, the outlook remains tilted toward easing. However, sticky inflation and rising trade barriers could complicate this path. Later in the quarter, the euro’s direction will depend on European Commission and ECB policy responses, as well as Germany’s fiscal stimulus. Valuation swings could hinge on a flight-to-safety move, particularly if global growth slows and the euro is viewed as a safe-haven during a U.S. recession.

Calendar

Thursday 13.15pm | ECB Interest Rate Decision

Friday 8:15 - 9:00am | Eurozone Manufacturing & Services PMI

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