Dollar Under Pressure with Payroll Data The Focus
- Mar 6
- 3 min read
GBP : GBP/USD continues to rally
The GBP/EUR exchange rate dropped to €1.1937 on Thursday, the lowest since January, as the Euro gained strength due to Germany's significant defense and infrastructure spending. German bond yields have risen due to plans to change the constitution to allow for more borrowing, which has drawn significant capital inflows. "The motto 'whatever it takes' must now apply to the country's defense, given the threats to our freedom and peace on our continent," stated incoming Chancellor Friedrich Merz.
This represents a wider realignment of the market. Once supported by tariffs, the dollar is currently under pressure as investors reevaluate their effects. The GBP/USD rose beyond $1.2730 and gained momentum when EUR/USD broke through important resistance around $1.0530.
EUR : All eyes on ECB rate cut decision
European markets have seen a significant change as a result of Germany's move to loosen budgetary restrictions and add EUR 900 billion in additional spending. German bond yields increased by 40 basis points yesterday, while other European sovereign bonds saw comparable changes. Stronger economic growth, possible inflationary pressures, and larger deficits are what investors are expecting. Market analysts believe that these changes are unlikely to completely revert, however there may be some brief declines after the quick adjustment.
The EUR/USD exchange rate is now at $1.0900 after rising more than 3% in the previous two sessions. Short-term valuation models only predict a minor risk premium of about 1.2% in spite of this spike. The two-year swap rate difference between the Euro and the Dollar has significantly narrowed, which is the cause of this. In a rare and striking split, markets are decreasing their predictions for the Federal Reserve's interest rate while simultaneously pricing in higher ECB rates. Last week, the Euro-Dollar two-year swap rate spread was -175 basis points; today, it is -145 basis points.
It is generally anticipated that the ECB will lower interest rates by 25 basis points today, and recent market movements are unlikely to have an impact on this decision. Nonetheless, the policy statement and press conference's language will probably be influenced by both market and fiscal events. Whether the ECB would stop referring to monetary policy as "restrictive" after cutting rates to 2.5% is one of the key questions. Although this didn't appear realistic at first, the ECB's more hawkish position might be supported by the arrival of large fiscal spending and its possible inflationary implications. President Christine Lagarde might still help the Euro by indicating a cautious approach to further rate reduction, even if the majority of the ECB rate repricing has already taken place.
USD : Dollar under pressure with payroll data the focus
The United States' trade policy has undergone recent changes. The automobile industry, which mostly depends on cross-border supply networks with Canada and Mexico, was given an exception by the US under the USMCA. This industry was shown to be especially susceptible to the new 25% tariffs. The idea that Mexico is closer to reaching a possible agreement to postpone tariffs is further supported by Canada's seeming more assertive response to US trade measures than Mexico's. The Mexican Peso (MXN) may therefore do better than the Canadian Dollar (CAD). But during the past week, both currencies have marginally increased because the Dollar hasn't been able to capitalize on trade-related developments due to continued appraisal of the US economy's strength. Furthermore, the possibility of long-term tariffs has not yet been completely factored into markets.
With the exception of the announcement of January's trade deficit, which is anticipated to have increased even more, today's US economic calendar is comparatively quiet. The US administration may respond to this with a more muscular trade strategy. Although it could be tempting to expect the dollar to bounce right away, prudence is advised in light of the impending payrolls report. Although the dollar has been under constant pressure in March, it's possible that the magnitude of its loss has been overstated. In the upcoming weeks, a dollar recovery may be supported by the reality of extended US tariffs and their effects on the European economy. For now, however, the most likely scenario for Dollar bulls may be a period of consolidation in the DXY index between 104 and 105.
