Markets Wary as Tariff Decision Awaits
- Mar 3
- 3 min read
Updated: Mar 17
GBP : All eyes on Bailey's testimony this week
The Pound will mostly be influenced by outside sources this week, as the UK data calendar is quiet. The main domestic event on Wednesday will most likely be the interrogation of Bank of England Governor Andrew Bailey and other MPC members by the Treasury Committee. The February BoE cut was accompanied by a split of dovish votes, but subsequent data has indicated greater hesitancy on easing. December wages, January CPI, and fourth-quarter growth all showed better-than-expected results, and there is a chance that Bailey's posture will shift toward hawkishness.
The anticipation is that the UK budget event at the end of March could put additional pressure on the pound by possibly unsettling the weak gilt market. The market believes that GBP/USD rallies won't prove sustainable beyond the very near term. In the upcoming weeks, Cable (GBP/USD) might break below the $1.2500 mark, but this week, the pair might hold its ground.
EUR : Euro rebounds but remains fragile
The future of the Euro is still dependent on US tariff developments and peace negotiations with Ukraine. The Trump-Zelenskyy episode hurt EUR/USD late Friday, but since trading resumed on Sunday night, it has recovered, possibly due to reports that Ukraine is still open to a mineral deal with the US and that the EU is actively working to get the US back to the bargaining table with Ukraine. Following some somewhat dovish signs from regional prints, the Eurozone today announced its inflation forecasts for February. Germany's inflation stayed the same, the core measure fell, and the CPI in Spain and Italy undershot. There is general agreement that the eurozone headline CPI will slow to 2.3% and the core CPI to 2.5%.
We are awaiting the European Central Bank's interest rate decision this week, and a drop is expected this Thursday. However, there aren't many negative risks for the Euro ahead of Thursday because markets are pricing in three cuts by year's end in the Eurozone.
USD : Dollar retreats to start the week
Following a heated debate between Presidents Trump and Zelenskyy, US-Ukraine negotiations broke down on Friday. Markets continue to envision a possible truce between Russia and Ukraine, even if the US withdrew from mediating a peace agreement and the mineral deal is off. A summit with European leaders emphasized the US's crucial role in negotiations while pledging to end the war. If a peace agreement is struck, exposed currencies (EUR, Scandies) would rise, but geopolitical risk could rise if the US confronts Europe and Ukraine. Updates on US tariffs on Canada and Mexico, which are expected to start at 25% tomorrow, are the main market focus today. A last-minute agreement is being pushed by officials, and the US may lower tariffs or demand that both nations equal US duties on China, which could raise them from 10% to 20%.
Major banks are not pricing in 25% tariffs as the baseline, despite the fact that CAD and MXN declined last week. The Loonie is lagging the Peso, which suggests that the FX market still views Mexico as having a higher chance of avoiding tariffs. Given that markets are leaning toward yet another tariff delay, today's events are probably going to be binary for FX, with greater downside risks than upside for CAD and MXN.
