Sizing Up The Dollar Correction

GBP : Pound upsurge pauses ahead of key data releases

We have learned from the FX markets this year not to follow major headlines or breakout moves, and most people think the same is true for the GBP/USD pair near $1.2600/$1.2610. Most anticipate gains will wane rather than go higher, since this seems to be a critical resistance zone. In retrospect, it could have been wise to raise Sterling hedging ratios for the year at these levels.

This week, Sterling will be watching UK jobs statistics, CPI, and a speech by Bank of England Governor Andrew Bailey tomorrow morning, in addition to US foreign policy developments. With former MPC hawk Catherine Mann emphasizing a "non-linear" shift in UK employment, expect special attention to the jobs data.  

Most people are still doubtful that the GBP/USD exchange rate can stay over $1.2600 and anticipate a decline to $1.2400 by the end of March.  

EUR : European leaders gather in Paris to discuss future

The sudden change in US foreign policy last week has caused European leaders to pause and think deeply. They are currently meeting in Paris to establish a common position after being shut out of the Saudi Arabian negotiations. The main point of contention will be whether or not defense spending should be set at 3.0 to 3.5% of GDP and fiscal regulations should be relaxed to meet this goal. Should that be the case, long-term interest rates in Europe might rise. This was hinted at Friday when European bond yields remained stable, deviating from the US Treasury yield decrease that followed poorer US retail sales data.

The wider trend of growing US isolationism is scarcely good for the Euro, even though progress toward a ceasefire in Ukraine has given the EUR/USD some slight support. Clear indications of significantly lower US economic data would probably be necessary for a sustained EUR/USD gain from here, which is not what we expect.

The majority still believe that the EUR/USD correction is losing steam in the $1.0535–$1.0575 region and that the pair will return to $1.0300 in less than a month.

The Eurozone agenda for this week includes the flash February PMIs on Friday and consumer confidence data on Thursday. Markets will also be closely monitoring Germany's elections this weekend; given the present European leadership void, a close outcome and possible coalition delays could be interpreted as Euro-negative. 

USD : Sizing up the correction

Since its peak in early January, the DXY Dollar index has dropped by just over 3%. The temporary tariff reprieve for Canada and Mexico is one indication that markets believe US President Donald Trump's trade bluster may be harsher than his actual actions. On the other hand, the US retail sales data for January released on Friday indicates that US growth is off to a slower start in 2025. However, several foreign economies, like Japan, have reported faster-than-expected growth. Nonetheless, the White House should notice that net exports accounted for a large portion of Japan's fourth-quarter growth, supporting the idea that US trade partners are profiting from robust US demand. For comparison, the US goods trade imbalance in 2024 was $1.2 trillion, of which $68 billion came from Japan. 

How much more correction of the Dollar is required is now the crucial question. The prevailing opinion: not much. Tariffs are still a danger, and the foundation for "reciprocal" tariffs last week indicates that significant actions will probably be taken in the second quarter. Tariffs have historically helped the dollar, even after its 10% increase from October to January.

Most people think this dollar slump is coming to an end, unless you are convinced that US economic statistics will continue to deteriorate drastically from here. For the first quarter, a DXY low in the 106.00–106.35 zone appears expected. 

Following today's US Presidents' Day vacation, market attention will turn to geopolitical developments this week, especially talks in Saudi Arabia and Europe as European, Russian, and US officials attempt to find a solution to the conflict in Ukraine. The FOMC minutes on Wednesday and the business and consumer confidence statistics on Friday are the two most notable items on the comparatively thin US data docket. 

Today's Highlights

GBP : No Data

EUR : No Data

USD : 23:00 FOMC Member Waller Speaks