CAD
The loonie softened to start the week, with a backdrop of falling US equities proving a drag for the Canadian dollar. That leaves USDCAD trading around 1.44 ahead of tomorrow’s BoC decision, with risks skewed toward another leg higher, provided the Governing Council cuts rates and US CPI prints solid, in line with our base case expectations. All told, we continue to find it a struggle to turn constructive on the loonie with tariff risks looming large. But a move higher for USDCAD later this week would leave the pair trading at levels better reflective of fundamentals as we see them.
USD
As we wrote in our look ahead to this week, political developments were always likely to be front and centre once again, with plenty of the details around the Russia-Ukraine peace talks, tariffs, and European spending, still to be cleared up. That said, we had not expected to see a public rebuttal of German spending plans quite so quickly – with news that the German Greens are unwilling to support debt-break reform catching our eye yesterday. This, unsurprisingly helped to put a lid on euro strength, for the time being at least. But this was not enough to see any significant greenback gains, as rising recession fears saw US equity markets slide precipitously. The NASDAQ fell -4% on Monday, the largest single-day drop for the index since 2022, while the S&P also slipped -2.7% to start the week. This morning, it is European fiscal plans back in focus, with the German Green’s co-leader offering a counterpoint to yesterday’s headlines, suggesting that a defence deal could be agreed upon as soon as this week. This has naturally seen European FX take another leg higher, with the DXY index falling back 0.4% through early trading. With the Fed now in its blackout period ahead of next week’s meeting, that leaves JOLTs data this afternoon and tomorrow’s CPI report as the major non-political domestic events to keep an eye on for those looking for a dollar turnaround.
EUR
After last week’s European political love-in, signs that the German coalition in favour of greater spending is not quite as solid as it initially appeared helped take the shine off the euro on Monday. Specifically, yesterday saw the Greens publicly oppose change to Germany’s debt break – a core pillar of Chancellor-in-waiting Merz’s plan to boost infrastructure and defence spending. For now, we suspect this is a negotiating tactic, a view that appears widely shared by markets. Indeed, after treading water to start the week, the euro is back on the front foot through this morning’s early trading on further headlines out of Germany, up 0.6% against the dollar. But yesterday’s developments also highlight why we expect euro strength to be capped. While there remains some scope for EURUSD upside in the short run, especially with today’s light data calendar set to keep politics in focus, we continue to think that markets are underestimating the political challenges that need to be overcome, and the downside risks that they pose.
GBP
Given a light UK data calendar for the next few days, the pound is once again being dragged higher by the euro, with little on the domestic front to disrupt this trend. As of writing, this leaves GBPUSD trading just north of 1.29, with 1.30 potentially in range if EURUSD can continue to rally. Even so, we continue to think GBPEUR is more informative from a fundamental perspective. The cross has slipped back to the mid-1.18s, in part prompted by the expected boost to fiscal spending on the continent. However, we also suspect domestic UK developments are also beginning to weigh at the margin. Growing noise around benefits cuts come March 26th is likely to deliver a further knock to sentiment, at least in the short run. If realised, this would also point toward GBP underperformance this month, albeit we are inclined to view reforms to the benefits system as a long-term positive for the pound, once the initial negative headlines begin to subside.
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