As US President Trump claimed that he would impose tariffs on Canada and Mexico starting next week, the US dollar index suddenly jumped on Thursday and returned to above the 107 mark, eventually closing up 0.74%, the largest single-day increase in two months. As of now, the US dollar is quoted at 107.37.
Views of Federal Reserve officials:
Kansas Fed President Schmid: The concept of core inflation may need to be reconsidered because food prices now behave more like other commodities
Richmond Fed President Barkin: The 2% inflation target has worked for a long time
Cleveland Fed President Hammack: Interest rates may be close to neutral, and policies do not seem to be significantly restrictive, or interest rates may need to be kept unchanged for quite a long time. The current stock market valuation is high, and the economy can adapt to higher interest rates in the long run
Philadelphia Fed President Harker: The policy interest rate is still restrictive enough, and the situation is inclined to keep the interest rate unchanged before it becomes clear.
The number of initial jobless claims in the United States for the week ending February 22 was 242,000, the highest since the week ending December 7, 2024; the monthly rate of durable goods orders in the United States in January was 3.1%, the largest increase since July 2024; the U.S. existing home sales index in January fell to a record low.
The annualized quarterly revised value of real GDP in the fourth quarter of the United States was 2.3%, in line with expectations, and the PCE price index was revised up to 2.7%.
Trump made it clear that tariffs on Mexico and Canada will be implemented on March 4, and said that reciprocal tariffs will be implemented on April 2; the Canadian Prime Minister responded: If the U.S. tariff policy is implemented, it will respond strongly immediately. For the United Kingdom, Trump said that if a trade agreement is reached, there is no need to impose tariffs on the United Kingdom.
The leader of the Kurdistan Workers' Party issued a historic statement calling for reconciliation with the Turkish government.
Our forecast for the PCE index is mild, especially compared with the 0.5% month-on-month increase in CPI in January, which is slightly lower than the market consensus. We expect the overall PCE to increase by 0.3% month-on-month and the core PCE to increase by 0.2% month-on-month. This is significant because financial markets and the Federal Reserve remain optimistic about inflation and generally prefer to cut interest rates. However, the confirmation of inflation data is crucial.
By the end of the first quarter of 2025, fear will return as trade threats trigger the euro/dollar to fall below parity. In this environment, it is predicted that GBP/USD will also suffer losses in global markets, with GBP/USD falling to 1.21. However, a reversal from multi-month lows is indeed expected.
In terms of trade policy, the global economy is not out of the woods yet, and it expects headlines around tariffs to continue to appear during 2025 and 2026. If the trade war escalates, it expects business confidence to take a major hit as the US economy is hit less than other major economies, which tends to support the dollar.
In terms of interest rates, the Federal Reserve is expected to cut interest rates from the current 4.50% to 4.00% by the end of 2025. Looking at the UK's monetary policy, the bank expects the Bank of England to cut interest rates to 3.75% by the end of this year. The dollar is expected to lose traction later in 2025, which will allow GBP/USD to rebound to 1.32 by the end of 2025.
The tariff war between the United States and the eurozone will make the eurozone economy vulnerable to growth, which has already broken due to weak demand. This situation will put pressure on the euro. Meanwhile, uncertainty over the outcome of negotiations to form a coalition government in Germany also puts the euro at a disadvantage. The conservative Christian Democratic Union (CDU) led by Merz is likely to form a government with the Social Democratic Party (SPD) of the outgoing chancellor.
EUR/USD fell vertically to around 1.0420 after failing to hold 1.0500 on Thursday. The major currency pair is struggling to hold the 50-day exponential moving average (EMA), which is trading around 1.0440. The RSI is hovering below the 60.00 level, suggesting that upside remains limited. On the downside, the February 10 low of 1.0285 will act as a major support area for the pair. Conversely, the December 6 high of 1.0630 will act as a major hurdle for euro bulls.
We tend to believe that the correction in the US dollar will not be too large, but at the same time we will look for clues from technical analysis. The USD/CHF pair has formed a double top reversal pattern, which could lead to a further drop of 2.5% in the pair. It is therefore important that the USD/CHF can quickly rally above the 0.8965-0.9000 area to negate the pattern. For the USD index, we would like to see support in the 106.00/106.30 area. The weak performance of the US consumer has hit the dollar in recent times. The surge in US initial jobless claims is likely to be the biggest risk to the dollar in the short term. As for the revised data of US GDP in the fourth quarter of 2024, it is not expected to have much impact on the market. Meanwhile, Musk's efforts to cut US government spending will also continue to be in the spotlight. Judging from the rhetoric coming out of Washington, there is a clear effort to reduce the budget deficit. In fact, the term premium (i.e. fiscal risk) on the US 10-year Treasury bond has fallen from 70 basis points to 30 basis points this year. Although the lower US yields have put pressure on currency pairs such as the USD/JPY, a more balanced budget may eventually have a positive impact on the dollar. Because lower yields are good for the stock market, the wealth effect, and consumption, while also maintaining America's pre-eminence in growth.