## United States
The dollar experienced a decline last week, influenced by persistent concerns about the U.S. economy and fiscal initiatives in Europe. The Atlanta Federal Reserve’s GDP tracker indicates that the U.S. economy is shrinking at an annualized rate of 2.4%, though this may be an overestimation. While the U.S. 10-year yield had previously fallen 50 basis points over a seven-week period, it rose by about 15 basis points last week. In comparison, Eurozone 10-year benchmark yields increased by roughly 35 basis points. The narrowing of the U.S. premium on two-year rates further contributed to the dollar’s weakness.
The European Central Bank reduced its key rate by 25 basis points last week, and the Bank of Canada is likely to implement a similar cut soon. Looking ahead, the Fed is expected to cut rates more aggressively than other central banks, with futures markets pricing in two rate cuts, and a 65% likelihood of a third by the year’s end. Key data releases to watch this week include inflation statistics from both China and the U.S., with expectations that both CPI and PPI in the U.S. might show slight decreases.
As the U.S. navigates tariff threats, particularly concerning steel and aluminum, economic uncertainty and volatility are on the rise. This uncertainty is notable in the markets, with expectations of a cut in interest rates bolstered by disappointing economic data. March 15 marks the deadline for the U.S. to address its debt ceiling, adding additional pressure as the threat of a government shutdown looms.
Turning our attention to prices, the Dollar Index witnessed a sharp decline last week due to diminishing confidence in U.S. economic health. The Index settled below its lower Bollinger Band, with resistance levels appearing near 104.40.
## Eurozone
In the context of U.S. actions concerning tariffs and geopolitical alliances, Eurozone interest rates and exchange rates have faced upward pressure. Germany’s planned spending, amounting to 500 billion euros over the next decade, has contributed to rising core European benchmark 10-year yields. While the market perceives a 60% chance of another rate cut by the ECB next month, this sentiment reflects broader confidence in European growth prospects.
Following the recent ECB meeting, expectations are for further rate adjustments, given prospects for economic expansion and inflation. The euro enjoyed its best performance since 1990, climbing near $1.0890, which is the highest since the days following the U.S. election. Resistance near $1.0940 could pave the way for a test of the $1.10 mark. Current market support can be found around $1.08.
## United Kingdom
The broader trajectory of the U.S. dollar has influenced sterling, which has shifted following a 10% fall from late September to mid-January. Brexit implications are also playing a role, with ongoing discussions about defense spending creating new opportunities for UK-EU cooperation. The British economy demonstrated resilience in the final quarter of last year, and growth projections for Q1 2025 are positive, despite a front-loaded forecast.
The economic calendar this week is light, focusing on the January GDP report. Sterling appreciated 2.65% last week, marking its most significant advance since November 2022. Sterling found support slightly beneath $1.2900, with potential resistance in the $1.3000-$1.3050 range.
## China
The U.S. has introduced a new 10% tariff on imports from China, including those from Hong Kong. Federal Reserve research estimates this increase in trade costs could temporarily elevate U.S. inflation by 0.5 percentage points. Upcoming data releases will include February’s CPI and PPI, with producer price deflation possibly moderating to levels not seen since last August.
Notably, the dollar saw a decline against the offshore yuan, marking its most significant drop in six weeks. With the offshore yuan rising approximately 1.4% year-to-date, market participants will be monitoring currency movements closely.
## Japan
Recent market activity has affected the strong correlation between changes in the U.S. 10-year Treasury yield and the dollar-yen exchange rate. Japan plans to release its January labor earnings data shortly, with particular emphasis on how inflation-adjusted earnings might influence the Bank of Japan’s policy normalization plans.
Last week, the dollar experienced fluctuations against the yen, with trade dynamics and statements from Fed Chair Powell influencing market sentiment. Across the board, the narrowing of the U.S. premium over Japan has implications for currency and bond markets in the region.
## Canada
The shift in U.S. trade policy under the current administration has introduced unexpected challenges to the Canadian economy. February saw limited job growth, with full-time positions decreasing significantly. As the White House pursues tariffs, Canada faces increasing pressure, although exemptions remain possible.
Political developments will feature prominently this week as Canada’s Liberal Party chooses a new leader, with former central bank governor Mark Carney a favorite. The Bank of Canada’s upcoming meeting will be closely monitored for policy rate decisions in the wake of recent U.S. tariff actions.
## Australia
Concerns about the broader impact of U.S. trade conflicts on global growth exerted pressure on the Australian dollar in the first half of last week. However, European defense initiatives helped stabilize and recover the currency towards the end of the week. No major economic releases are expected this week, with market participants focusing on April’s central bank meeting and subsequent releases, including labor market and inflation data later in March.
The Australian dollar experienced some volatility last week, with momentum indicators offering mixed signals in a narrow trading range.
## Mexico
The U.S. granted Mexico a reprieve from tariffs, citing the USMCA. Mexico’s economy contracted at the end of last year, though there is a possibility for ongoing central bank rate cuts given the pressure on the economy. The central bank’s next anticipated policy move is scheduled for late March. The U.S.-Mexico relationship remains strained by trade-related discourse, even as Mexico contemplates retaliatory tariffs.
Last week saw the U.S. dollar spike against the Mexican peso, nearing MXN21.00 before stabilizing as U.S. tariffs were deferred. Consolidation in currency markets is underway, with carry attractiveness and volatility still influential factors for traders.
