EUROPEAN FX UPDATE: USD remains on the backfoot, EUR digests defence spending pledges, havens firmer

USD: DXY -0.2%; 106.32

• DXY is once again on the backfoot as the support from Trump's tariff announcements yesterday proved to be shortlived. Selling in early European trade picked alongside an appreciation of the EUR as EU's von der Leyen provided an update on the bloc's defence spending intentions (see below for details). It's also worth noting that downside for the DXY is taking place in the context of an ongoing run of soft US data releases with ISM manufacturing and the Atlanta Fed GDPNow tracker adding to concerns of a slowdown in the US economy. Subsequently, markets now fully price in 3 x 25bps rate cuts from the Fed this year vs. the 66bps of loosening expected at the start of the week. It is also worth highlighting that the losses in US equity markets (S&P 500 lower YTD) and rotation into European stocks is placing further pressure on the greenback. Today's docket is light in terms of data, however, Trump will be delivering his State of the Union address 21:00EST. DXY now down as low as 106.15 with the YTD trough in touching distance @ 106.12.

EUR: EUR/USD +0.3%; 1.0512

• EUR/USD is up for a second session in a row as prospects of increased European defence spending overshadow concerns over the global trade war in which Europe is a clear target of the Trump administration. European yields experienced another boost in early European trade after EU Commission President von der Leyen proposed a new instrument that will provide EUR 150bln of loans for defence spending. This, allied with the recent run of soft US data has been enough to underpin EUR/USD with the pair now back on a 1.05 handle and eyeing its YTD peak from 27th January @ 1.0532. As the week progresses, attention will turn to Thursday's ECB policy announcement which is expected to see the GC deliver another 25bps rate cut. Greater attention lies on whether policymakers will still view policy as restrictive.

JPY: USD/JPY -0.4%; 148.98

• JPY has benefitted from the risk-aversion seen in the wake of Trump's decision to proceed with tariff hikes on Mexico, Canada and China as well as reaffirming that reciprocal tariffs will start on April 2nd. ING also makes the point that the trade war and its ramifications for growth prospects "can see global interest rates edge closer towards the low rates in Japan". On which, JPY has also been underpinned by dynamics in the domestic bond market with the 30yr yield hitting its highest level since October 2008. 148.61 is the low print for USD/JPY today with the YTD trough just below @ 148.56.

GBP: GBP/USD +0.1%; 1.2711

• Cable is once again on the front foot after a solid showing yesterday which brought the pair from a 1.2577 low to a YTD peak @ 1.2726. Fresh macro drivers for the UK are on the light side aside from a 0.7% contraction in the BRC shop price index overnight. Scheduled events for the UK are thin this week with the main highlight coming via BoE Bailey, Pill, Taylor and Greene appearing before the TSC tomorrow. As such, it may be the case that the USD leg of the equation provides the greater source of traction in the near-term. If yesterday's 1.2726 YTD peak is breached, the 200DMA kicks in @ 1.2785.

Antipodeans: AUD/USD -0.1%; 0.6218. NZD/USD +0.1%; 0.5621

• Both were knocked lower by Trump's decision to proceed with tariffs on Canada and Mexico as well as doubling tariffs on China to 20%. China's decision to retaliate to the US also added to the trade angst. Overnight data releases for Australia (retail sales and current account) were mixed and provided little traction for AUD. In Early European trade as the USD lost ground to major peers, AUD/USD was able to gain a firmer footing on a 0.62 handle after hitting a trough @ 0.6188 in APAC hours. The next upside target for AUD/USD comes via yesterday's peak @ 0.6254 with the 50DMA just above @ 0.6257. NZD/USD has returned to a 0.56 handle with potential resistance at yesterday's 0.5641 peak; if breached, 50DMA kicks in @ 0.5653.

04 Mar 2025 - 10:25- ForexData- Source: Newsquawk