EUR / USD
Last week, EUR/USD skyrocketed, as the US dollar weakened against major currencies, including a 4.3% decline against the euro over the past month. This weakness stems from eroding confidence in US assets as investors respond to President Trump's volatile trade policies and growing uncertainty about America's economic trajectory. The Federal Reserve's stance remains cautious, with officials like Neel Kashkari indicating they will focus on keeping inflation expectations anchored rather than providing immediate policy support.
European Central Bank is expected to cut rates by 25 basis points to 2.25% at their upcoming meeting on Thursday, though this appears largely priced into current exchange rates. While recent tariff reversal might pause foreign capital outflows from both US equities and Treasuries, given the continued uncertainty from the Trump administration, long-term realignment of global investment flows that could continue supporting euro strength against the dollar.
We expect the euro to remain elevated in the short term.
USD / JPY
The Japanese yen has emerged as a key focus in global markets amid escalating trade tensions and monetary policy developments. Recent statements from Japan's ruling party indicate a growing preference for a stronger yen to combat rising living costs, marking a significant shift from the country's historical stance of preventing excessive currency appreciation. The Bank of Japan's gradual approach to raising interest rates has come under scrutiny, particularly as upcoming bilateral trade negotiations with the US are expected to address currency policy concerns. Japanese policymakers have explicitly ruled out using their substantial US Treasury holdings as a negotiating tool, despite holding over $1 trillion in US government debt.
Last week’s trade tensions have triggered significant market volatility, with the yen strengthening to multi-month highs against the dollar as investors seek safe-haven assets. The upcoming Japanese inflation data and trade balance figures will be crucial in determining the yen's trajectory, with core inflation expected to rise to 3.2% and potentially influence the BOJ's monetary policy decisions. Market participants are closely monitoring US-Japan trade discussions, as any developments could significantly impact currency movements and broader economic relations between the two nations.
The combination of trade uncertainties, policy shifts, and economic indicators suggests continued volatility in the USD/JPY pair, with potential for further yen appreciation.
GBP / USD
The pound rallied last week driven by dollar weakness; however, the pair faces stronger headwinds in comparison to its European counterpart. The Bank of England remains cautious about accelerating monetary easing despite the challenging global backdrop, as UK inflation and wage growth continue to run above target levels. Recent economic data showing unexpected growth in February has reinforced the BoE's measured approach.
The European Central Bank's anticipated rate cut this week could put additional pressure on sterling against the euro, while the Federal Reserve's stance on maintaining rates to combat potential tariff-induced inflation may support cable in the near term. Market confidence in the US dollar has been notably shaken, with unprecedented simultaneous selling of US equities, bonds and the dollar suggesting a potential paradigm shift in global capital flows.
Growing uncertainty around global trade policies and their inflationary consequences will likely keep currency markets volatile, with the pound particularly vulnerable to shifts in risk sentiment and relative monetary policy divergences.
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