The euro’s outlook remains tied to developments on US tariffs and on Ukraine peace talks. EUR/USD took a hit late Friday after the Trump-Zelenskyy incident, but has rebounded since trading resumed on Sunday evening – perhaps on the news that Ukraine remains open to a mineral deal with the US and that the EU is actively trying to bring the US back to the negotiating table with Ukraine.
Today, the eurozone releases inflation estimates for February after regional prints provided some tentatively dovish signals. Spanish and Italian CPI undershot, German’s inflation was unchanged, but the core measure declined. Consensus is for a deceleration to 2.3% in eurozone headline CPI and to 2.5% in core. As discussed here, we expect this CPI report to endorse a still-dovish tone by the European Central Bank as it delivers a highly anticipated cut this Thursday.
Still, with markets pricing in three cuts by year-end in the eurozone, the euro’s downside risks ahead of Thursday are limited. In our baseline USD-negative scenario for this week, we can see EUR/USD moving back to 1.050.
The UK data calendar is quiet this week, and the pound will primarily be driven by external input. The major domestic event is probably the Treasury Committee questioning of Bank of England Governor Andrew Bailey and other MPC members on Wednesday.
The February BoE cut was accompanied by a dovish vote split, but data has since pointed to more caution on easing. Fourth-quarter growth, December wages and January CPI all came in stronger than expected, and the risks are that we could see some hawkish adjustment in Bailey’s stance.
We remain of the view that GBP/USD rallies won’t prove sustainable beyond the very near term as we expect the UK budget event at the end of March to trigger fresh pressure on the pound also by potentially unnerving the fragile gilt market. We expect a decisive break below 1.25 in Cable in the coming weeks, but this week the pair may remain supported.
