The USD is firmer overnight, mostly vs the JPY, as attention centres on tariff uncertainty
Following a cabinet meeting yesterday, President Trump spoke at length on foreign policy and tariffs, though there was some confusion on the latter. Trump initially said that “tariffs on Canada and Mexico will now go into effect on 2nd April,” but the White House clarified later that the deadline remains 4 March and Trump has not yet decided whether to grant a further extension (Bloomberg). On Europe, Trump said that EU tariffs are to be 25% on autos and other things and details will be announced soon, adding that the EU “can try to retaliate.” US Commerce Secretary Lutnick later spoke after the cabinet meeting and said that 2 April is the baseline for reciprocal tariffs. While it remains unclear whether the tariffs would affect all exports or specific sectors, the moderate move lower in EUR-USD suggests that tariff threats have somewhat lost their sting. This points towards some market fatigue over tariff headlines.
This leaves the main near-term focus still on whether tariffs will be imposed next week on Canada and Mexico, while month-end effects could also impact the FX market
As we approach month-end, this could offer possible USD firmness given softer equity markets, which could mean US funds’ hedges on European equities are increased, causing selling pressure on the EUR around fixings. Geopolitics are also in focus, in particular Ukraine, and it was confirmed by President Trump that President Zelensky will come to the US tomorrow, and will be signing a minerals agreement, among other things. Meanwhile, Fox News cited an OMB/OPM Memo indicating that US federal agencies have been directed to prepare for large-scale layoffs, and that federal agencies must submit reorganization plans by 13 March.
Today’s US data focus will be on possible revisions to Q4 US GDP, especially to deflators, and initial jobless claims
A shift in Q4 data could give a hint towards the January PCE core deflator tomorrow. The consensus is currently for this figure to slow to 2.6% y-o-y from 2.8% prior. Initial jobless claims will also be monitored attentively given the headlines around public sector job losses, coming from the newly formed Department of Government Efficiency (DOGE). Durable goods orders are also released at 8:30am NY. We also get a number of Fed speakers today, with the likely messaging to be on the policy pause, and the lack of any rush to cut. Watch too for possible (though unlikely) comments about the recent (and potential future) public sector job losses, and the implications for the economy.
Eurozone confidence measures were little changed on the month, per consensus expectations
Sweden’s measures were weak, falling to an eight-month low, while the overall EU Economic Confidence Index rose to 96.3 from 95.2 (95.9 consensus). Consumer confidence stayed weak at -13.6. Industrial Confidence edged lower, which may not be too surprising given the tariff uncertainties. Meanwhile, Spain’s provisional inflation for February came in line with consensus, with the headline CPI reading moving up a tenth to 3.0% y-o-y. Germany’s and France’s CPI is out tomorrow, and the eurozone aggregate on Monday. The weak growth/sticky inflation mix remains a challenge for the EUR.
Tonight sees Tokyo inflation data, which may show some deceleration in y-o-y terms during February relative to January
However, the broader story is that deflation in Japan is now in the rearview mirror, and the BOJ can deliver more hikes so long as the economy moves in the right direction (as they expect it to do). Still, no rate hikes are priced in for the March BOJ meeting, and only 5bp for May. The market has 12bp for June, suggesting an approximate 50% chance of a hike by then. The JPY is likely to hold steady against the USD, buoyed by its safe haven status and a shifting narrative on Japan. However, further JPY upside may be difficult given the move already seen year-to-date, and the move in positioning. We would look to play JPY resilience on the crosses. (See FX Tactician, 20 February)
AUD-USD is a touch weaker after Q4 capex fell 0.2% q-o-q and lower iron ore prices
Despite the weaker Q4 capex number, however, the initial estimate for planned capex for the 2025-26 period rose 1.8% to AUD148bn vs the first estimate for 2024-25. The RBA is more focused on the labour market though, and with this staying tight and inflation still in the upper half of its target range, our economists only expect the next RBA cut to be in Q3 2025. Cash rate futures imply 56bp worth of cuts over the next 12 months, with 18bp priced by the May meeting. We extend our tactically optimistic stance on AUD-USD into early March given it is tracking cheaply versus our modelled range. However, external factors still point to an uncertain path thereafter (see FX Tactician, 20 February).
Most of LatAm FX struggled yesterday amid a risk-off session, partly prompted by renewed concerns about tariffs,
despite President Trump suggesting that tariffs on Mexico and Canada may be delayed further. The BRL saw the largest declines in EM, falling over 1%, which we believe is partly an unwind of a crowded position over the last few weeks. While we came into the year constructive on BRL against the rest of LatAm, it does appear that the rally needs new catalysts to continue, which may only come later in the year. Today, we will receive balance of payments data for Brazil, a key metric for the BRL, in particular the current account balance. We will also have Mexican unemployment and trade balance data, which should allow us to better understand the health of the Mexican economy at the start of 2025 following a marked slowdown at the end of 2025.
