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The euro’s sharp fall after Donald Trump’s November US presidential election victory to below $1.02 early last month meant parity with the dollar seemed inevitable in the eyes of some analysts and investors. Many assumed that the Eurozone economy would be in the front line of a full-blown global trade war.
But the currency has enjoyed a blistering rally this month, helped by the potential economic lift to the region from a German plan to inject hundreds of billions of euros in extra funding into the country’s military and infrastructure. The dollar, meanwhile, has weakened amid growing anxiety over the health of the US economy.
On Friday the single currency reached as high as $1.089, its strongest level since the day after the US election. Many in the market are now revising their parity bets and pushing their forecasts higher.
“Trump’s policy backdrop has pushed Europe in a direction of far more fiscal loosening than any of us had thought,” said Adam Pickett, a multi-asset strategist at Citigroup. “The European Central Bank might need to cut less now.”
After Thursday’s interest rate cut, traders are now only fully pricing in one further quarter-point reduction in 2025, which would take the deposit rate to 2.25 per cent. About a week ago they had fully priced in the rate moving to 2 per cent by December.
According to Jefferies, the euro has reached a bottom “for now” and will only go higher from here this year. “The mood on [the] euro coming into 2025 was so sour, with most expecting a break of parity, but now the euro is flying,” said Brad Bechtel, an analyst at the bank.
But the threat of tariffs has not been eliminated, with many investors arguing that Trump will eventually follow through on threats to target the EU, which he has said “was formed to screw the United States”.
Bank of America’s David Hauner argues it is way too early to call for a sustainable revival of the euro, as it is “only in the last few weeks that investors have started to warm up to the idea the dollar will weaken” and that the tide can turn “with any new headline”. Mari Novik
Is US inflation on the way down?
US inflation is expected to have ticked lower in February, but still remain some distance above the Federal Reserve’s target, amid concerns over the impact on inflation and economic growth of President Donald Trump’s trade tariffs.
Consumer price index data due on Wednesday is set to give an inflation reading of 2.9 per cent year-on-year for February, according to a Reuters consensus forecast. That would still leave price growth above the central bank’s long-term target of 2 per cent, and after a reading of 3 per cent in January.
Stripping out volatile items such as food and energy, core inflation is forecast at 3.2 per cent year-on-year, down from 3.3 per cent.
But stronger than expected numbers could prompt investors to scale back their predictions for interest rate cuts; a softer number may compound concerns over a growth slowdown fuelled by Trump’s trade war, adding to expectations of monetary policy easing.
On Friday market pricing indicated that investors were betting on close to three rate cuts by the Fed in 2025, up from two reductions as recently as the previous week.
Economists at Bank of America forecast that the increase in tariffs on China would boost core goods, excluding used-car prices. Core services inflation, meanwhile, should moderate but remain above levels consistent with the Fed’s target, the bank said.
“In short,” the economists wrote, “CPI data should reinforce our view that inflation progress has stalled”. Harriet Clarfelt
Will Canada cut rates amid tariff uncertainty?
Economists are increasingly expecting a seventh consecutive interest rate reduction when the Bank of Canada meets on Wednesday. But there is still debate over how much further governor Tiff Macklem’s team might cut given the uncertainty around US tariff plans.
Weak local jobs data on Friday added to investor expectations for a rate cut, with Canadian interest rate swaps implying a 80 per cent chance the BoC’s main policy rate is cut by a quarter-point to 2.75 per cent. That would take the central bank’s total reductions since June to 2.25 percentage points.
The softer employment figures followed a run of firmer data that had suggested Canada’s economy was picking up speed from the rate cuts to date. Recent figures showed fourth-quarter GDP growth reached 2.6 per cent year-on-year, surprising economists who had expected 1.8 per cent.
Expectations for 25 per cent US tariffs on a range of Canadian goods have however changed the picture. Even this week’s surprise one-month stay on most of the levies, following a one-day imposition, has failed to lift spirits north of the border.
“New downside risks for the labour market will emerge into the spring and summer from factors such as tariffs themselves, uncertainty due to tariffs, and — as we have long expected — further weakening in activity in the US,” said Citi economist Veronica Clark.
A Reuters poll of economists this week across Canada, the US and Mexico asking about recession risks found that nearly every respondent felt the risk of a contraction in their respective economies had increased. Jennifer Hughes
