German elections countdown: the uncomfortable truth about Germany’s political and economic state

The euro could benefit if the German government formed after Sunday's federal election delivers more expansionary fiscal policy, Commerzbank's currency analyst Ulrich Leuchtmann says in a note. Germany currently appears to be the "sick man of Europe" with weak growth that is dragging down the eurozone economy, he says. "Many market participants may suspect that a more expansionary fiscal policy could reduce the problem." This could have a moderately positive effect on the euro. While this would push government debt higher, it would only marginally change the assessment of the euro-area's fiscal situation. (renae.dyer@wsj.com)

The Reserve Bank of India will conduct a longer duration dollar/rupee buy/sell swap to infuse durable liquidity into the banking system next week, the central bank said on Friday.The RBI will conduct a three-year buy/sell swap worth $10 billion on February 28. The first leg of the transaction would be settled on March. 4.

This will be the second swap auction by the central bank in a month, after it infused $5.1 billion through a six-month swap on January 31.The RBI has infused more than 3.6 trillion rupees ($41.56 billion) of durable liquidity into the banking system through a combination of debt purchases, FX swap and longer duration repos.

The US dollar rose against its major trading partners early Friday before the release of S&P Global's flash purchasing managers' index estimates for February at 9:45 am ET.

The final University of Michigan consumer sentiment reading for February is due at 10:00 am ET, at the same time as existing home sales data for January.

The St. Louis Federal Reserve is expected to update its Q1 gross domestic product growth Nowcast estimate around midday and Fed Vice Chair Philip Jefferson is scheduled to speak at 11:30 am ET.

A quick summary of foreign exchange activity heading into Friday:

fell to 1.0467 from 1.0503 at the Thursday US close but was above a level of 1.0441 at the same time Thursday morning. Eurozone manufacturing PMI rose more than expected in February, but still indicates contraction, while services PMI unexpectedly declined to now indicate slower growth, according to data released earlier Friday. European Central Bank policy board member Philip Lane is due to speak at 9:30 am ET, followed by Eurozone consumer confidence data for February at 10:00 am ET. The next European Central Bank meeting is scheduled for March 5-6.

fell to 1.2641 from 1.2670 at the Thursday US close but was above a level of 1.2614 at the same Thursday morning. UK retail sales rose more than expected in January, but the year-over-year rates slowed, according to data released overnight. UK manufacturing PMI declined further below the breakeven point in February while services PMI increased to indicate faster expansion. The next Bank of England meeting is scheduled for March 20.

rose to 150.3777 from 149.6782 at the Thursday US close and 150.0560 at the same time Thursday morning. Japanese consumer price growth accelerated in January, while Japanese manufacturing and services PMI both increased in February, according to data released overnight. The next Bank of Japan meeting is scheduled for March 18-19.

rose to 1.4194 from 1.4174 at the Thursday US close but was below a level of 1.4218 at the same time Thursday morning. Canadian retail sales data for December and January are due to be released 8:30 am ET, followed by an appearance by Bank of Canada Governor Tiff Macklem at 12:30 pm ET. The next Bank of Canada meeting is scheduled for March 12.

The latest Market Talks covering FX and Fixed Income. Published exclusively on Dow Jones Newswires throughout the day.

1209 GMT - The euro is vulnerable as markets aren't pricing in much risk of a stronger-than-expected result from the far-right Alternative for Germany (AfD) party in Germany's federal election Sunday, ING's Francesco Pesole says in a note. "Polls currently place the center-right CDU/CSU alliance in the lead at 30% followed by AfD at 20% and the Social Democratic Party at 15%," he says. While markets aren't expecting a better result for the AfD, markets could still find good value in selling the euro ahead of the election given the single currency's recent gains, Pesole says. ING remains negative on the euro against the dollar. The euro falls 0.3% to $1.0474. (renae.dyer@wsj.com)

1156 GMT - The main concern from February's eurozone purchasing managers' surveys come from inflationary signals, with both input and output prices showing signs of acceleration, says Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions. This raises the risk that the European Central Bank might not cut rates as much as expected in 2025, he says in a note. Comments this week given by policymaker Isabel Schnabel advocating for a pause in ECB rate cuts this week align with this concern. However, in his view upside risks to inflation are fading, and the ECB needs to normalize its monetary policy quickly to support the rebound in the manufacturing sector. (edward.frankl@wsj.com)

1140 GMT - Bitcoin edges higher but stays stuck below $100,000 as the sharp rally seen after Trump's presidential election victory in November continues to stall. The cryptocurrency has been trading within a relatively tight range in recent weeks. It reached record highs last month amid optimism over Trump's crypto-friendly stance but has since consolidated. However, some analysts see scope for renewed upward momentum. "As Bitcoin starts to break away from traditional assets and macro conditions improve, like a reversal in money supply contraction, there's potential for fresh momentum," Innovating Capital's Anthony Georgiades says in a note. Bitcoin rises 0.5% to $98,665, having reached an all-time high of $109,071 on January 20, according to LSEG. (renae.dyer@wsj.com)

1139 GMT - The improving purchasing managers' index no longer indicates a collapse in manufacturing production, Deutsche Bank's chief economist for Germany, Robin Winkler, says in a note. The manufacturing PMI rose to a nine-month high of 47.3 in February, albeit still indicating contraction. However, the downside is that the data show industrial companies still expect a sharp decline in employment, consistent with continued reports of job cuts at various companies, he says. Moreover, although the order situation stabilized at the start of the year, it remains to be seen whether this is not just the calm before the storm, Winkler says. "Export-orientated companies are currently benefiting from a weak euro, anticipating a potential tariff conflict with the U.S.," he says. (edward.frankl@wsj.com)

1135 GMT - Sterling faces a hit as the Bank of England could cut interest rates more than markets expect, TD Securities strategists say in a note. Following a recent string of better-than-expected U.K. economic data, the strategists now expect the BOE to deliver its next rate cut in May instead of March. However, they still predict 125 basis points of cuts this year including this month's 25bp move. The market is pricing in a further 50bp of cuts this year, according to LSEG. Investor positioning in sterling remains optimistic, leaving it vulnerable to a further downward correction, the strategists say. Moreover, heightened uncertainty surrounding President Trump's tariff plans could weigh on the risk sensitive sterling versus the dollar. (renae.dyer@wsj.com)

1059 GMT - The cost of insuring euro junk bonds against default edges lower, staying close to its lowest level in five months. Optimism about prospects of eurozone interest-rate cuts has boosted credit markets, while investors for now shrug off heightened global economic uncertainty, LBBW analysts say in a note. The iTraxx Europe Crossover index, which tracks euro junk bond CDS, falls one basis point to 283bps, S&P Global Market Intelligence data show. The index reached a five-month low of 278bps on Monday. The iTraxx Europe Senior Financials index--which tracks euro investment-grade financial bond CDS--trades at 56 basis points for a seventh consecutive day, its lowest level in more than three years. (jessica.fleetham@wsj.com)

1025 GMT - The eurozone economy is stagnating but the European Central Bank will likely be cautious about cutting rates ahead, Capital Economics' Adrian Prettejohn says after business surveys showed no pickup in growth in the currency area this month. The closely watched PMI surveys published Friday remained at the same level of anemic growth as in January, defying economists' hopes for a slight acceleration in activity. The eurozone labor market looks to be weakening, but the situation is complicated by signs that price pressures are intensifying again, Prettejohn says. That "will provide more support for those policymakers at the ECB who are making a case for a pause or end to the rate-cutting cycle after one more hike in March," he tells clients in a note. (joshua.kirby@wsj.com; @joshualeokirby)

1019 GMT - The latest European purchasing managers' surveys support the case for a weaker euro, Monex Europe analysts say in a note. Manufacturing activity on the continent remained in contraction in February while a sharp fall in the French services reading is notable, they say. This left the eurozone composite purchasing managers' index unchanged 50.2 and is indicative of stagnant private sector growth. This is "hardly a positive" for the eurozone. The data come ahead of German elections on Sunday and the prospect of U.S. tariffs, "both of which pose short-term downside risks." The euro last trades down 0.3% at $1.0470. Monex says it still risks falling to parity against the dollar. (renae.dyer@wsj.com)

1012 GMT - The dollar has fallen recently but it could bounce back strongly in 2Q if President Trump follows through on threats for disruptive trade tariffs, MUFG's Lee Hardman says in a note. The dollar on Thursday hit a 10-week low against a basket of currencies as investors shrug off tariff threats for now. However, the next couple of months should be pivotal for the dollar, Hardman says. The various tariffs that Trump has announced are planned to take effect in either March or April, he says. "We still believe it is premature to drop our forecasts for a stronger U.S. dollar." The DXY dollar index rises 0.3% to 106.695, having fallen to a low of 106.334 on Thursday. (jessica.fleetham@wsj.com)

1010 GMT - Sterling and U.K. government bond yields fall marginally after a key measure of U.K. manufacturing and services activity edged lower in February but was slightly better than expected. The U.K. composite purchasing mangers' index fell to 50.5 in February from 50.6 in January. Economists in a WSJ survey expected 50.4. A level above 50 signals growth. Input cost inflation also accelerated. Subdued growth alongside rising price pressures presents a "growing dilemma" for the Bank of England, S&P economist Chris Williamson says in the survey's press release. GBP/USD falls to 1.2646 after the data from 1.2652 beforehand. EUR/GBP rises to 0.8283, from 0.8278. The 10-year gilt yield trades flat at 4.607%, compared to 4.614% before the data. (renae.dyer@wsj.com)

0927 GMT - The euro and European government bond yields stay lower after eurozone purchasing managers' index data were a tad below forecasts. The eurozone composite PMI was unchanged at 50.2 in February, below the 50.5 reading expected by economists in a WSJ survey. However, it is just above the 50 level which signals expansion in economic activity. The data provide "more evidence that, after expanding by only 0.1% in the fourth quarter, the eurozone economy remains all but stagnant in the first quarter," Capital Economics economist Adrian Prettejohn says in a note. The euro falls 0.1% to $1.0473. The 10-year German bond yield trades 3 basis points lower at 2.503%, according to Tradeweb. The French equivalent drops nearly 2 basis points to 3.204%. (renae.dyer@wsj.com)

0927 GMT - Malaysian inflation is expected to stay manageable in 2025, supported by easing global commodity prices and moderate demand pressures, says RHB economist Chin Yee Sian. She projects CPI to rise 2.4%, compared with a 1.8% increase in 2024. The country's RON95 fuel subsidy reform, set for mid-2025, may have limited impact if implemented gradually, she reckons. Malaysia's 2025 GDP growth could remain robust at 5.0% in 2025, similar to the 5.1% growth registered last year, supported by robust domestic demand, continued trade expansion and manufacturing activities, she says. Given steady economic conditions and controlled inflation, RHB thinks Bank Negara is likely to keep its policy rate at 3.00% throughout 2025. (yingxian.wong@wsj.com)

The euro is vulnerable as markets aren't pricing in much risk of a stronger-than-expected result from the far-right Alternative for Germany (AfD) party in Germany's federal election Sunday, ING's Francesco Pesole says in a note. "Polls currently place the center-right CDU/CSU alliance in the lead at 30% followed by AfD at 20% and the Social Democratic Party at 15%," he says. While markets aren't expecting a better result for the AfD, markets could still find good value in selling the euro ahead of the election given the single currency's recent gains, Pesole says. ING remains negative on the euro against the dollar. The euro falls 0.3% to $1.0474. (renae.dyer@wsj.com)

The latest European purchasing managers' surveys support the case for a weaker euro, Monex Europe analysts say in a note. Manufacturing activity on the continent remained in contraction in February while a sharp fall in the French services reading is notable, they say. This left the eurozone composite purchasing managers' index unchanged 50.2 and is indicative of stagnant private sector growth. This is "hardly a positive" for the eurozone. The data come ahead of German elections on Sunday and the prospect of U.S. tariffs, "both of which pose short-term downside risks." The euro last trades down 0.3% at $1.0470. Monex says it still risks falling to parity against the dollar. (renae.dyer@wsj.com)