US Dollar Retreats to Start Week, Focus Remains on Geopolitics

The meeting between US President Trump and Ukrainian President Zelensky didn’t go as planned—no mineral deal was signed, and the talks ended in a clash. In contrast, Zelensky’s meeting with UK Prime Minister Starmer was more productive. Starmer urged European companies to form a ‘coalition of the willing’ to support Ukraine with military aid and security guarantees. Later, Macron announced plans to pursue a one-month truce.

Overall, tensions between the two continents have worsened. Oil prices initially rose in early Asian trading amid concerns that the Trump-Zelensky conflict could delay any path to lasting peace. However, selling pressure outweighed geopolitical risk perception, as last Friday’s US economic data fueled concerns about slowing growth—Atlanta Fed’s GDPNow tanked to -1.5%!

The EURUSD started the week on a positive note after slipping below its 50-day moving average on Friday.

The European will to stand with Ukraine means more military spending. Increased defense spending from the ‘coalition of the willing’ should provide a short-term economic boost but also accelerate technological advancements in the medium to long run. The whole situation is a wake-up alarm for the sleeping European beauty.

On the budget side, higher spending also means increased borrowing, which could push European yields higher. The latter doesn’t impact optimistic mood among investors this monday morning with DAX futures leading gains. Appetite for the European defense stocks will certainly remain solid. Gold has given back early session gains, while the US dollar is broadly softer even against the Loonie although the US is supposed to go ahead with 25% tariffs on Mexican and Canadian imports, while levies on Chinese products would be doubled to 20%.

Speaking of China, the CSI and HSI kicked off the week on a negative note despite a stronger-than-expected Caixin data that suggested the manufacturing activity in China grew faster than expected in February. Chinese bubble tea giant Mixue made a strong debut in Hong Kong trading—something to take your mind off geopolitics for a moment.
On the data front

Friday’s economic data was bitter-sweet. The core PCE index, the Federal Reserve’s (Fed) favourite gauge of inflation, came in line with expectations. But the combination of higher-than-expected personal income but lower-than-expected – and unexpectedly negative – spending growth in January raised worries regarding US growth prospects. On top, Atlanta Fed’s GDPNow forecast tanked to -1.5% from above 2% printed previously. As such, the US growth expectations are deteriorating – and they are deteriorating fast. The latter could boost the dovish Fed expectations – which could be an encouraging development for risk appetite – but for the Fed to go ahead with further support to the economy, inflation should remain under control. And with tariffs due to materialize starting from this month, controlling inflation won’t be a walk in the park.

Anyway, this week, the market will focus on January employment numbers. A consensus of analyst expectations on the latest Bloomberg survey suggests that the US economy may have added 156K nonfarm jobs in January and slightly slower wages growth. Investors will also be looking at the impact of mass firings at the federal government offices in the coming months. Soft data is good for boosting Fed doves, pushing the yields lower and improving sentiment in risk assets, but if inflation doesn’t allow, the ‘bad news is good news’ trade could be limited.

In Europe

The geopolitical developments are perceived with optimism among investors on hope that the clash with the US will finally awaken the sleeping European economies, shift focus from financial control to more spending without asking too many questions on whether the extra spending is justified – because it is. In the past, war and military spending have accelerated technology advances and served to the broader economy.

On the trade front, the next step in Trump’s tariff threats is the actual implementation, with levies set to increase. The latter will certainly have a negative impact on growth prospects and call for a decent support from the European Central Bank (ECB) to the underlying economies. Here, as well, the inflation’s trajectory is important to assess the extent to which the ECB could ease financial conditions to boost growth. The CPI updates for February released last week pointed at a mixed picture across the major eurozone countries. But the aggregate CPI update due this morning is expected to print a softening headline and core inflation in February. If that’s the case, the impact on the euro is not certain. In one hand, soft inflation numbers back the expectation of a more dovish ECB stance and could weigh on the euro, but on the other hand, the geopolitical tensions boost growth prospects and the idea that monetary and fiscal support would lead to a stronger growth across Europe – and that’s positive for the euro outlook. The combination of deteriorating growth prospects for the US and improved growth prospects for Europe could help the EURUSD regain confidence and appreciate sustainably beyond the 1.06 mark, the major 38.2% Fibonacci retracement on September to January Trump selloff, and reverse the Trump-led bearish trend.

Source: ACTIONFOREX

USD/CAD could retest the “pullback resistance” near the key psychological level of 1.4450.

The bullish outlook remains intact, reinforced by the 14-day Relative Strength Index staying above 50.

The nine-day Exponential Moving Average at 1.4356 may act as the primary support level.

USD/CAD snaps its six-day winning streak, hovering around 1.4440 during Friday’s Asian session. Technical analysis on the daily chart shows the pair holding above the nine- and 14-day Exponential Moving Averages (EMAs), indicating strengthening short-term bullish momentum.

Moreover, the 14-day Relative Strength Index (RSI) remains above 50, signaling a continued bullish sentiment.

The USD/CAD pair is testing the "pullback resistance" near the key psychological level of 1.4450. A decisive breakout above this level could pave the way for a climb toward 1.4793, its highest level since March 2003, reached on February 3.

On the downside, initial support is seen at the nine-day EMA of 1.4356, followed by the 14-day EMA at 1.4334. A break below these levels could dampen short-term momentum, potentially pushing the pair toward the three-month low of 1.4151, recorded on February 14.

A decisive break below the three-month low could drive the USD/CAD pair toward the four-month low of 1.3927, last seen on November 25.

USD/CAD: Daily Chart

Canadian Dollar PRICE Today

The table below shows the percentage change of Canadian Dollar (CAD) against listed major currencies today. Canadian Dollar was the weakest against the Japanese Yen.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Canadian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent CAD (base)/USD (quote).

Source: FXSTREET

In focus today

In the euro area, focus turns to the inflation data for February. As hinted by the national releases (see our what happened over the weekend section), we forecast euro area headline inflation to decline to 2.3% y/y from 2.5% y/y. Most importantly, underlying inflation continued to ease in all countries, with muted monthly price increases and a decline in the yearly growth rates. Services inflation is finally starting to decline due to base effects and lower momentum, and we thus expect euro area core inflation to fall to 2.4 % y/y from 2.7% y/y. We also look out for the final release of the manufacturing PMI for February, which rose more than expected to 47.3 in the flash print.

In the US, focus turns to the ISM Manufacturing index for February released at 16.00 CET. Consensus points to a modest downtick to 50.5 from 50.9 in January. This is in contrast to the flash S&P Manufacturing PMI, which showed an improvement in February. Note that the final release of the S&P-measure will be released at 15:45.

In Sweden, PMI for the manufacturing sector has been in solid territory over the past year with an average of 52.0, and the last print for January was 52.9. While our base case is for a number around that level, we look for any impact of recent jitters around tariffs and the increasing geopolitical tensions. Given the rather weak state of the labour market, we will also look more closely at how the employment sub-index evolved. We will also get the Riksbank Business Survey, which will be an important input for the board ahead of the upcoming March meeting and has been highlighted by Aino Bunge as especially important.

The focus this week will most likely be on geopolitical news – in particular any progress in the Russia-Ukraine peace talks and whether the Trump administration’s tariffs imposed on Mexico, Canada and China will be implemented Tuesday. Furthermore, the ECB will convene on Thursday, where we expect them to cut rates by 25bp, while the week is concluded with the US February Jobs Report scheduled for release on Friday.

Economic and market news

What happened over the weekend

In the US, Core PCE was close to expectations at +0.3% m/m (SA), while core services inflation moderated. While this is not exactly a surprise, it is still positive for the Fed to see that the upside surprise in CPI was not repeated in PCE data.

And while spending data for January is subject to residual seasonality, at first glance it is noteworthy that savings rate ticks quite sharply higher to 4.6% (from 3.5%). This causes real household spending volume to decline by 0.5% m/m (SA). It will be interesting to see if weaker consumer sentiment in February translates into further cautiousness in spending.

In the euro area, there were several inflation releases on Friday. German CPI inflation was unchanged at 2.3% y/y in February (consensus 2.3% y/y), but higher than indicated by regional data. In France, HICP inflation fell to 0.9% y/y from 1.8% y/y (consensus 1.1% y/y). Italian HICP rose 1.7% y/y, which was below expectations of a rise to 1.8% y/y (prior 1.7%). Hence, Italian inflation also came in lower like France and Germany.

In Norway, NAV registered labour market report showed an unemployment rate of 2.0% (SA) which is slightly below Norges Bank’s forecast of 2.1%. The number of full-time employees fell by 327 people s.a. in February which is clearly considerably better than what other indicators would suggest. Retail sales showed a monthly rise of 1.1% m/m which paints a picture of a slight pick-up in goods consumption towards the end of last year and the beginning of 2025.

The Norges Bank’s Q1 expectations survey showed that price and wage expectations are on the decline. Thus, the range for expected wage growth in 2025 is in the range 3.9-4.2%, compared with Norges Bank’s estimate of 4.2% from the December monetary policy report.

In Sweden, GDP numbers came in better than expected at 0.8% q/q and 2.4% y/y. The domestic economy also performed better than expected, and consumption ticked up by 0.7% q/q. Thus, we expect consumption to show a more modest increase in Q1 than in Q4.

In China, manufacturing and non-manufacturing activities showed growth in February, with the PMI (NBS) rising to 50.2 and 50.4 respectively, suggesting improved domestic demand. Composite PMI increased to 51.1 in February. Like NBS, Caixin manufacturing PMI increased to 50.8 from 50.3.

Turning to politics, China plans to counter the upcoming US tariffs by targeting American agricultural exports, according to China’s state-backed Global Times. The US agricultural sector, with China as its largest market, has historically been prone to being leveraged during trade conflicts.

On the geopolitical front, the UK and France announced they would lead the so-called Coalition of the Willing and work on a ceasefire proposal for Ukraine after the emergency meeting convened by the UK Prime Minister Starmer in London yesterday. They emphasize that for any peace deal to be sustainable, the US needs to be involved and say that signing of the minerals deal is a key priority next. Late in the evening, French PM Macron also proposed a partial one-month ceasefire that would not cover ground fighting. This morning we published a piece about the most recent talks in the Russia-Ukraine war, see Research Global: Arming Ukraine is the cheap option for Europe, 3 March. After the heated Trump-Zelensky exchange in the Oval Office on Friday, it is ever more clear that Europe urgently needs a plan to ensure undisrupted support for Ukraine. We argue that arming Ukraine is by far the cheapest option for Europe, even if it requires that Europe would cover the costs on behalf of the US. We also think the easiest way forward is to work with the so-called Coalition of the Willing instead of pursuing a unanimous EU-wide decision on the matter of confiscating the frozen Russian assets.

In the Middle East, the ceasefire between Hamas and Israel lapsed on Sunday morning after Hamas rejected an updated proposal by Israel regarding the extension of the ceasefire under phase two. As a result, Israeli PM Netanyahu announced that all aid deliveries to Gaza would stop.

Equities: Equities rose on Friday as US markets rallied, closing at their highest point after a late surge in trading. However, this does not alter the fact that equities were lower over the week on a global scale, led by declines in the US and within the tech growth sector. It is also worth remembering that Japan and other Asian markets experienced sharp declines on Friday morning.

Before jumping to conclusions, it is essential to thoroughly review the performance of cross-equities and cross-asset classes. One notable observation is that European equities rose last week, driven by banks, which saw gains of more than 4%. Thus, the initial conclusion is that we are not witnessing a global growth scare. Also, value stocks outperformed growth stocks by 3% last week, which does not align with the message from the bond market, where yields continued to fall, including on Friday.

It is tempting to point to a growth scare in the bond market, drawing parallels to previous episodes. However, the still relatively new US administration plays a significant role here. Again, look at Europe, where the 10-year yield is down “only” 25 basis points from its peak in January compared to the US, where the decline is about 60 basis points. Hence, we are not really seeing a global growth scare.

A final noteworthy observation is the performance of assets such as Bitcoin and Tesla, which surged right after the election but are currently under pressure. This indicates that we are not dealing with a classic growth scare sell-off but rather a policy fear and uncertainty-driven readjustment. US equities on Friday: Dow +1.4%, S&P 500 +1.6%, Nasdaq +1.6%, and Russell 2000 +1.1%. Markets in Asia are playing catch-up this morning despite the looming tariff deadline tomorrow. European futures are also reflecting the strong late-hour performance in the US on Friday, rising by half a percent this morning. US futures are green as well, although not rising as strongly as in Europe.

FI: The decline in US yields continued through Friday’s session as US consumer spending weakened significantly in January. The bulk of the move came from the front end of the curve with the 2Y US Treasury yield breaking below the 4% mark. In Europe, rates were relatively flat throughout the session despite a new batch of soft figures on core inflation from Germany and France. The recent string of soft US data has lowered the implied terminal Fed Funds rate from 4% by mid-February to 3.50% as of today. We think the downward correction can proceed a bit longer, as we target a terminal rate of 3-3.25%. However, the rapid repricing seen recently has left US yields more sensitive in the near term to upside data surprises (e.g. on this Friday’s NFP) and the ongoing process of delivering an expansionary tax reform.

FX: EUR/USD dropped below 1.04 after Trump’s tariff tweet last Thursday, which triggered a typical risk-off reaction and a broadly stronger USD – its first weekly gain in a month, also supported by general risk off sentiment. CEE currencies ended the US-session on Friday on a weak footing after Zelensky’s visit to the White House took a turn for the worse, halting further immediate progress between the two nations. Closer to home, the market continued to press EUR/DKK FX forwards higher on Friday in anticipation of tighter liquidity conditions at the end of March.

Source: ACTIONFOREX

The US Dollar Index (DXY) faces some selling pressure to near 107.25, snapping the three-day winning streak during the early European session on Monday. The rising expectation that the US Federal Reserve (Fed) will cut interest rates by a quarter of a percentage point twice by the end of this year drags the DXY lower.

Technically, the bullish outlook of the DXY remains in play as the index holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, the 14-day Exponential Moving Average (EMA) hovers around the midline, suggesting that further consolidation cannot be ruled out in the near term. 

On the bright side, the immediate resistance level for the US Dollar Index emerges near 108.45, representing the high of February 10 and the upper boundary of the Bollinger Band. Sustained trading above this level could pave the way to 109.80, the high of February 3. The additional upside filter to watch is the 110.00 psychological level. 

On the flip side, the 100-day EMA at 106.70 acts as an initial support level for the DXY. A decisive break below the mentioned level could expose the key contention level at 106.00, portraying the round figure and the lower limit of the Bollinger Band. Further south, the next downside stop to watch is 105.41, the low of December 6, 2024.  

The US Dollar Index (DXY) daily chart

Source: FXSTREET