FX Talking: Dollar falls back to earth

On the former, softer employment and consumption trends have seen the expected Federal Reserve easing cycle cut by 50bp. And on the latter, US President Donald Trump’s threat to withdraw Europe’s security umbrella has galvanised European leaders into some much-needed fiscal stimulus.

The most impactful market development has been Germany’s announcement of a EUR500bn infrastructure fund. Assuming this all passes parliament over the coming weeks, the prospect of looser fiscal and relatively tighter monetary policy argues that EUR/USD does not have to trade under 1.05 again. The biggest threat to the euro – and to the Rest of World currencies – is the early April announcement of ‘reciprocal’ US tariffs. These could be big and universal as Washington seeks to rewire the global trading system.

EUR/USD now looks to be a 1.05-1.10 rather than a 1.00-1.05 trading range. A more meaningful break higher in EUR/USD – say above the 1.12 area – will likely require a much steeper US slowdown. We are not in a position to make that call yet.

Expect the Japanese yen to keep outperforming in April on tariff-induced weakness in risk assets and growing confidence that the Bank of Japan will hike again in May. Underperforming in G10 could well be the pound, when the UK Spring Statement of 26 March will have to see the Chancellor cut spending or suffer the wrath of the Gilt market.

And in EM, we could see continued CEE outperformance on local growth trends.