Another Bumpy Week for the US Dollar

The dollar starts the week on the soft side as investors digest what trade policy uncertainty means for the US economy. The risk of a US military strike against Iran has not receded, and traders will be reluctant to pile into pro-risk positions. For today, look out for an upbeat German Ifo; we’ll also hear why the Fed’s Christopher Waller wants a rate cut

USD: Uncertainty Does Not Help the Dollar

The dollar is starting the week on the softer side. The fact that the US did not launch a military strike on Iran this weekend is probably one factor behind the dollar selling, but trade uncertainty and what it means for the US economy is another. Please see our macro team’s update on the most recent US trade policy developments here.

On the trade side, the world now has to deal with a 15% Section 122 import surcharge, rather than the varying tariff levels imposed under the prior IEEPA regime. This means that the likes of China and Brazil could get lower tariff rates, but countries such as the UK and Australia would lose the advantage of their 10% negotiated deals. Needless to say, many are now reviewing their trade deals with the US, the most important of which is probably the EU. While US equities initially bounced on the news on Friday, equity futures are off 0.6/0.7% overnight as investors reassess ongoing tariffs and US businesses face little immediate prospect of seeing any tariff rebates.

In our market reaction piece on Friday, we felt one of the cleanest moves would be for US Treasuries to weaken on fiscal concerns. Holidays in Asia have meant we have not seen much US Treasury action overnight, but certainly the FX market will be taking its cue from Treasuries today. There is a small chance of a synchronised sell-off in Treasuries, equities and the dollar if investors believe that one of the core pillars of Washington’s economic policy is starting to crumble.

After a soft 4Q25 US GDP print on Friday, the US economic calendar this week has some consumer confidence figures (Tuesday) and PPI figures (Friday). Event risk also comes in the form of US President Donald Trump’s State of the Union speech tomorrow evening and Nvidia’s (NASDAQ:NVDA) 4Q25 earnings release on Wednesday evening. For today, we are interested in a speech from the Federal Reserve’s Christopher Waller at 2:00pm CET. He voted for a 25bp cut in January. Presumably, he will stay dovish today with his stance that a rate cut should prove precautionary against a further deterioration in the US labour market. Any less dovish statements could give the dollar a bounce, given the influential nature of his speeches over recent years.

The risk of a military strike on Iran probably discourages heavy dollar selling this week, but we can see DXY softening within a 97.00-98.00 range.

EUR: Defensive Gains?

EUR/USD is edging higher even though Friday’s bounce in risk assets did not last long. One takeaway is probably that the EU will not get any worse a trade deal than it already has, and one that European exporters have learnt to live with. This comes at a time when eurozone business sentiment continues to creep higher. That story should see further backing today in the form of the German Ifo business survey for February. A modest uptick is seen in the expectations component – although we would probably need to see a spike to the 91.5 area (last year’s highs) to give the euro much of a lift today.

But, as above, there is also the small risk that US assets and the dollar have a soft day, which would lend support to the next most liquid currency after the dollar. EUR/USD can probably edge up to the 1.1850/80 area, but looking for an advance through 1.1900 looks premature given the Iran risk.

GBP: BoE Speakers and By-election in Focus

EUR/GBP remains reasonably bid ahead of two event risks this week. The first of those is probably testimony to the Treasury committee tomorrow by Bank of England Governor, Andrew Bailey, and Megan Greene. Any suggestion that they could move into the rate-cutting camp for the 19 March decision could firm up the pricing of the March cut to 25bp from 20bp currently.

The second event risk is Thursday’s UK by-election in Gorton and Denton. A heavy defeat for the ruling Labour Party could re-ignite speculation over the Labour leadership and again weigh on sterling. EUR/GBP could well be ending the week closer to 0.88.

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