Dollar dips as trade war concerns rise

Important calendar events

• JPY: Tokyo Core CPI, BOJ Summary of Opinions
• EUR: German GfK Consumer Climate, French Consumer Spending, French and Spanish Flash CPI, German Unemployment Change
• USD: Core PCE Price Index, Personal Income, Personal Spending, Revised UoM Consumer Sentiment, Revised UoM Inflation Expectations

USD

The dollar edged lower on Thursday, and the index dipped from 104.5 to 104.3. U.S. Treasury yields edged higher, with the US 10-year bond yield rising from 4.35% to 4.38%. 

The US Federal Reserve kept interest rates unchanged at its policy meeting in March. FOMC policymakers voted unanimously to maintain the federal funds rate to a target range of 4.25% to 4.50%. Policymakers remained cautious and opted to keep interest rates steady under a climate of economic and inflationary statements. 

The Fed, however, updated its “dot plot”, which is a summary of the central bank’s economic projections and reflects the central bank’s rate outlook. The latest FOMC dot plot indicates that policymakers expect to deliver approximately two more rate cuts this year of 25 basis points each, raising market expectations of future rate cuts. Markets are pricing in two more rate cuts this year, with the first rate cut in June, while a third rate cut is also considered possible. 

Fed Chair Jerome Powell delivered a hawkish message after the policy meeting, stating that the central bank is not in a hurry to lower interest rates. Powell cited economic instability and elevated inflation risks due to trade tariffs as the reasons behind the Fed’s decision to keep interest rates steady. 

On the data front, Final GDP data on Thursday showed that the US economy expanded by 2.4% in the final quarter of 2024, against previous estimates of 2.3%, following a 3.1% expansion in the third quarter of 2024. In addition, the US economy expanded by 3.0% in the second quarter of 2024 and by 1.4% in the first quarter.

US Unemployment Claims released on Thursday dropped to 224K for the week ending March 22 from 225K the week before, against expectations of a 225K print.

US Durable Goods Orders came in higher than anticipated on Wednesday, boosting the dollar. Durable Goods Orders rose by 0.9% in February against expectations of 1a .1% contraction, but fell below January’s print of 3.2%. Core Durable Goods, which exclude automobiles, came in at 0.7% in February, surpassing expectations of 0.2%, as well as January’s print of 0.1%

The US Conference Board (CB) Consumer Confidence report was released on Tuesday, and it was less optimistic than anticipated, putting pressure on the dollar. The report showed that consumer confidence dropped in March, indicating reduced consumer spending. 

Headline inflation in the US rose by 2.8% year-on-year in February after rising by 3.0% in January against expectations of a 2.9% print. Monthly inflation rose by just 0.2% in February, after rising by 0.5% in January against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.2% in February, which was significantly lower than January’s reading of 0.4% and fell below expectations of 0.3%. Annual Core CPI rose by 3.1% in February, below the 3.2% estimate, down from 3.3% in January.

US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Trump has threatened to impose reciprocal tariffs on many countries, which would raise US import taxes to match those imposed by the country’s other trading partners. Markets this week will continue to focus on Trump’s economic policies and trade tariffs, and Trump’s statements are likely to cause volatility in the price of the dollar. 

Trump’s tariffs may spark global trade wars and are causing turmoil in markets. Import taxes will raise the price of many products, fueling inflationary pressures. Other nations are likely to reciprocate with tariffs of their own, starting global trade wars, which may lead to economic deterioration and rising inflation in many countries. Trump’s economic policies are raising concerns that the US economic growth will slow down. Many analysts are already expressing concerns that the US will enter a recession.

On Thursday, Trump announced that he will postpone tariffs for automobile parts. According to Reuters, automobiles will be subject to the 25% tariff after April 2, but tariffs on automobile parts will be delayed for up to a month. 

Core PCE Price Index data on Friday are this week’s most highly anticipated fundamentals, as this is the Fed’s preferred inflation gauge.

TRADE USD PAIRS

EUR 

EUR/USD rallied on Thursday, rising from 1.073 to 1.079. If the EUR/USD pair declines, it may find support at 1.071, while resistance may be encountered near 1.095.

The ECB lowered its benchmark interest rate by 25 basis points at its latest policy meeting, bringing its main refinancing rate down to 2.65% from 2.90%. In her speech after the policy meeting, ECB President Christine Lagarde reiterated her former statement that the central bank’s policy will remain data dependent and warned that the ECB will need to stay vigilant in these uncertain times. 

Lagarde testified before the Committee on Economic and Monetary Affairs of the European Parliament on Thursday. In her testimony, Lagarde stressed the ECB's commitment to lowering inflation in the Eurozone sustainably to the central bank’s 2% target. Lagarde also stressed, however, that US trade tariffs and retaliatory measures could raise inflation in the Eurozone by approximately half a percentage point.

US President Donald Trump threatened Europe and Canada with high tariffs on Thursday. Trump stated in his social media platform that if the EU and Canada work together to do economic harm to the US, he will impose large scale tariffs on both of them. On Thursday, US President Donald Trump announced that he will impose a 25% tariff on automobiles after April 2. Several EU countries, such as France, Italy, and Germany export cars to the US and will be affected by these tariffs. Germany, in particular, sells 13% of its total automobile exports to the US. According to Reuters, the EU is preparing its response to the import tariffs announced by the US.

On the data front, the German ifo Business Climate Index rose to 86.7 in March from 85.3 in February, coming below market expectations of 86.8.

Revised GDP data showed that the Eurozone economy expanded by 0.2% in the final quarter of 2024 after expanding by 0.3% in the second quarter, against original estimates of 0.1% growth. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.

Eurozone inflation rose to 2.3% year-on-year in February after rising by 2.5% in January, against a previous reading of 2.4%. Core CPI, which excludes food and energy, dropped to 2.6% in February from 2.7% in January.

TRADE EUR PAIRS

GBP 

The Sterling benefitted from the dollar’s decline on Thursday and GBP/USD surged from 1.287 to 1.296. If the GBP/USD rate goes up, it may encounter resistance at 1.301, while support may be found near 1.286.  

British inflation data came in softer than anticipated on Wednesday, putting pressure on the Sterling. Headline inflation in the UK rose by 2.8% annually in February, down from 3.0% in January, against expectations of a 2.9% print. Core inflation, which excludes food and energy, rose by 3.5% year-on-year in February, falling below expectations of 3.6% as well as January’s print of 3.7%. 

British Finance Minister Rachel Reeves announced the government's budget for the year on Wednesday. Reeves reduced the government’s spending budget by approximately £7bn. In addition, Reeves confirmed that the British government has revised the GDP growth for 2025 downward to 1% from 2% forecasted in autumn, due to global economic uncertainty.

On Thursday, US President Donald Trump announced that he will impose a 25% tariff on automobiles after April 2 as well as other reciprocal taxes. The Sterling gained strength, however, boosted by hopes that the UK will be exempt from Trump’s tariffs, as the UK has enjoyed a close partnership with the US for many years. Reeves stated on Thursday that the UK is in intensive talks with the Trump administration to secure an exemption from US auto tariffs.

BOE policymakers kept interest rates steady in March and the Official Bank Rate was maintained at 4.5%. MPC members voted 8-1 to keep rates on hold, with only one member voting for a 25 basis point rate cut. 

In his speech after the policy meeting, Bank of England Governor Andrew Bailey stated that there is a lot of uncertainty at the moment, but he still thinks that interest rates are on a declining path. The BOE currently anticipates that the British economy will grow by 0.25% in the current quarter, up from 0.1% previously.

The British economy contracted unexpectedly by 0.1% in January after expanding by 0.4% in December, missing expectations of 0.1% growth. Preliminary GDP data for the fourth quarter of 2024 showed that the British economy expanded by 0.1% against estimates of 0.1% contraction and following economic stagnation in the third quarter of 2024.

TRADE GBP PAIRS

JPY

USD/JPY remained bullish on Thursday, rising from 150.4 to 151.1. If the USD/JPY pair declines, it may find support at 148.1. If the pair climbs, it may find resistance at 151.3. 

The BOJ held interest steady at 0.50% at its policy meeting in March. BOJ Governor Kazuo Ueda stated that the central bank will keep adjusting the degree of monetary easing to support the country’s economy. Ueda stressed, however, that inflation in Japan remains below the BOJ’s 2% target, lowering rate hike expectations and boosting the Yen. 

Markets anticipate that the BOJ will raise interest rates at least one more time this year, and there is a high probability of a second 25-bp rate hike within the year. The BOJ is expected to raise interest rates by approximately 75 basis points in the next two years, which will bring the central bank’s peak rate to 1.25%. 

The Yen gained strength on Tuesday after the release of the minutes of the BOJ policy meeting in January. The minutes revealed that most BOJ policymakers felt that the likelihood of Japan’s inflation rising above the central bank’s 2% target is high. Some BOJ members also opined that the central bank should continue tightening its monetary policy if the bank’s inflationary and economic targets were achieved.

On Thursday, US President Donald Trump announced that he will impose a 25% tariff on automobiles after April 2. Japan is a major importer of automobiles to the US, and the tariffs are likely to affect the country’s economy. Japan’s Prime Minister Shigeru Ishiba stated on Thursday that all options were open in response to the US tariffs.

Final GDP data for the final quarter of 2024 showed that the Japanese economy expanded by only 0.6% against expectations of 0.7% growth. Final GDP data for the third quarter of 2024 showed that Japan’s economy expanded by 0.3%, down from 0.7% in the second quarter. 

Inflation in Japan is on the rise, raising the odds of future rate hikes and providing support for the Yen. The headline Tokyo CPI inflation rose to 3.4% annually in January from 3.0% in December. National Core inflation in Japan came in at 3.0% year-on-year in February against expectations of a 2.9% print, but came down from January’s 3.2% print. In addition, BOJ Core CPI remained steady at 2.2% year-on-year in February.

TRADE JPY PAIRS

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Written by:
Myrsini Giannouli

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