21/03/2025 Market Watch

Dollar Recovery Signals Possible Bottom Amid Global Market Tensions

The US dollar's recent downtrend appears to be stabilizing, with early technical signals suggesting a potential bottom may be forming. Market sentiment remains cautious due to heightened uncertainty over upcoming US tariff announcements. While the dollar strengthens against most major currencies, global equities are facing broad pressure, and commodity prices are consolidating after recent highs.

The dollar is showing signs of resilience, trading near the week's highest levels against major currencies. While emerging market currencies present a mixed performance, the broader outlook suggests a pause in the dollar's recent weakness. This shift comes amid rising uncertainty around potential US tariff actions set to be revealed on April 2, adding tension for investors, businesses, and policymakers alike.

Stock markets are broadly weaker. Despite some strength in Asia earlier, steep losses in Hong Kong and Chinese markets erased weekly gains. European equities are retreating, with the Stoxx 600 falling for a second straight session and wiping out most of the week's advance. US futures are also in the red, pointing to continued pressure heading into the weekend.

In the bond market, European 10-year yields are generally lower by a couple of basis points, except for UK Gilts, which are rising and ending the week higher. US 10-year Treasury yields are holding steady around 4.22%, slightly above yesterday’s low of 4.17%.

Gold prices are consolidating after hitting a record near $3057.50. Currently hovering around $3029, it sits just below this week's average. Meanwhile, May WTI crude oil surged to a new monthly high of $68.65 before reversing and dipping below yesterday’s close.

United States of America

Overview

The US dollar's downtrend remains intact, though signs of exhaustion are emerging. After reaching its lowest point since mid-October, the greenback has attempted to recover but has struggled to maintain momentum above key technical levels. Market sentiment is cautious, driven by concerns over upcoming US tariff measures and expectations surrounding next week’s inflation data. Consumption figures are also in focus, with a potential rebound anticipated following weather-related distortions in January.

Economic Drivers

Investor sentiment is under pressure due to looming trade policy risks and inflation dynamics. The threat of sector-specific and reciprocal tariffs by the US is clouding market outlooks, while consumption trends and inflation figures are drawing increased scrutiny.

• The US has threatened reciprocal and sectoral tariffs, set to be announced on April 2, dampening confidence.
• The dollar's longer-term weakness has been prolonged, but fundamentals suggest it may be bottoming.
• January's real personal consumption fell sharply by 0.5%, but this appears overstated due to winter weather disruptions.
• Nominal consumption dropped by 0.2% in January but is expected to rebound by 0.6%, implying a real increase of about 0.3%.

Data and Events

Next week’s US economic calendar is expected to influence market direction, with inflation and consumption data in focus. These reports will provide insight into consumer activity and price pressures, helping shape expectations around monetary policy.

1. March PCE Deflator – Scheduled for release next week, this key inflation gauge is expected to show a 0.3% increase in both the headline and core rates. This would keep the annual headline rate at 2.5%, while the core rate could edge up to 2.7% from 2.6%.
2. February Personal Consumption Report – Economists forecast a 0.6% rise in nominal consumption, rebounding from a 0.2% decline in January. This would translate into a 0.3% increase in real consumption, recovering from January’s weather-related drop of 0.5%.

Price Action

Technically, the dollar remains in a downtrend but is showing signs of stabilizing. This week, it tested support near 103.20 and attempted to reclaim 104.00 but failed to close above it. It is now testing this level again in Europe. A sustained close above 104.00 would target the 104.90–105.00 area, which aligns with the 38.2% retracement of the month’s decline and the 200-day moving average.

Key Points:

• Dollar remains weak but is showing signs of forming a base.
• US tariff threat adds pressure on market sentiment.
• Inflation data and personal consumption reports in focus next week.
• Real consumption expected to rebound after January’s sharp drop.
• Technical resistance at 104.00 is key; a break may signal further recovery.

Australia

Overview

The Australian dollar has come under pressure this week, falling in response to broad US dollar strength and disappointing local employment data. However, despite slipping to $0.6270, it held above last week’s low and managed to close just above $0.6300. The currency continues to trade within a well-defined range, with near-term attention turning to upcoming economic releases and ongoing weather-related disruptions.

Economic Drivers

The Australian dollar’s decline has been driven by both external and domestic forces, including a stronger US dollar and weaker-than-expected employment data. Market pricing continues to reflect expectations for multiple interest rate cuts later in the year, reducing the weight of near-term inflation figures.

• Broader greenback strength has pressured the Aussie lower.
• A weak employment report (prior to cyclone impact) added to downside momentum.
• Futures markets are pricing in approximately 2.5 rate cuts by year-end, mostly in the second half.
• Near-term inflation data is seen as less impactful due to the timing of expected monetary easing.

Data and Events

Next week’s calendar includes key indicators that may influence sentiment, though their impact could be limited by prevailing market expectations and weather-related risks.

1. Preliminary March PMI – Scheduled for release next week, this report may reflect downside risks due to Cyclone Alfred's disruption of business activity.
2. February CPI – While this is a core economic indicator, markets are likely to discount its significance given that rate cut expectations are centered later in the year.

Price Action

The Australian dollar dropped to $0.6270 but managed to stay above last week’s low of $0.6260. It closed just above $0.6300, near the 20-day moving average, and remains in consolidation at the lower end of yesterday’s trading range. Since President Trump's inauguration, the currency has largely remained within a $0.6200–$0.6400 range on a closing basis, with only minor intraday deviations.

Key Points:

• AUD weakened due to USD strength and soft employment data.
• February CPI likely to have limited impact due to backloaded rate cut expectations.
• PMI may show storm-related weakness next week.
• AUD continues to trade within a tight long-term range.
• Holding above $0.6260 keeps technical support intact.

Canada

Overview

The US dollar briefly pushed above CAD1.4400 this week before retreating to around CAD1.4315, where it remains stable. The currency pair is consolidating as markets digest political turmoil in Canada and brace for potential US tariff actions. While recent Canadian retail data may show a pullback from December's surge, its market impact is likely to be muted. All eyes now shift to political developments and upcoming economic data.

Economic Drivers

Broader market movements and domestic political events are shaping sentiment around the Canadian dollar. Although recent retail sales are expected to soften, more influential factors lie in upcoming tariffs and the political landscape.

• Canada's December retail sales jumped 2.5% due to a short-lived tax holiday, which also contributed to the resignation of Finance Minister Freeland and the collapse of the Trudeau government.
• January retail sales are expected to decline by 0.4% overall and 0.2% excluding autos.
• The anticipated decline is unlikely to influence Bank of Canada policy due to broader priorities.
• A key market concern is the potential impact of US reciprocal and sectoral tariffs expected to be announced on April 2.

Data and Events

Next week brings a significant economic report and potential political developments that could influence market direction and investor sentiment.

1. January GDP Report (Canada) – Scheduled for release next week, this data will offer insight into the country's post-holiday economic momentum.
2. Possible Federal Election Announcement – Media reports suggest a Canadian federal election may be called on Sunday, ahead of Parliament’s return. Two polls currently show the Liberal party leading the Conservatives.

Price Action

USD/CAD reached a weekly high above CAD1.4400 before retracing to CAD1.4315. Yesterday’s low has held firm, keeping the pair in a tight, technically-defined range.

Key Points:

• USD/CAD is consolidating, capped near 1.4400.
• Canadian retail sales expected to drop after December's tax-driven surge.
• Tariff risks from the US remain a key concern for CAD.
• January GDP report and possible federal election announcement are key events to watch.
• Political uncertainty may overshadow near-term economic data.

China

Overview

The offshore yuan is trading near its weakest level of the week as the US dollar gains ground. Although Beijing has made policy announcements aimed at supporting growth, their actual impact remains unclear. Market sentiment remains cautious amid concerns over China's slowing economic momentum and rising geopolitical tensions involving key Chinese firms.

Economic Drivers

China’s economy continues to face headwinds, with ongoing concerns about growth, industrial strategy, and external political pressure. While recent policy measures show intent, clarity and effectiveness are still uncertain.

• The yuan is under pressure as the dollar strengthens broadly.
• Since reopening from the pandemic, China's economy has struggled to regain traction.
• Official growth figures: 5.4% in 2022, 5.0% in 2023, and a projected 4.5% for 2024 (per multiple forecasts).
• Beijing is reportedly considering blocking a Hong Kong firm’s port sale to protect national interests.
• Reports suggest Chinese authorities may prevent BYD from establishing a car factory in Mexico, citing concerns over technology exposure near US borders.

Data and Events

While no specific major economic reports are highlighted, key developments revolve around government decisions and strategic policy actions that may shape investor expectations.

1. Yuan Fixing – Today’s yuan fix was set at CNY7.1760, a minimal move compared to the previous day’s CNY7.1754, marking the smallest adjustment of the week.
2. Geopolitical Monitoring – Ongoing scrutiny of the port sale by CK Hutchinson and BYD’s Mexico plans remain high-stakes developments likely to impact investor sentiment and trade dynamics.

Price Action

The US dollar is testing key resistance against the offshore yuan. It briefly touched levels near CNH7.2565, close to last week's high of CNH7.27, which remains the next major hurdle. It also approached its 20-day moving average but has yet to break through decisively. The pair is currently trading at the highest levels for the week, signaling firm dollar demand.

Key Points:

• Offshore yuan weakens as the dollar nears key resistance levels.
• China's economy continues to slow, with growth expected to fall to 4.5% in 2024.
• Beijing's policy signals remain unclear in terms of execution and impact.
• Yuan fix saw the smallest adjustment of the week, indicating minimal intervention.
• Geopolitical concerns around technology and trade add to market uncertainty.

Europe

Overview

The euro has retreated from recent highs, falling to an eight-day low near $1.0815, with technical indicators pointing toward a deeper pullback. This comes at the end of a significant week for the eurozone, marked by major fiscal developments in Germany and growing debate over EU-wide spending policies. While technical levels are being tested, investor attention is shifting to upcoming economic data and the European Union summit.

Economic Drivers

The euro is under pressure as shifting fiscal dynamics across Europe begin to reshape market sentiment. Although Germany is boosting infrastructure investment, disagreements over joint EU borrowing continue to surface.

• Germany approved a €500 billion, 10-year infrastructure plan after years of underinvestment.
• Defense spending was excluded from Germany’s constitutional debt limits.
• The European Commission is working to ease fiscal constraints on member states.
• Germany and the Netherlands reportedly opposed new joint EU bond issuance, limiting broader fiscal integration.

Data and Events

Next week will offer fresh insights into economic momentum and political direction across the eurozone.

1. Preliminary March PMI (Eurozone) – Expected to give early signals on business activity and economic sentiment heading into Q2.
2. EU Summit – Set to focus on fiscal policy coordination, investment strategies, and political alignment within the bloc.

Price Action

The euro has fallen to an eight-day low of $1.0815, with key support now targeted in the $1.0700–$1.0725 range. This zone includes the 20- and 200-day moving averages and aligns with the 38.2% retracement of this month’s rally. Price action also suggests a possible double top formation near $1.0950, pointing to a technical correction in progress.

Key Points:

• Euro drops to lowest level in over a week, with further downside possible.
• Germany commits to massive infrastructure spending, excluding defense from debt rules.
• EU debates over fiscal policy intensify, with joint bond issuance facing resistance.
• Preliminary PMI and EU summit are next week’s key events.
• Technical indicators point to deeper pullback toward the $1.0700–$1.0725 zone.

Japan

Overview

The dollar found support near JPY148.20 after slipping below this week’s low, buoyed by a rebound in US Treasury yields. Despite intraday weakness, momentum indicators remain constructive, and another test of the JPY150 level appears likely. Meanwhile, Japan’s February CPI confirmed the ongoing disinflation trend already reflected in Tokyo’s earlier data. Markets are now turning to next week’s Tokyo CPI for fresh direction.

Economic Drivers

The yen’s performance continues to reflect interest rate differentials and inflation dynamics. The drop in yields earlier this week briefly supported the yen, but broader fundamentals still lean in favour of the dollar.

• US 10-year yields dropped as much as 17 basis points from Tuesday’s high to Thursday’s low of 4.17%, helping lift the yen temporarily.
• Dollar momentum remains positive, supported by the prospect of another test of JPY150.
• Japan's national CPI for February showed further disinflation, with headline inflation easing to 3.7% from 4.0%.
• The core rate (excluding fresh food) fell to 3.0% from 3.2%, while the measure excluding fresh food and energy ticked up to 2.6% from 2.5%.

Data and Events

Markets are awaiting Tokyo’s March CPI next week, which is expected to confirm the ongoing downward trend in inflation.

1. Tokyo March CPI (due next week) – Forecasts suggest little change from February’s figures, reinforcing the overall direction seen in recent data.
2. Swaps Market Pricing – The probability of a rate cut by June has risen to around 56%, up from 48% last week, reflecting shifting policy expectations.

Price Action

The dollar reached a weekly low just below JPY148.20, breaching the 50% retracement of the move off the March 11 low near JPY146.55. It has since recovered and is now trading near the midpoint of this week’s range (JPY148.20–JPY150.15). Despite intraday moves, the dollar has yet to close above JPY150 this month, though the technical setup still supports a potential breakout.

Key Points:

• Dollar remains supported by rebound in US yields after midweek drop.
• Japan’s February CPI confirmed ongoing disinflation, in line with earlier Tokyo data.
• Market expectations for a June rate cut in Japan have increased.
• Key support held at JPY148.20; momentum points toward another test of JPY150.
• Tokyo’s March CPI will be the key data focus next week.

United Kingdom

Overview

Sterling continues to trade within a tight range, showing little directional commitment despite testing both sides of Wednesday’s price band. While it has struggled to rise beyond the $1.3010–1.3015 area, it has also stayed above $1.29 throughout the month. Momentum indicators suggest a potential downside break, as attention turns to next week's Spring Statement and key economic data.

Economic Drivers

UK political and fiscal developments are beginning to weigh on sentiment, particularly amid concerns about limited room for policy support in a weak growth environment. Controversial spending shifts and tax speculation are further complicating the outlook.

• Sterling has been unable to break above $1.3015 or below $1.29 this month, suggesting investor indecision.
• Weak economic growth could limit the UK Chancellor’s fiscal flexibility in the Spring Statement.
• The government’s move to reduce foreign aid to fund defense, along with cuts to disability support, has sparked controversy.
• Speculation is growing that Chancellor Reeves may introduce income tax increases, potentially hurting Labour’s standing ahead of May’s local elections.

Data and Events

A heavy data calendar and a key fiscal update next week will shape market expectations and provide fresh direction for the pound.

1. February CPI – A key inflation reading that could influence monetary policy expectations.
2. February Retail Sales – Will offer insight into consumer spending trends during a period of economic uncertainty.
3. Delayed January Trade Data – Draws extra attention due to a reporting delay and reports of significant gold exports to the US.
4. Spring Statement by Chancellor Reeves – Scheduled for next week, it will include updated economic forecasts by the Office for Budget Responsibility (OBR) and could include policy shifts such as tax changes.

Price Action

Sterling closed within Wednesday’s range, neutralizing any immediate breakout signals. The pair has respected the $1.2915–$1.3015 range so far this week, with today's European session low around $1.2920. Momentum indicators are tilting bearish, supporting a bias for a downside break if support near $1.29 gives way.

Key Points:

• Sterling remains range-bound, with technical signals neutral but momentum turning lower.
• Controversial spending cuts and tax speculation are adding political pressure.
• Spring Statement and OBR forecasts are key events next week.
• February CPI, retail sales, and delayed trade figures will offer crucial economic insight.
• Downside break below $1.29 could open up further losses if confirmed by price action.