EUROPEAN FX UPDATE: EUR surges on German spending plans, DXY breaks below 200DMA

USD: DXY -0.6%; 104.92

• DXY has extended its downside for a third consecutive session as gains in the EUR (see below for details) act as a drag on the index. DXY has fallen from the 107.56 level seen at the start of the week to a current session trough @ 104.85, taking out its 200DMA @ 105.00 in the process. Headwinds for the DXY aren't just a case of EUR strength, they are also in the context of domestic weakness following a recent run of soft data prints. The uncertain and negative trade environment is clearly acting as a drag on the US economy and absent a pivot from the Trump admin, it will likely remain so. Yesterday, US Commerce Secretary Lutnick suggested Trump could potentially reduce tariffs on Canada and Mexico, perhaps as soon as Wednesday. However, this has done little to buoy sentiment. Furthermore, the economy is unlikely to receive any support from the monetary sphere with Fed's Williams noting that he doesn't see the need to change the policy rate right now. Today's data slate sees US ADP and ISM services PMI with the former taking place in the context of Friday's NFP print. Markets fully price the next 25bps cut in June with a total of 74bps of loosening seen by year-end.

EUR: EUR/USD +0.8%; 1.0707

• EUR is the clear outperformer across the majors with the obvious catalyst for recent price action being the latest updates out of Germany. To recap, the measures announced by Merz and others include a special EUR 500bln 10yr fund for infrastructure investments, changes to the debt brake to exempt defence spending of more than 1% of GDP, a loosening of the regional balanced budget requirement and a new instrument to provide EUR 150bln of loans. Subsequently, EUR/USD has surged from the circa 1.0388 level seen at the start of the week to a multi-month peak @ 1.0722, bringing it within touching distance of its 200DMA @ 1.0725. As the dust settles on the announcement, attention will turn to tomorrow's ECB policy announcement which is expected to see the GC deliver another 25bps rate cut. Greater attention lies on whether policymakers will still view policy as restrictive.


• EUR/USD opex: 1.0480 (1.3bln), 1.0500 (1.7bln), 1.0550 (317mln), 1.0600-10 (1.1bln).

JPY: USD/JPY -0.2%; 149.49

• JPY is firmer vs. the broadly weaker USD. On the domestic front, BoJ Governor Ueda noted that diverging monetary policy stance among countries could potentially increase volatility, have destabilising effects on exchange-rate dynamics. Elsewhere, BoJ Deputy Governor Uchida said he does not have a preset idea in mind on the pace of future rate hikes and does not think it is good communication for the BoJ to judge whether market pricing of future moves are appropriate or not. USD/JPY has delved as low as 149.11 but stayed clear of yesterday's 148.08 YTD trough.


• USD/JPY opex: 148.50 (505mln), 149.00 (1bln), 149.85 (303mln), 151.00 (1.3bln).

GBP: GBP/USD +0.3%; 1.2836

• Cable is up for a third session in a row, clearing the 1.28 mark and its 200DMA @ 1.2803, printing a fresh YTD peak @ 1.2854. Newsflow for the UK remains on the light side aside from reporting via the BBC that the Treasury will inform the OBR of its "major measures" on Wednesday aimed at reducing spending by billions pounds. Looking ahead, attention will be on the appearance of BoE's Bailey, Pill, Taylor and Greene before the Treasury Select Committee. Attention will be on any further divisions on the MPC and how it could impact consensus on the board going forward. As it stands, the next 25bps cut is priced in June with a total of 54bps of loosening seen by year-end. If upside momentum in Cable continues, the next target comes via the November 12th peak @ 1.2877.

Antipodeans: AUD/USD +0.2%; 0.6283. NZD/USD +0.3%; 0.5680

• Overnight, both faded some of their recent gains as the greenback recouped lost ground and amid the mixed risk sentiment in Asia, while there was little reaction seen following better-than-expected Australian GDP data or from the announcement that RBNZ Governor Orr resigned. Elsewhere overnight, markets digested the NPC and the Official Work Report in which China maintained its annual growth target of around 5% and pledged measures including a boost in spending. As the European session progressed and the USD lost ground, AUD/USD reverted into positive territory with the pair now back above its 50DMA @ 0.6259 and eyeing the 0.63 mark. Similar price action for NZD/USD which is back above its 50DMA @ 0.5654 and eyeing the 0.57 level.

CHF: EUR/CHF +0.3%; 0.9479

• Hotter-than-expected Swiss inflation metrics from Switzerland triggered a knee-jerk lower in EUR/CHF from 0.9470 to 0.9453 before paring almost all of the move. The release exceeded expectations but fell in-line with the SNB's Q1 projection of 0.3%. However, when the January figure of 0.4% is also accounted for, the Q1 rate is running slightly hotter than the SNB had projected, but only very marginally. The data prompted a very slight shift in market pricing for March (though, much of the action appeared to be driven by global yields on account of the significant Bund sell off) with around 22bps of easing implied vs a 25bps cut being fully priced at the end of last week. Capital Economics writes that it still thinks the SNB will likely cut rates by 25bps this month but the release has increased odds of an unchanged decision.

05 Mar 2025 - 10:20- ForexData- Source: Newsquawk