CAPITALDIGEST MARKET REVIEW, 03/03/2025

STERLING EDGES LOWER VERSUS DOLLAR, EYES ON MILITARY SPENDING

Sterling edged lower against a strengthening dollar and held steady versus the euro a day after the British government’s pledge to increase military spending. The U.S. dollar edged up from its 11-week low on Wednesday as U.S. Treasury yields bounced back after recent declines. British Prime Minister Keir Starmer said on Tuesday he would increase annual defence spending to 2.5% of gross domestic product (GDP) by 2027 and target a 3% level last seen just after the Cold War, a signal to U.S. President Donald Trump that Britain can boost Europe’s security. Sterling was down 0.1% to $1.2653. It hit $1.2626 on Monday, its highest level since December 18. “We think sterling can start to underperform in March,” said Chris Turner, head of forex strategy at ING. Some analysts argued that the Bank of England could unlock more cuts in line with the recent dovish shift. BoE policymakers do not have a consensus about how fast the central bank should cut interest rates, even though they all agreed to use the word “gradual”, Monetary Policy Committee member Swati Dhingra said on Monday. Dhingra was one of two Monetary Policy Committee members to vote for a half-point interest rate cut on February 6, while the majority voted for a quarter-point cut to 4.5%. Investors are closely watching developments in U.S. trade policy but expect U.S. tariffs to hurt the economy more in Europe than in the UK. However, they expect the U.S. protectionist measures to weigh on all European currencies.

DOLLAR JUMPS AS TRUMP TARIFFS LOOM

The dollar jumped on Thursday and was poised for its biggest daily percentage gain in more than two months as U.S. President Donald Trump’s latest tariff comments overshadowed signs of slower economic growth. The greenback initially pared gains after data showed weekly initial jobless claims rose by 22,000 to a seasonally adjusted 242,000, above the 221,000 estimate of economists polled by Reuters.  Other data from the Commerce Department showed gross domestic product increased at a 2.3% annualized rate last quarter after accelerating at a 3.1% pace in the July-September quarter in its second estimate of the data.  But the dollar quickly rebounded after Trump said 25% tariffs on Mexican and Canadian goods will go into effect on March 4 as scheduled because drugs are still pouring into the United States from those countries. “It’s a world where people do not know what’s going on, so they will wait for clarity before they commit to bigger investments, and that leaves foreign exchange a little bit sidelined and a little bit more prone to these kind of quick catch-ups,” said Bob Savage, head markets strategist at BNY in New York.  “Tariffs will confuse people about what it means for the economics of the world and who’s going to get hurt the most and who wins and who loses, and there’s going to be a lot of noise and dust to figure out before anyone comes through all of that,” Savage added.

STERLING STEADY AS TRUMP THREATENS EU WITH TARIFFS

The British pound was little changed against the dollar on Thursday, trading just below a more than two-month high hit the previous day, as U.S. President Donald Trump’s tariff threats turn towards the European Union. Sterling was last at $1.2674 against the dollar, little changed on the day, having risen to $1.2717 on Wednesday, its highest level since December 18 Late on Wednesday, Trump floated the idea of a 25% tariff rate on goods from the European Union, saying he would be announcing it “very soon”. Danske Bank analyst Mohamad Al-Saraf said the pound could be a relative outperformer from U.S. import tariffs because the trade deficit between the U.S. and Britain is relatively small. “If we actually see tariffs being implemented, we expect the pound to outperform in the G10 space,” Al-Saraf said. “Looking at the price action in the past few months, the pound is relatively immune to all this tariff talk.” The pound has also been supported by expectations for relatively fewer rate cuts from the Bank of England than some other central banks, namely the European Central Bank. The BoE lowered interest rates this month and markets are pricing in two further quarter-point cuts this year. For the ECB, which is expected to lower interest rates next week, markets are fully pricing in three rate cuts and around 30% chance of a fourth.

EURO FALLS TO MORE THAN TWO-WEEK LOW AFTER TRUMP, ZELENSKIY MEETING

The euro dropped on Friday, after a meeting between Ukrainian President Volodymyr Zelenskiy and U.S. President Donald Trump went up in flames, dashing hopes any peace deal could be reached soon in the war with Russia. Trump and Zelenskiy traded verbal barbs during a meeting that was designed to help Ukraine convince the U.S. to not side with Russian President Vladimir Putin, who ordered the invasion of Ukraine three years ago. Zelenskiy left the White House early following the meeting, without signing a deal between Ukraine and the U.S. over the joint development of natural resources. “A big driving force of markets now is uncertainty on a lot of different levels, and this is just another part of that,” said Jack Mcintyre, portfolio manager at Brandywine Global in Philadelphia. “It looked like we were moving towards progress on a peace deal or a ceasefire between Russia and Ukraine and maybe now that gets to come on hold, so you have to price in a little bit more uncertainty.” The euro slumped after the meeting and was last down 0.29% at $1.0367 after dropping to $1.0359, its lowest since February 12. After falling for several months from a more than one-year high hit in September, the single currency has shown signs of stabilizing, partly on hopes a peace deal could be reached.

CANADIAN DOLLAR CLINGS TO MONTHLY GAIN AS GDP BEATS ESTIMATES

The Canadian dollar was little changed against its U.S. counterpart on Friday as investors assessed domestic data that showed stronger-than-expected economic growth and awaited the potential implementation of U.S. trade tariffs. The loonie was trading nearly unchanged at 1.4440 per U.S. dollar, or 69.25 U.S. cents, after touching its weakest intraday level since February 4 at to 1.4453. For the week, the currency was on track to decline 1.5%. Still, it was up 0.6% since the start of February after recovering from a 22-year low earlier in the month. Canada’s gross domestic product expanded by 2.6% on an annualized basis in the fourth quarter, surpassing expectations for an increase of 1.8%, helped by a jump in consumer spending. “The Canadian economy has certainly faced some headwinds but it exited 2024 in a stronger position than believed,” said Adam Button, chief currency analyst at ForexLive. “Canadian consumers continue to reach into their wallets and spend though I expect tariff threats to reverse some of that in Q1.” Canada and Mexico sought to show U.S. President Donald Trump’s administration evidence of progress in curbing the flow of fentanyl opioids into the U.S. ahead of a March 4 deadline for punishing 25% tariffs on their goods imports.