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• Dollar’s pain could worsen as US CPI expected to ease slightly.
• Bank of Canada faces rate cut dilemma amid US tariffs.
• UK and Japanese indicators also eyed.

Will US CPI report bring some inflation relief?

As investors attempt to keep up with the daily shift in President Trump’s tariff policies, the February CPI report out of the United States on Wednesday will likely come as a much-needed distraction. Specifically, the inflation data may signify the start of a new downward path for the CPI measure, following in the footsteps of the January PCE figures.

The Fed’s fight against high inflation hasn’t been easy. The recent uptick in price pressures must have been frustrating for policymakers to say the least. But US inflation appears to be turning a corner now and is expected to head lower over the next few months.

There is one problem – tariffs. Trump’s decision to go ahead with levies as high as 25% against Canada and Mexico and raise them by 20% for China, not to forget the sectoral and reciprocal tariffs that have yet to be finalized, could derail the Fed’s battle to steer inflation all the way down to 2.0%.

In January, the headline rate of CPI climbed to the highest since June 2024, reaching 3.0% y/y. Core CPI also edged up, rising to 3.3% y/y. But the February data will likely end months of worry that inflation is rearing its ugly head again, as headline CPI is projected to moderate to 2.9%, while core CPI is expected to decline to 3.1%. The month-on-month forecasts for both are 0.3%.

On Thursday, the producer price index for the same month will shed further light on underlying price pressures in the US economy, and on Friday, investors will turn their attention to the University of Michigan’s preliminary consumer sentiment survey for March. Last month’s survey sparked some concerns as it showed consumers’ inflation expectations creeping higher. In particular, five-year expectations rose to a 30-year high.

Can the Dollar recoup some lost ground?

A continuation of this uptrend would cast doubt on the notion that the inflation outlook is improving, arguing for ongoing caution at the Fed.

However, looking at Fed rate cut expectations, it seems that investors have already made up their minds that inflation no longer poses a threat, and that the bigger danger is economic growth grinding to a halt on the back of Trump’s protectionist trade policies.

Yet, with the US dollar having tumbled by more than 3% over the past week, any upside surprises in the incoming price indicators could spur a rebound.

BoC rate cut may hang in the balance

The Bank of Canada meets on Wednesday to set interest rates, keeping the spotlight on the country amid the trade spat with the United States. Unlike his Mexican counterpart, Prime Minister Justin Trudeau has not held back in announcing retaliatory tariffs on imports from Canada’s southern neighbour and by far its biggest trading partner.

Hence, this escalation is not only expected to deliver a severe blow to Canada’s economy, but it could also lead to higher prices on C$125 billion worth of goods imported from the US.

But it may not come to that, as Trump just signed new executive orders delaying the 25% tariffs on almost 40% of goods entering from Canada until April 2. In response, Trudeau has put on hold his latest counter levies.

For the Bank of Canada, however, this still poses a major policy dilemma. Following the Bank’s aggressive rate cuts last year, the Canadian economy is bouncing back, with employment surging, although consumer spending remains somewhat patchy. More importantly for policymakers, there are signs that inflation is bottoming out.

Having already slashed rates by a total of 200 basis points, it makes sense for the BoC to take to the sidelines. But the downside risks to growth from Trump’s tariffs will likely sway policymakers to cut again in March.

Investors have assigned a 66% probability of a 25-bps reduction in the target rate. The Canadian dollar therefore stands to see a strong reaction either way. Although in the scenario of a rate cut, the loonie might even appreciate against the US dollar if the BoC signals that a pause is on the horizon.

It’s possible of course that Trump may steal the BoC’s thunder if there are any further tariff developments over the next few days, keeping loonie traders on standby.

Will UK data spoil the Pound’s bullish streak?

The pound, along with the euro, have benefited the most from the dollar’s pullback. Sterling has set its sights on the $1.30 handle, recovering sharply from its January lows. However, it’s uncertain how sustainable this rally is as the UK economy is grappling with its own problems even in the absence of a direct tariff threat.

On Friday, investors will be keeping an eye on the latest monthly output figures on industrial, manufacturing and services production, as well as aggregate GDP.

There was a surprise rebound in GDP growth in December, providing some reprieve for the embattled Labour chancellor, Rachel Reeves. But if growth faltered again in January, the pressure on Reeves will increase ahead of the March 26 Spring Budget Statement to come up with stronger measures to support the economy.

Yen gets caught in Trump’s trade storm

The Japanese yen, on the other hand has been the laggard among the major FX pairs, despite the Bank of Japan maintaining its hawkish rhetoric. The underperformance could be related to the Trump’s remarks about Japan manipulating the yen to keep it weak, raising speculation that Tokyo could be next on the President’s tariff hit list.

In the meantime, there’s a flurry of releases out of Japan in the first half of the week. Wage growth and household spending data for January on Monday and Tuesday, respectively, will be important in gauging whether Japanese inflation is on a sustainable path of sticking near the BoJ’s 2% target. Revisions to Q4 GDP growth are also due on Tuesday, while on Wednesday, corporate goods prices for February will be watched.

The new European security order has become the main market driver. This week, European equities continued to outperform the US, driven by defence stocks. At the time of writing, the German 10y yield was up 20bp on the week, diverging from US rates developments. Euro was up more than 4% against the dollar. The optimism in European assets reflects expectations of a massive defence expenditure boost. This week, the European Council decided on creating a new European instrument, up to EUR 150bn in loans from the EU to member states. Additional flexibility within the Stability and Growth pact is expected to enable EUR 650bn in investments, while the EIB's expected mandate extension should improve access to private capital.

Danske Bank published its updated macroeconomic projections this week. Regardless of all the uncertainty, the cyclical story has not changed much, see Normalising economies despite the noise, 5 March. The disinflationary process is still on the way, rates are on decline, and labour markets are cooling. All Nordic economies are expected to recover this year but divergence in pace remains. The US economy, despite cooling down, is projected to grow by 2.3% this year, while growth in euro area is projected to remain slightly below 1%. Increased defence spending in euro area is an upside risk to growth, not least in Germany where the Parliament is expected to approve sizable fiscal packages next week, while also relaxing the debt brake. If implemented, these measures will boost the German economy, but the effects will be felt next year at the earliest. Read more on Euro Area Macro Monitor - Diverging signals as Germany proposes historic changes, 7 March.

The ECB cut its policy rates by 25bp this week, bringing the deposit rate to 2.5%. Importantly, the ECB adjusted its message saying that "monetary policy is becoming meaningfully restricted". As we read it, although this week's decision was still a consensus, it is likely that some Governing Council members would soon prefer at least a pause. The spillover from a broader rally in European assets prior to the ECB meeting had already led to markets pricing out one ECB cut for this year. Currently, markets price only two additional cuts for this year, and 19bp for April. As the disinflationary process is intact (Monday's February flash print confirmed that) and as the positive growth impact from additional fiscal spending in Europe will take time to materialise, we keep our call unchanged. We still see the ECB cutting deposit rate to 1.5% by September.

Tariffs also made headlines this week. The US tariffs on goods imported from Mexico and Canada were initially raised to 25% on Tuesday, but by the end of the week, Trump had signed orders that exempted most goods until early April. The additional 10% tariff on Chinese goods that entered into force this week remains in place, and China has retaliated with tariffs targeting US farmers. This week, China announced it will stick to its 5% growth target this year and will use stimulus to counterbalance the negative impact from US tariffs.

Next week will be quiet on the data front. The Chinese CPI data will be released early on Monday. On Wednesday, we will get the US February CPI data, and on Friday, the Michigan consumer survey for March will be released. In geopolitics, we will keep an eye on the US-Ukraine meeting in Saudi Arabia on Wednesday.

Full report in PDF.

Markets

US February payrolls and Chair Powell’s after-European-close speech wrap up a hectic week. The former showed US employment growing by 151k, more or less in line with the expected 160k. January was revised down a bit by 18k. The goods sector added 34k, services 106k, led by the health & social sector (63k) and finance (21k), offset by leisure & hospitality (-16k) and temporary help (-6k). DOGE’s work started showed up in the federal government sector, which has shed 10k jobs. It’s the biggest monthly decline since July 2022. The household survey brought a slightly different message, with employment actually dropping. This helps explain why the unemployment rate (calculated from this survey) unexpectedly picked up from 4% to 4.1% even as the labour force participation dropped as well (62.4%). Hourly wage growth rose the expected 0.3% m/m to come in at 4% on a yearly basis. January’s figures were slightly adjusted downwards. We’d label today’s report as decent and in any case close to expectations.

It makes the market reaction all the more telling. Markets took the soft view and with it reveal ongoing sensitivity for weaker economic data. We think the genie, set free by president Trump’s chaotic policy and DOGE-sparked fears, will be hard to put back in the bottle. US Treasury yields extended previous losses to change -4 to -7 bps on a daily basis at some point, before paring them again to pre-payrolls levels as US investors joined. The dollar is down for the day but the bulk of the declines happened before the payrolls release. DXY is near the November correction low (103.37) EUR/USD did try a first shy attempt for 1.09 shortly after the publication though, but it lacked strong enough momentum. It’s given another chance later today when Powell seizes the final opportunity to speech before the black-out period kicks in ahead of the Fed meeting March 19. Another rate status quo then is all but certain. But markets have dramatically shifted the timeline over the past couple of weeks: from a first new rate cut in September somewhere mid-February towards one fully priced in for June and already 50% for May today. Stressing the recent weaker than expected economic data and/or putting the spotlights on downside growth risks could prompt more aggressive bets. Next week brings some of the final input for that March FOMC meeting with JOLTS job openings on Tuesday, CPI figures on Wednesday and a closely watched consumer confidence indicator on Friday. On the tariff front, Wednesday is an important date with March 12 being the US deadline to impose 25% steel and aluminum tariffs on the EU. “The ECB and Its Watchers” conference kicks off the same day. Friday poses another US deadline. Lawmakers need to strike a spending deal in order to avoid a federal government shutdown.

News & Views

Czech nominal wage growth beat both market and Czech National Bank (7%) expectations yesterday, rising by 7.2% Y/Y in Q4. From the CNB's perspective, wage development is a reason for caution, especially given that wage growth in the private sector surprised on the upside (+8.3% vs. the CNB's staff forecast of 7.6%). In our view, this development increases the chances that the CNB will choose to pause again its cutting cycle at the March meeting, i.e. our baseline scenario, with a next cut in official interest rates to be delivered at the May meeting. The Czech koruna failed to take a new aim at EUR/CZK 25 with current euro momentum on the back of fiscal-driven growth prospects overturning such move.

Canadian employment was virtually unchanged in February with the economy adding 1.1k jobs. Consensus hoped on a stronger, 20k, net job creation. Details moreover showed gains in part-time employment (+20.8k) compensating for losses in full-time occupations (-19.7k). Employment increased in wholesale and retail trade (+51k) as well as finance, insurance, real estate, rental and leasing (+16k). There were declines in professional, scientific and technical services (-33k) and transportation and warehousing (-23k). Both employment (61.1%) and unemployment rate (6.6%) held steady. The latter occurred against a drop in the labour force participation rate from 65.5% to 65.3%. Average hourly wage growth accelerated from 3.5% Y/Y in January to 3.8%. The Loonie extends this week’s roller-coaster ride against the US dollar caused by the on-off tariff announcements by the US. The combination of good US payrolls and weaker Canadian ones, lifts USD/CAD from 1.4290 to 1.4360.

Daily Pivots: (S1) 147.09; (P) 148.21; (R1) 149.11; More...

No change in USD/JPY's outlook and intraday bias stays on the downside. Fall from 158.86, as the third leg of the corrective pattern from 161.94 high, is in progress for 61.8% retracement of 139.57 to 158.86 at 146.32. Sustained break there will pave the way back to 139.57 low. On the upside, 149.32 minor resistance will turn intraday bias neutral and bring consolidations again, before staging another fall.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). In case of another fall, strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.8800; (P) 0.8863; (R1) 0.8900; More…

No change in USD/CHF's outlook and intraday bias stays on the downside. As noted before, rise from 0.8374 should have completed at 0.9222, after rejection by 0.9223 key resistance. Deeper fall should be seen to 61.8% retracement of 0.8374 to 0.9200 at 0.8690 next. On the upside, above 0.8855 minor resistance will turn intraday bias neutral first. But rise will stay on the downside as long as 0.9035 resistance holds, in case of recovery.

In the bigger picture, rejection by 0.9223 key resistance keep medium term outlook bearish. That is, larger fall from 1.0342 (2017 high) is not completed yet. Firm break of 0.8332 (2023 low) will confirm down trend resumption.

Daily Pivots: (S1) 1.2857; (P) 1.2891; (R1) 1.2915; More...

GBP/USD's rally resumed after brief retreat and intraday bias is back on the upside. Sustained break of 61.8% retracement of 1.3433 to 1.2099 at 1.2923 will pave the way back to 1.3433 high. On the downside, below 1.2865 minor support will turn intraday bias neutral again and bring consolidations.

In the bigger picture, fall from 1.3433 (2024 high) should have completed at 1.2099 as a corrective move. Up trend from 1.3051 (2022 low) is still in progress but it's too early to say that it's resuming. Corrective pattern from 1.3433 could extend with one more down leg. But after all, eventual upside breakout is expected at a later stage.

The U.S. economy added 151k jobs in February, only a touch below the consensus forecast of 160k. Payroll figures for December 2024 were revised higher by 16k (to 323k), while January was revised lower by 18k (to 125k), resulting in a total net revision of -2k over the two prior months.

Private payrolls rose 140k – up from January's 81k – with the largest gains seen in private health care & social assistance (+63k), financial services (+21k), construction (+19k) and transportation & warehousing (+18k). Leisure & hospitality (-16k) and retail trade (-6k) both lost jobs on the month. Meanwhile, the public sector added a more modest 11k jobs in February – down from the 38k averaged over the prior twelve-months – but the gain was entirely due to a further uptick in state & local hiring. Employment at the federal level was lower by 10k.

In the household survey, civilian employment (-588k) plunged by more than the labor force (-385k), pushing the unemployment rate up to a still low 4.1% (from 4.0% in January). The labor force participation rate dropped 0.2 percentage points to 62.4% or the lowest reading since January 2023.

Average hourly earnings (AHE) rose 0.3% month-on-month (m/m), a deceleration from January's downwardly revised gain of 0.4% m/m (previously 0.5% m/m). On a twelve-month basis, AHE held steady at 4.0%, while the three-month annualized pace dipped to 3.6% – signaling a further easing in wage pressures in the months ahead. Aggregate weekly hours rose 0.1% m/m, after having declined in each of the two prior months.

Key Implications

Payroll growth turned modestly higher in February, following a softer reading in January, which was likely hindered by inclement weather and the California wildfires. Over the last three months, hiring activity has remained solid – averaging 200k jobs per-month. However, job growth is likely to soften over the coming months, as federal layoffs related to DOGE continue to mount and ongoing trade policy uncertainty helps to weigh on near-term hiring intentions.

Financial markets have become increasingly concerned about slowing growth prospects in recent weeks, with fed futures now fully pricing for three 25bps rate cuts by year-end. However, the Fed is unlikely to be swayed by the recent market volatility, particularly amid a still healthy labor market and potential policy changes that could further add to still elevated inflationary pressures. More evidence of cooling inflation or a sudden U-turn in the labor market are likely a prerequisite for the next rate cut, something which Fed Chair Powell is likely to emphasize in his speech this afternoon at 12:30 PM ET.

The Canadian labour market came back down to earth in February, adding just 1.1k positions, compared to a gain of 76k in January. Full-time positions declined (-19.7k), offset by gains in part-time (+20.8k).

The unemployment rate held at 6.6%, as the labour force contracted for the first time in seven months. Easing population flows were the driver here, following the implementation of the federal government's new non-permanent resident policy.

Employment by sector diverged, with wholesale and retail trade (+51k) and finance/insurance/real estate (+16k) making gains. However, declines were seen in professional, scientific and technical services (-33k) and transportation and warehousing (-23k).

Lastly, total hours worked cratered by 1.3% month-on-month, as winter storms resulted in lost work for thousands of employees. Meanwhile wages were up 3.8% year-on-year (from 3.5% in January).

Key Implications

The job market couldn't keep up its feverish pace over the last few months. Winter storms were likely the culprit, but deteriorating hiring sentiment given heighten policy/trade uncertainty may have also started to bleed into the data. One month doesn't make a trend, but Canadians should be closely watching the labour market for signs of weakness in the months ahead. Luckily, the Canadian labour market came into the current tariff crisis on solid footing, which is important given the significant headwinds the economy is facing.

The Bank of Canada is set to meet next week, and markets are solidifying around a 25 bp cut. We have been arguing that it is prudent for the central bank to keep cutting as insurance against the downside risks brought on by tariffs. Our scenario analysis embeds significant risk of recession should President Trump keep holding tariffs over our heads. And even if delays keep happening, the uncertainty will weigh on business and consumer confidence, diminishing our previously rosy outlook for the economy.

Daily Pivots: (S1) 1.0749; (P) 1.0801; (R1) 1.0837; More...

EUR/USD's rally from 1.0176 resumed after brief retreat, and intraday bias is back on the upside for 161.8% projection of 1.0176 to 1.0531 from 1.0358 at 1.0932 next. On the downside, below 1.0764 minor support will turn bias neutral and bring consolidations. But downside of retreat should be contained above 55 4H EMA (now at 1.0613) to bring another rally.

In the bigger picture, the strong break of 55 W EMA (now at 1.0668) suggests that fall from 1.1274 (2024 high) has completed as a three wave correction to 1.0176. That came after drawing support from 0.9534 (2022 low) to 1.1274 at 1.0199. Rise from 0.9534 is still intact, and might be ready to resume through 1.1274. This will now be the favored case as long as 1.0531 resistance turned support holds.

The much-anticipated U.S. non-farm payrolls report came and went without much impact to the markets. With job growth largely in line with forecasts, the data signaled a stable labor market and the balanced outcome offers little guidance to Fed policymakers, who will continue weighing inflation trends, fiscal uncertainties, and global trade risks before committing to any policy shift. Investors, for their part, appear content to sit on the sidelines until more definitive signals emerge, resulting in subdued market reactions.

In contrast, Canadian dollar faltered after domestic employment data revealed a near standstill in job growth. Despite a short-lived uplift from fresh tariff exemptions, Loonie found itself on the back foot again, as stagnant employment reignited concerns over economic momentum. Whether the currency will face further downward pressure in the final trading hours of the week may depend heavily on broader risk sentiment, which has already pushed Australian and New Zealand Dollars lower.

Meanwhile, European majors are holding their ground, with Euro on track to end the week as the best performer. Sterling and Swiss Franc also remain well-supported, benefiting from the rally tied to Europe’s sweeping fiscal and defence initiatives.

In Europe, at the time of writing, FTSE is down -0.25%. DAX is down -1.79%. CAC is down -1.19%. UK 10-year yield is down -0.053 at 4.569. Germany 10-year yield is down -0.046 at 2.789. Earlier in Asia, Nikkei fell -2.17%. Hong Kong HSI fell -0.57%. China Shanghai SSE fell -0.25%. Singapore Strait Times fell -0.07%. Japan 10-year JGB yield rose 0.012 to 1.524.

US NFP rises 151k in Feb, slightly below expectations

US non-farm payroll employment increased by 151k in February, just slightly below expectations of 156k, and broadly in line with the 12-month average of 168k.

Unemployment rate edged up from 4.0% to 4.1%. Unemployment rate has remained in a narrow range of 4.0% to 4.2% since May 2024. Labor force participation rate slipped from 62.6% to 62.4%.

Average hourly earnings rose 0.3% mom, in line with forecasts, while the average workweek remained unchanged at 34.1 hours.

Canada's job growth stalls, unemployment rate steady at 6.6%

Canada's labor market was stagnant in February, with employment rising by just 1.1k, falling far short of the expected 17.8k increase.

Unemployment rate held steady at 6.6%, better than expectation of 6.7%, while the labor force participation rate dropped from 65.5% to 65.3%, marking its first decline since September 2024. A notable contraction was seen in total hours worked, which fell by -1.3% mom.

Despite the weak employment figures, wage growth accelerated, with average hourly wages rising 3.8% yoy, up from January's 3.5% gain.

China’s exports rise 2.3% yoy, imports fall -8.4% yoy

China’s exports rose just 2.3% yoy to USD 539.9B in the January–February period, coming in below forecasts of 5.0% yoy and down sharply from December’s 10.7% yoy.

Meanwhile, imports sank -8.4% yoy to USD 369.4B, missing expectations of 1.0% yoy growth and marking a noticeable drop from December’s 1.0% yoy.

As a result, trade balance resulted in USD 170.5B surplus exceeding projections of USD 147.5B.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0749; (P) 1.0801; (R1) 1.0837; More...

EUR/USD's rally from 1.0176 resumed after brief retreat, and intraday bias is back on the upside for 161.8% projection of 1.0176 to 1.0531 from 1.0358 at 1.0932 next. On the downside, below 1.0764 minor support will turn bias neutral and bring consolidations. But downside of retreat should be contained above 55 4H EMA (now at 1.0613) to bring another rally.

In the bigger picture, the strong break of 55 W EMA (now at 1.0668) suggests that fall from 1.1274 (2024 high) has completed as a three wave correction to 1.0176. That came after drawing support from 0.9534 (2022 low) to 1.1274 at 1.0199. Rise from 0.9534 is still intact, and might be ready to resume through 1.1274. This will now be the favored case as long as 1.0531 resistance turned support holds.