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It has been another highly volatile week, with financial markets moving on headlines from the war in Iran and sharp swings in energy prices. Attacks on energy infrastructure in the Middle East have escalated the conflict and prolonged the negative supply shock facing the global economy. As a result, the two-year European swap rate has risen from 2.60% to 2.82%, as the TTF gas price surged to EUR 62/MWh from EUR 50/MWh last week and the oil price to USD 110 per barrel from USD 100. Equities have declined as the war drags on with increasingly negative effects on demand. We expect markets to continue reacting to headlines from the war in Iran and emphasise that the destruction of energy infrastructure lengthens the impact on the global economy even when the war ends.

Amid high volatility and the war in Iran, central banks around the world met this week. The US Federal Reserve kept the target range at 3.5-3.75%, as expected. Chair Powell offered little forward guidance and appeared more concerned about inflation than downside growth risks. The median 'dots' were unchanged, but the distribution shifted towards later cuts. Markets reacted slightly hawkishly and now price only 5bp of cuts this year, while we still expect two cuts in June and September. The ECB also left key policy rates unchanged, keeping the deposit facility rate at 2.00%, as expected. President Lagarde offered a calm, balanced assessment of higher energy prices, suggesting the ECB is in no hurry to raise rates. In a forecast scenario closely aligned with current commodity futures pricing, ECB staff project euro area HICP inflation at 3.5% y/y in 2026 and 2.1% y/y in 2027, with growth at 0.6% y/y in 2026 and 1.2% y/y in 2027. We believe this should serve as the current baseline for the euro area and allow the ECB to keep policy unchanged at 2.00% in both 2026 and 2027, though we acknowledge clear upside risks to this call. Markets are currently pricing in 75bp worth of hikes this year. In contrast to the ECB and the Fed, the Bank of England delivered a clear hawkish surprise as all members voted to keep rates at 3.75%, whereas two had been expected to maintain their call for cuts. The communication was also hawkish, highlighting risks of second-round inflation effects from higher energy prices, so markets now price three BoE hikes this year. In Japan, the Bank of Japan kept rates unchanged at 0.75%, as expected, and delivered no news that affected market pricing.

Beyond central bank meetings, this week also brought new macro releases. Germany's ZEW survey for March showed an improved assessment of the current situation, while expectations for future growth saw a historically sharp decline. In the United States, February PPI surprised to the upside for a second month, with broad-based increases suggesting tariff-related cost pressures are building, a hawkish signal. In China, the monthly data were slightly better than expected, with retail sales rising and smaller declines in house prices.

Next week, attention turns to the March flash PMIs for the euro area, UK and US on Tuesday. We expect the euro area manufacturing PMI to decline to 49.3 from 50.8, while the services PMI is likely unchanged as higher energy prices have yet to feed through. Spain's flash March inflation is due on Friday, while February inflation will be released for Japan on Tuesday and for the UK on Wednesday.

Full report in PDF. 

Economic data releases in Canada are quiet in the week ahead with the most notable being January’s Survey of Employment, Payrolls and Hours (SEPH) on Thursday, when we expect further stabilization in job vacancies following improvements in timelier job openings data from Indeed Hiring Lab.

February’s labour market report was weak with the unemployment rate rising to 6.7%. However, layoffs remained low and the unemployment rate was still below 7% in Q3, and 6.8% in Q4 2025.

Solid domestic demand beneath weak headline gross domestic product in Q4 2025 should continue to support a rebound in hiring early this year. We still look for the unemployment rate to gradually decline to 6.3% by the end of 2026.

We will also receive advance February industry data that should show a partial rebound after disruptions in the auto industry drove large declines in January.

Manufacturing sales dropped 3.9% due to a significant decline in transport equipment sales from atypical production disruptions at several Ontario plants. Wholesale sales also fell 1.5% in January. Some moderation in production disruptions should support a partial rebound in February sales with manufacturing on Tuesday and wholesales on Friday.

BoC and Fed stand pat on rates

Overall, as the Bank of Canada noted in its meeting on Wednesday, the economy started Q1 on a softer footing than expected. However, with weakness in production mostly driven by disruptions in the auto sector, we expect some recovery later in the quarter.

We have left our outlook for modest growth and improved per-capita economic conditions this year broadly unchanged, and for now expects relatively neutral economic impact from recent oil price increases in both Canada and the U.S. –with the BoC and U.S. Federal Reserve remaining on hold through 2026.

At their meetings this week, both central banks held rates steady and refrained from commenting too much on the economic impact from the ongoing Middle East conflict.

In Canada, persistently weak inflation pressure prior to the oil price shock should leave the BoC with room to wait for additional clarity, compared to the U.S., where inflation pressures have been more stubborn, and tariff-related pressures are starting to show up.

Retail sales rose 1.1% month-on-month (m/m) in January, coming in below Statistics Canada’s advance estimate of 1.5%.

In real terms, sales volumes increased 1.0% m/m, suggesting the gain was largely driven by higher activity rather than prices.

Auto sales rebounded, rising 2.0% m/m, driven by new car dealers (+2.5% m/m), marking the first increase in three months.

Receipts at gasoline stations and fuel vendors declined 0.4% m/m in both nominal and volume terms, pointing to weaker demand.

Core retail sales—excluding motor vehicles and gasoline—also strengthened, rising 0.9% m/m and starting the year on firmer footing.

• Gains were led by general merchandise retailers (+3.0% m/m), miscellaneous store retailers (+3.0% m/m), health and personal care stores (+1.2% m/m), and sporting goods and hobby stores (+1.0% m/m).
• The main laggard was food and beverage stores (-0.6% m/m), with declines also evident in real terms, suggesting softer demand.

Retail e-commerce sales rose 1.5% m/m in January.

Looking ahead, Statistics Canada’s advance estimate points to a further 0.9% m/m increase in February.

Key Implications

Consumers loosened their purse strings to start the year, with retail sales rising in January and early indications pointing to continued demand in February. Momentum in services spending appears intact, based on our internal credit and debit card data, likely supported by higher-income households with greater financial buffers. This keeps our outlook for Q1 real consumption growth at a relatively healthy 1.1% (quarter-on-quarter, annualized).

That said, the retail report is inherently backward-looking and, in this case, feels particularly in the rear-view day by day. New headwinds – from higher prices at the pump to financial market volatility – risk weighing on demand through both higher costs and a potential reversal of wealth effects.

Daily Pivots: (S1) 156.84; (P) 158.38; (R1) 159.25; More...

No change in USD/JPY's outlook. Correction from 159.88 is expected to extend lower to 38.2% retracement of 152.25 to 159.88 at 156.96. For now, near term outlook will be neutral with risk on the downside as long as 159.88 resistance holds, in case of recovery.

In the bigger picture, outlook is unchanged that corrective pattern from 161.94 (2024 high) should have completed with three waves at 139.87. Larger up trend from 102.58 (2021 low) could be ready to resume through 161.94. This will remain the favored case as long as 55 W EMA (now at 152.70) holds. Firm break of 161.94 will pave the way to 61.8% projection of 102.58 to 161.94 from 139.87 at 176.75.

Daily Pivots: (S1) 0.7840; (P) 0.7899; (R1) 0.7942; More….

Intraday bias in USD/CHF remains neutral and some more consolidations would be seen below 0.7957. Further rally is in favor as long as 0.7746 support holds. Rise from 0.7603 is seen as correcting the whole down trend from 0.9200. Above 0.7957 will target 38.2% retracement of 0.9200 to 0.7603 at 0.8213.

In the bigger picture, a medium term bottom should be in place at 0.7603 on bullish convergence condition in D MACD. Rebound from there is seen as correcting the fall from 0.9200 only. However, decisive break of 55 W EMA (now at 0.8091) will suggest that it's probably correcting the larger scale down trend from 1.0146 (2022 high). On the other hand, rejection by the 55 W EMA will setup down trend resumption to 100% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.7382 at a later stage.

Daily Pivots: (S1) 1.3295; (P) 1.3382; (R1) 1.3517; More...

Intraday bias in GBPUSD remains neutral for the moment. With 1.3482 resistance intact, further decline remains in favor. On the downside, below 1.3216 will resume the fall from 1.3867 to 1.3008 structural support. However, decisive break of 1.3482 will argue that the fall from 1.3867 has completed, and turn bias back to the upside for 61.8% retracement of 1.3867 to 1.3216 at 1.3618.

In the bigger picture, considering bearish divergence condition in both D and W MACD, a medium term top should be in place from 1.3867. Firm break of 1.3008 support will argue that fall from 1.3867 is at least correcting the rise from 1.0351 (2022 low) with risk of bearish reversal. That would open up further decline to 38.2% retracement of 1.0351 to 1.3867 at 1.2524. For now, medium term outlook will be neutral at best as long as 1.3867 resistance holds, or under further development.

Daily Pivots: (S1) 1.1488; (P) 1.1518; (R1) 1.1570; More….

EUR/USD is still bounded in established range trading and intraday bias remains neutral. Further decline is in favor as long as 1.1666 resistance holds. On the downside, below 1.1408 will resume the fall from 1.2081 to 38.2% retracement of 1.0176 to 1.2081 at 1.1353. However, decisive break of 1.1666 will argue that the fall from 1.2081 has completed, and turn bias back to the upside for 61.8% retracement of 1.2081 to 1.1408 at 1.1824.

In the bigger picture, the break of 55 W EMA (now at 1.1495) confirms rejection by 1.2 key cluster resistance level. The whole up trend from 0.9534 (2022 low) might have completed as a three wave corrective rise too. In either case, deeper fall is now expected to long term channel support (now at 1.0528. Risk will stay on the downside as long as 1.2081 holds, in case of recovery.

ECB rate hike expectations are gaining traction in markets, with growing speculation that tightening could begin as early as April. Major institutions including Barclays and J.P. Morgan are now forecasting an initial move next month, followed by additional hikes in June and July, reflecting a rapid shift in policy expectations amid rising inflation risks.

Other banks remain slightly more cautious on timing but not direction. Morgan Stanley and Deutsche Bank both expect hikes starting in mid-year, while Goldman Sachs’ adverse scenario outlines a cumulative 75bps tightening path, with the possibility that April could still mark the beginning if energy-driven inflation intensifies further.

This repricing comes even as the ECB kept its deposit rate unchanged at 2.00% in the latest meeting. However, the updated projections told a different story, with 2026 inflation revised up to 2.6% while growth was cut sharply to 0.9%. This marks a clear shift away from the previous “goldilocks” environment toward a more challenging stagflation backdrop.

The ECB’s communication also underscored this transition. By publishing adverse and severe scenarios, policymakers effectively signaled readiness to act if energy prices remain elevated. The message was clear: while the baseline does not yet justify an immediate hike, contingency plans are firmly in place.

Within the Governing Council, three distinct camps have emerged. The hawks, led by Bundesbank President Joachim Nagel, are increasingly concerned about inflation expectations becoming unanchored and have openly warned that a more restrictive stance may soon be required.

In contrast, centrists such as France's Francois Villeroy de Galhau and Finland's Olli Rehn are urging caution. They emphasize the need to avoid overreacting to supply-side shocks, arguing that short-term energy-driven inflation should not automatically trigger aggressive tightening.

Meanwhile, the data-dependent camp, represented by Spain’s Jose Luis Escriva, continues to advocate a meeting-by-meeting approach. This group highlights the high degree of uncertainty surrounding the persistence of the energy shock and its transmission into core inflation.

Despite these internal divisions, markets are clearly leaning toward the hawkish interpretation. The shift in rate expectations has provided support for the Euro, which is among the stronger performers this week, particularly against the Swiss Franc.

The Franc’s weakness is partly policy-driven, as the SNB has stepped up its intervention rhetoric to prevent excessive appreciation. This has created a favorable backdrop for EUR/CHF, amplifying Euro strength beyond what ECB expectations alone would justify.

However, against the Dollar, the Euro’s gains remain more tentative. Price action is still capped below key resistance levels, suggesting the move may be corrective rather than the start of a sustained uptrend. For a more decisive shift, The market might need to see the ECB actually step closer to execute one of those 25 bps hikes.

In Europe, at the time of writing, FTSE is up 0.10%. DAX is up 0.07%. CAC is up 0.19%. UK 10-year yield is up 0.085 at 4.869. Germany 10-year yield is up 0.01 at 2.973. Earlier in Asia, Japan was on holiday. Hong Kong HSI fell -0.88%. China Shanghai SSE fell -1.24%. Singapore Strait Times fell -0.38%.

Canada retail sales rise 1.1% mom but miss expectations

Retail sales rose 1.1% in January, missing forecasts, but core spending remained firm with solid gains in general merchandise. February data points to continued steady momentum. Read more.

EU trade contracts sharply, US exports drag

Eurozone trade weakens: Exports fell -7.6% yoy, imports -7.3% yoy, resulting in a EUR 1.9B deficit; intra-Eurozone trade also declined, signaling soft internal demand. Read more.

NZ exports hit by soft China and Japan demand

NZ’s trade balance slipped into deficit as exports to China and Japan declined while imports surged. Soft Asian demand and rising external imbalance could weigh further on NZD. Read more.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1488; (P) 1.1518; (R1) 1.1570; More….

EUR/USD is still bounded in established range trading and intraday bias remains neutral. Further decline is in favor as long as 1.1666 resistance holds. On the downside, below 1.1408 will resume the fall from 1.2081 to 38.2% retracement of 1.0176 to 1.2081 at 1.1353. However, decisive break of 1.1666 will argue that the fall from 1.2081 has completed, and turn bias back to the upside for 61.8% retracement of 1.2081 to 1.1408 at 1.1824.

In the bigger picture, the break of 55 W EMA (now at 1.1495) confirms rejection by 1.2 key cluster resistance level. The whole up trend from 0.9534 (2022 low) might have completed as a three wave corrective rise too. In either case, deeper fall is now expected to long term channel support (now at 1.0528. Risk will stay on the downside as long as 1.2081 holds, in case of recovery.

Canada’s retail sales rose 1.1% mom to CAD 70.7B in January, falling short of expectations for a stronger 1.4% increase. The gain was nevertheless broad-based, with six of nine subsectors posting growth, led by motor vehicle and parts dealers.

Core retail sales, which strip out volatile components such as gasoline and autos, rose a solid 0.9% on the month. The increase was driven primarily by general merchandise retailers, where sales jumped 3.0%, marking a fourth consecutive monthly gain. This points to underlying strength in discretionary spending.

Looking ahead, Statistics Canada’s advance estimate indicates that retail sales rose another 0.9% mom in February, suggesting steady momentum into Q1.

Full Canada retail sales release here.

Eurozone trade data for January painted a weak start to the year, with both exports and imports contracting sharply. Exports fell -7.6% yoy to EUR 215.2B, while imports dropped -7.3% yoy to EUR 217.2B, leaving a EUR -1.9B deficit. Intra-Eurozone trade also softened, declining -3.3% yoy to EUR 213.1B, pointing to subdued demand both within the bloc and externally.

At the broader EU level, the deterioration was even more pronounced. Exports plunged -10.0% yoy to EUR 189.2B, while imports fell -9.0% yoy to EUR 195.1B, resulting in a EUR -5.9B deficit. The decline in trade flows suggests that the slowdown in global demand is weighing heavily on European exporters, even as weaker imports reflect cooling domestic activity.

A closer look at trading partners highlights the uneven nature of the downturn. Exports to the US dropped sharply by -27.8% yoy, driving a significant narrowing in the surplus with the US to EUR 9.2B from EUR 18.1B a year earlier. Trade with China remained deeply negative, with the deficit widening slightly to EUR -32.5B. By contrast, trade with the United Kingdom and Switzerland proved relatively resilient, though still showing modest declines.

Full Eurozone and EU trade balance release here.