Germany agrees historic deal to increase infrastructure and defence spending
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Daily Currency Update
Euphoria was the theme last week in Europe as the German chancellor-in-waiting, Friedrich Merz, reached an agreement with the Green party on a massive increase in state borrowing in Europe’s largest economy. The purpose of this increase is to fund major defence and infrastructure spending which will likely capitulate across the broader European bloc. While this is positive for Germany, many analysts are questioning how quickly the plans can be delivered.The Pound lost ground on Friday after data presented a grim picture for the UK economy. British gross domestic product contracted by - 0.1% vs expectations for an expansion of + 0.1%. Analysts have suggested that weaker growth data in the UK is an important reminder that UK fiscal and cyclical dynamics may continue to be more challenging than elsewhere. That said the Pound last week staged its largest rally vs the Dollar in more than two years.
The University of Michigan survey on Friday showed U.S consumer sentiment plunged in March while inflation expectations soared on worries about the impact President Trump’s sweeping tariffs will have on the U.S economy. Consumers' 12 month inflation expectations rose to 4.9% from 4.3% in February, which creates a rather confusing picture for the Federal Reserve, as they look to lower borrowing costs to keep momentum in the economy while inflation is persistently sticky.
Key Movers
European policymaker and Governor of the Austrian Central Bank, Robert Holzmann, is vocally backing for the ECB to keep interest rates unchanged at their next meeting. He said that higher trade tariffs and increased Government spending could lead to a sharp increase in inflation. The ECB cut rates for the 6th straight meeting last week but the chances for a pause in this cycle have increased substantially while markets assess the economic uncertainty that lies ahead. Holzmann was the only ECB council member who did not vote for a rate cut last week.In the UK the Pound remained firm as the UK Government refused to engage in tit-for-tat tariffs with the Trump administration. The most important issue for the UK is they have a trade deficit with the States and exports a lot more services than other countries and as such is not as vulnerable to tariffs being imposed by the U.S. It is interesting to note that the Pound has rallied 6% vs the Dollar since Trump took office in January.
The US Federal Reserve is to meet this Wednesday to set interest rate policy with expectations of no change but the forward guidance will be scrutinised closely for clues as to the timing of the next cut in borrowing costs by the Fed. Futures market expect three cuts totalling 75 basis points before year end, the next of which is expected in June. Policymakers have been absolutely clear that with such global uncertainly cuts will be data and event dependent throughout the rest of this year.
Expected Ranges
- GBP/USD: 1.2910 - 1.2960 ▲
- GBP/EUR: 1.1865 - 1.1915 ▲
- GBP/AUD: 2.0390 - 2.0425 ▲
- EUR/USD: 1.0855 - 1.0905 ▲