Headwinds Ahead

USD is firm in line with the modest widening in US-G6 2-year bond yield spreads. Uncertainty ahead of US “reciprocal” tariffs due April 2 is also containing financial market appetite for risk and offering USD support.

Nonetheless, the softer US growth outlook limits USD upside potential. The US Conference Board consumer confidence index fell to the lowest since January 2021 and consumers’ expectations were especially gloomy at a 12-year low. Moreover, the Philadelphia Fed non-manufacturing index plunged the lowest level since May 2020 and the Richmond Fed business conditions index dropped to near a two-year low.

Chicago Fed President Austan Goolsbee (FOMC voter) cautioned that the Fed is no longer on the “golden path,” witnessed in 2023 and 2024. Goolsbee added “there’s a lot of dust in the air” and “wait and see is the correct approach when you face uncertainty.” The comments are in line with the Fed’s “no hurry to resume easing” script.

The Atlanta Fed GDPNow model will be updated today after the US durable goods orders data. As of March 18, the model estimates Q1 growth at -1.8% SAAR vs. -2.1% on March 17. Today’s update will include the growth estimate adjusted for foreign trade in gold which was tracking growth at 0.4% SAAR earlier this month.

Fed speakers today include: Minneapolis Fed President Neel Kashkari (2026 FOMC voter) (2:00pm London) and St. Louis Fed President Alberto Musalem (FOMC voter) (5:10pm London).

The US is poised to impose tariffs on copper within several weeks according to a news report. Copper prices are soaring to fresh highs, and dragging CLP up along the way, as buyers scramble to front-run tariffs. Chile is by far the top supplier of refined copper to the US, accounting for over 70% of US refined copper imports in 2024.

UK

GBP/USD dipped by roughly 0.3% towards 1.2900 and gilts are outperforming. UK February CPI print was soft and leaves the Bank of England room to resume easing at its next May meeting. Headline CPI came in at 2.8% y/y (consensus: 3.0%, BOE forecast: 2.8%) vs. 3.0% in January and core CPI printed at 3.5% y/y (consensus: 3.6%) vs. 3.7% in January. Services CPI was unexpectedly steady at 5.0% y/y (consensus: 4.9%) vs. 5.0% in January but is lower than the BOE’s forecast of 5.1%.

Odds of a 25bps BOE rate cut at the May 8 meeting rose as much as 80% vs. 60% before the CPI data. In our view, diminishing likelihood the UK enters a period of stagflation suggests GBP/USD will hold above its 200-day moving average at 1.2800.

Chancellor of the Exchequer Rachel Reeves will deliver the Spring Budget Statement today (12:00pm London). Reeves is expected to turn to public spending reduction rather than tax hikes to balance the books. Also, gilt issuance for the 2024/2025 financial year is forecast to be raised £10 billion to near a record sum of £310 billion. Greater gilt issuance means yields face additional upside pressure despite expectations for BOE easing.

The UK fiscal backdrop is not pretty. Borrowing in the first eleven months of the 2024-25 financial year totaled £132.2 billion, reflecting both higher spending and lower tax receipts. This was £14.7 billion more than at the same point in the last financial year and the third highest financial year-to-February borrowing since monthly records began in 1993. It’s also £20.4 billion above the monthly profile consistent with the Office for Budget Responsibility (OBR) forecast.

JAPAN

USD/JPY is up near 150.50. Bank of Japan Governor Kazuo Ueda reiterated the bank’s guidance that it will continue to raise interest rates if its economic outlook is realized. Ueda also cautioned again that underlying price trend is still below the BOJ’s 2% inflation target, signaling that the bar is high for the bank to dial-up the pace of rate hikes. As such, the BOJ is unlikely to tighten the policy by more than is currently priced-in. The swaps market continues to imply about 50bps of rate hikes over the next twelve months. BOJ rate hike expectations suggests USD/JPY is unlikely to sustain a break above key resistance at its 200-day moving average at 151.71.

SWEDEN

Riksbank Minutes from the March 20 policy meeting is due today. At that meeting, the Riksbank kept the policy rate steady at 2.25% and signaled it was done easing. The Riksbank stressed that “the rate will remain at this level going forward” which is line with its December forecast. In contrast, the Fed is in the early phase of an easing cycle with between 50-75bps of cuts priced-in over the next 12 months. The implication is that US-Sweden 2-year bond yields spreads can further weigh on USD/SEK.

AUSTRALIA

AUD/USD is trading near the middle of a two-week 0.6260-0.6390 range. Australia CPI inflation cools in February. Headline CPI unexpectedly eased to 2.4% y/y (consensus: 2.5%) vs. 2.5% in January. The trimmed mean CPI dipped to 2.7% y/y vs. 2.8% in January. The monthly CPI indicator is in line with the RBA’s Q2 forecast.

It’s worth noting, that the RBA focuses on the quarterly CPI prints because it’s less volatile and captures more items than the monthly CPI indicator. Cash rate futures continue to fully price-in the next 25bps cut in July with 70% odds it will occur at the May meeting.

CZECH REPUBLIC

Czech National Bank (CNB) is expected to keep rates unchanged at 3.75% (1:30pm London). At the last meeting February 6, CNB cut rates 25bps to 3.75%, as expected. It was a hawkish cut, however, as Governor Michl warned that “Economic growth will be driven mainly by household consumption and government debt. Both of these factors are inflationary and a risk for inflation going forward. That’s why the bank board must be very careful about further interest-rate cuts.”

The swaps market is pricing steady rates over the next twelve months followed by a 25bps rate hike the subsequent 12 months. On a side note, Aleš Michl received the 2025 award for the world’s best governor in part because the CNB was one of the first central banks to return inflation to the 2% target.