US
USD continues to trade sideways in the absence of policy-relevant economic data releases. S&P500 futures point to a follow-though to yesterday’s semiconductor-driven decline in the benchmark index. Treasuries are up with the 10-year note below 4.00% for the first time since end-November 2025. The decline in Treasury yields reflects increased safe haven demand (perhaps a hedge against the so-called AI scare trade) as breakeven inflation rates remain steady.
Fed Governor Stephen Miran reiterated his call for more aggressive rate cuts yesterday. Miran said “four cuts [100bps this year], I think, are appropriate, and I’d rather get them sooner than later.” Fed funds futures continue to fully price-in 50bps of easing by year-end, which is reasonable in our view. US labor demand is weak, upside risks to inflation are fading, and underlying domestic private-sector demand is softening.
Nonetheless, the Fed can afford to be patient before resuming cutting rates. A big fiscal thrust is expected over Q1 reflecting a boost from the One Big Beautiful Bill Act (OBBBA), layoffs remain subdued, and core services less housing PCE inflation has been sticky between 3.2% and 3.4% since March 2025.
US January PPI is the data highlight (1:30pm London, 8:30am New York). Watch-out for PPI Services less Trade, Transportation, and Warehousing as it partially feeds into core services less housing PCE. That measure of PPI remains indicative of inflation stalling above the Fed’s 2% goal.
UK
GBP and gilts are underperforming. UK Prime Minister Keir Starmer is poised to face growing pressure to resign following a disastrous by-election result. The leftwing Greens won the by-election in Gorton and Denton (Manchester), a constituency previously held by Labour for nearly 100 years, taking 40.7% of the vote. The rightwing Reform won 28.7% and Labour finished third with 25.4%.
Labour’s by-election trouncing raises the risk of a heavy defeat for Starmer’s party at the upcoming local and Scottish elections on May 7, potentially triggering a leadership challenge against Starmer. A leadership contest can be triggered if the leader resigns or a challenger secures the backing of at least 20% of Labour MPs.
Starmer is the most unpopular British prime minister since record began, even worse than Liz Truss’s 49-day in office. As such, his exit will not be a big shock to financial markets. The surprise would be if he managed to stay on as prime minister. Regardless, with or without Starmer the governing Labour party risk doubling down on left-leaning fiscal policies which is a headwind for GBP.
CHINA
USD/CNH ticked higher after testing its weakest level since March 2023. The PBOC stepped up measures aimed at slowing the yuan’s appreciation. Effective March 2, the PBOC will cut the reserve requirement on FX forwards to zero from 20%, eliminating the cost of shorting the yuan and increasing two-way flexibility. The announcement follows a record gap (793 pips) between the PBOC USD/CNY fixing (6.9228) and estimates (6.8435).
Still, there’s plenty more room for USD/CNH to edge lower. First, the yuan is deeply undervalued. The IMF assesses the yuan’s real effective exchange rate (REER) to be undervalued by about -16%. Second, A continued appreciation of the yuan can help China shift its growth model towards consumer spending by boosting disposable income through cheaper imports.
CANADA
USD/CAD is directionless around 1.3675. Canada’s Q4 GDP is due today (1:30pm London, 8:30am New York). The Bank of Canada (BOC) estimates real GDP growth to stall after rising 2.6% SAAR in Q3 because of inventory destocking. Consensus is more downbeat with a -0.2% SAAR decline in Q4 penciled in.
The BOC is in good position to keep the policy rate on hold at 2.25% for some time as core inflation pressures have eased and tracking the bank’s projection. The swaps curve price-in steady rates over the next twelve months. Bottom line: USD/CAD will likely hold above 1.3600 in the near term, with resistance offered at 1.3800 (the 200-day moving average).
EUROZONE
France and Spain’s EU harmonized inflation quicken in February. France CPI rose 1.1% y/y (consensus: 0.8%) vs. 0.4% in January, while Spain CPI increased 2.5% y/y (consensus: 2.3%) vs. 2.4% in January. Germany’s EU harmonized CPI is up next (1:00pm London, 8:00am New York) followed by the Eurozone February preliminary CPI print on Tuesday.
Eurozone inflation is stabilizing around the ECB’s 2% target and inflation expectations remain well anchored. As such, the ECB is well placed to keep rates on hold at 2.00% for some time, which limits EUR upside. The swaps curve price-in small odds (30%) of a 25bps cut in the next twelve months.
