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EUR/USD depreciated for a second day by 0.3% to 1.0857, driven by Germany’s political challenges to pass a substantial spending plan amid escalating EU-US trade tensions. The European Commission’s “ReArm Europe” Plan, which bolstered the EUR by 4.4% in the first week of March, faces several challenges. Germany’s CDU/CSU and the Social Democrats are engaged in intensive negotiations with the Greens to reach a compromise on reforming the debt brake to enable increased spending on defence and infrastructure. They aim to expedite a Bundestag vote on March 18th and Bundesrat approval on March 21st. The CDU/CSU, Social Democrats, and the Greens lack the two-thirds majority in the new Bundestag, which starts on March 25th, due to strong gains by the far-right and left parties.
The AfD has filed a motion with the Constitutional Court to challenge the legality of the plan to convene the outgoing Bundestag to push the spending package. Meanwhile, Fitch warned that the “ReArm Europe” Plan would lower the EU’s triple-A debt rating headroom because of the additional debt at the EU level.
More importantly, an EU-US tariff spat has emerged. The European Union retaliated against Trump’s 25% tariffs on steel and aluminium imports that took effect on March 13th. The European Commission announced tariffs on USD19.6bn of US goods, set to take effect between April 1st and 13th. Responding to the EU’s 50% tariff on American whiskey, Trump threatened a 200% tariff on all EU alcoholic products.
USD/CHF languished in a 0.88-0.8850 range for a second day after rising from a three-month low of 0.8758 on March 10th. We expect the Swiss National Bank to lower rates for the fifth time by 25 bps to 0.25% at the March 20th meeting. Due to a strong CHF and a sluggish economy, February CPI and core inflation were subdued at 0.3% YoY and 0.9%, respectively. On March 1st, the SNB expressed openness to forex interventions to counter the CHF’s haven status and indicated readiness to reintroduce negative interest rates if necessary to keep inflation within the official 0-2% target. The SNB forecasted the Swiss economy to expand by 1-1.5% in 2025. However, a lot has changed since March 1st. The EU economy is pulled in both directions from the US-EU tariff spat against heightening global trade tensions and the European Commission’s proposal for a “ReArm Europe” Plan. The OIS market suggests that this could be the final cut for the year, reflecting an expectation that the SNB will await greater clarity amid heightened uncertainties.
GBP/USD appreciated by 0.2% to 1.2950 in the first four days of this week, showing weaker momentum compared to the 2.7% rise in the first week of March. We expect the Bank of England to keep the bank rate unchanged at 4.50% at its March 20th meeting. Following a 25 bps cut on February 6th, CPI inflation rebounded to 3% YoY in January from 2.5% in December. Inflation should rise again in April due to higher National Insurance contributions by employers. Per the BOE’s guidance, inflation may reach 3.7% by 3Q 2025 before gradually returning to the 2% target by 4Q 2027. Services inflation, which the BOE uses to gauge underlying inflationary pressures, increased to 5% from 4.4%. However, the BOE has also adopted a cautious stance regarding the substantial risks posed by global trade tensions to the UK and global economies.
GBP bulls will be wary of the Spring Budget scheduled for March 26th, as the GBP10 billion headroom in Chancellor of the Exchequer Rachel Reeves’ Autumn Budget has been eroded by persistent inflation and sluggish growth. The Office for Budget Responsibility’s economic and fiscal forecasts will be crucial in determining the extent of necessary tax increases and spending cuts to adhere to the fiscal rules.
Quote of the Day
“I’m very proud of my gold pocket watch. My grandfather, on his deathbed, sold me this watch.”
Woody Allen
March 14 in history
The Gold Standard Act became effective in 1900, defining the USD by gold weight and requiring the US Treasury to redeem, on demand and in gold coin only.
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Related Insights
- US exceptionalism challenged with rising trade tensions 13 Mar 2025
- Recalibrating our FX forecasts 12 Mar 2025
- US recession fears and “ReArm EU” hurdles 11 Mar 2025
Related Insights
- US exceptionalism challenged with rising trade tensions 13 Mar 2025
- Recalibrating our FX forecasts 12 Mar 2025
- US recession fears and “ReArm EU” hurdles 11 Mar 2025