Forex News

TD Securities highlights the ECB Watchers’ Conference as a key platform for policymakers to discuss geopolitical risks and Eurozone monetary policy. The bank expects officials to reiterate that the ECB is ready to act but needs more time to assess risks. Diverging March PMIs in France and Germany show weaker French services and stronger German manufacturing, with rising input costs but limited pass-through to consumers so far.

ECB stance and mixed Eurozone PMIs

"This year's ECB Watchers' Conference will give Lagarde, Lane, Rehn, and Kocher a platform to further expand their views on current geopolitical events and how these may affect euro area monetary policy in the medium term. Although the conflict has evolved since the projections that were presented at the meeting on the 19th, it is anticipated that all members present will echo Lagarde's position: the ECB stands ready to act but believes more observation is necessary to evaluate any risks. The Governing Council is in a stronger situation than in 2022, which allows them extra time to reach an informed decision."

"March business activity across the euro area’s two largest economies diverged: France’s services sector saw a sharper contraction, with the PMI falling to 48.3 (TDS/mkt: 49.0) as demand weakened amid geopolitical uncertainty and pre-election caution, while German manufacturing experienced its strongest production growth in over four years, with the PMI rising to 51.7 (TDS: 49.0; mkt: 49.5) driven by increased orders linked to the Middle East conflict and stockpiling efforts. Both economies faced surging input costs, especially for energy and materials, but firms in neither yet showed signs of pass-through to consumers, temporarily easing monetary policy concerns. Jobs were cut more quickly and replaced more slowly in both countries, and sentiment across firms unsurprisingly saw a pronounced downturn in response to the Iran conflict uncertainty."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Bank of England’s (BoE) Chief Economist Huw Pill said that he stands ready to act against inflationary pressures stemming from the developments in the Middle East war in a text provided by the BoE on Tuesday. Pill claimed that the fog of uncertainty in which they operate cannot be an excuse for inaction.

Key takeaways:

Stands ready to act against inflationary pressures stemming from developments in the Middle East to deliver price stability over the medium term.

The fog of uncertainty in which we always operate cannot be an excuse for inaction.

Ready to act if necessary to contain the lasting components of any new inflationary pressures.

The task of monetary policy makers is to provide clarity on their pursuit of price stability.

Upside risks to price stability mounting as a result of events in the Gulf.

See need for “caution” in the conduct of monetary policy."

Scotiabank strategists Shaun Osborne and Eric Theoret note the Canadian Dollar (CAD) is little changed, with USD/CAD stretching its recent range but failing to sustain moves above the mid‑1.37s. They stress CAD remains below estimated fair value near 1.3400, supported by Oil and terms of trade, while Bank of Canada (BoC) policy is in a wait‑and‑see stance.

CAD holds firm below fair value

"The CAD is little changed on the session and while the USD continues to stretch the recent trading range, gains through the mid-1.37 area remain marginal and short-lived."

"The CAD is one of the better-performing major currencies on the session and spot remains significantly overvalued relative to our equilibrium assessment (1.3402 currently)."

"Oil prices and terms of trade are doing the heavy lifting here but narrower spreads are also a factor as markets mull BoC tightening risks."

"Last week, the Bank left the policy rate on hold and suggested it was adopting a “wait and see” approach to the situation in the Gulf. "

"There is little change in the CAD’s technical condition. The USD remains firm near the mid-1.37 area but USD gains are attracting better selling interest at the extremes and we still rather think the mid-1.37 zone represents a rough (considering overall market volatility) zone of resistance. Support is 1.3690/00. "

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• AUD/USD declines sharply, trading around 0.6950, down 0.82% on the day.
• Geopolitical tensions in the Middle East revive safe-haven demand.
• Weak Australian PMI data adds further pressure on the Australian Dollar.

AUD/USD falls sharply on Tuesday, trading around 0.6950 at the time of writing, under pressure amid a renewed wave of risk aversion across global markets, supporting safe-haven assets, particularly the US Dollar (USD).

Geopolitical tensions in the Middle East are currently driving market sentiment. US President Donald Trump announced a five-day delay regarding a deadline linked to the Strait of Hormuz, while signaling to what he described as constructive discussions with Tehran. However, Iranian officials denied any negotiations, adding to the uncertainty. At the same time, fresh Israeli strikes on Tehran heighten fears of a prolonged conflict, prompting investors to reduce risk exposure and move into the Greenback.

This environment supports the US Dollar, which strengthens against its major peers, while risk-sensitive currencies such as the Australian Dollar (AUD) come under pressure.

In the United States (US), the latest preliminary S&P Global data paint a mixed picture of economic activity. The Manufacturing Purchasing Managers Index (PMI) rose to 52.4 in March, up from 51.6 in February and above market expectations. By contrast, the services sector showed signs of softening, with the Services PMI easing to 51.1 from 51.7 previously. Overall, the Composite PMI declined to 51.4, its lowest level since April last year, marking a second consecutive month of slowing growth.

The Aussie is also weighed down by weak domestic fundamentals. The latest preliminary Purchasing Managers Index (PMI) data released by S&P Global showed a significant deterioration in economic activity in March. The Composite PMI dropped to 47, returning to contraction territory after eighteen months of expansion, driven by a sharp decline in the services sector.

These indicators reinforce concerns about the strength of domestic demand in Australia, despite the hawkish stance recently adopted by the Reserve Bank of Australia (RBA), which raised its policy rate to 4.10%. While a tighter monetary policy could provide some support to the Aussie, it remains insufficient to offset the downside pressure stemming from the global backdrop.

Market attention now turns to the upcoming inflation data in Australia, which is due on Wednesday. However, in a context dominated by geopolitical risks, overall market sentiment is likely to remain the primary driver for the pair in the near term.

• US S&P Global Manufacturing PMI rose to 52.4 in March.
• US Dollar Index stays in positive territory near 99.50.

The business activity in the US private sector continued to expand at a moderate pace in March, with the preliminary S&P Global Composite Purchasing Managers' Index (PMI) coming in at 51.4, down slightly from 51.9 in February.

In this period, the Manufacturing PMI improved to 52.4 from 51.6, while the Services PMI declined to 51.1 from 51.7.

Assessing the survey's findings, "the flash PMI survey data for March signal an unwelcome combination of slower growth and rising inflation following the outbreak of war in the Middle East," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

"The Fed will therefore need juggle these intensifying upside risks to inflation against the growing risk of the economy losing growth momentum, with much depending on the duration of the war and its impact on energy prices and global supply chains," Williamson added.

Market reaction

The US Dollar Index preserves its recovery momentum following the PMI data and was last seen rising 0.3% on the day at 99.45.

(This story was corrected at 15:11 GMT to note in the second paragraph that the Services PMI declined to 51.1 in March, not 51.5.)

• GBP/JPY edges lower as weak UK PMI data pressures the Pound.
• UK business activity slows sharply, with Composite PMI hitting a six-month low.
• Japan inflation eases, but underlying price pressures remain firm, supporting the Yen.

GBP/JPY trades in a narrow range on Tuesday with a mild downside bias, as the British Pound (GBP) weakens following weaker-than-expected UK business activity data. At the time of writing, the cross is trading near 212.50, reversing earlier gains driven by Japan’s softer inflation data.

The latest UK S&P Global preliminary Purchasing Managers Index (PMI) data showed a notable slowdown in economic activity in March. The Composite PMI fell to 51.0 from 53.7, missing expectations of 52.8 and marking a six-month low.

The Services PMI dropped sharply to 51.2 from 53.9, well below the 53.0 forecast. The Manufacturing PMI edged down to 51.4 from 51.7, but slightly beat expectations of 51.1.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, “The war in the Middle East has hit the UK economy in March, stalling growth while driving inflation sharply higher.” Williamsom added, “The full impact on inflation and economic growth depends not just on the duration of the war but also the length of disruptions to energy markets and shipping, though March’s PMI numbers clearly underscore how downside growth risks and upside inflation risks have already materialised.”

The Bank of England (BoE) kept interest rates unchanged at 3.75% last week, with policymakers warning that the Middle East conflict is likely to push inflation higher through rising energy costs. The latest PMI figures add to this challenge, suggesting the BoE is likely to remain on hold for longer, with traders now fully pricing in two rate hikes by year-end, a sharp shift from earlier expectations of policy easing.

Adding to this, BoE Chief Economist Huw Pill said on Tuesday the Bank is ready to act “if necessary to contain the lasting components of any new inflationary pressures.”

On the Japanese side, the Yen finds some support despite softer headline inflation data. Japan’s National Consumer Price Index (CPI) rose 1.3% YoY in February, easing from 1.5% previously, while core inflation excluding fresh food slowed to 1.6% from 2.0%, slipping below the Bank of Japan’s (BoJ) 2% target.

The data could complicate the Bank of Japan’s (BoJ) normalization path after the central bank kept its policy rate unchanged at 0.75% last week. Policymakers reiterated that they will continue to raise rates if the economy and prices evolve in line with forecasts, adding that policy will be guided by the goal of achieving the 2% inflation target stably and sustainably.

Attention now turns to the BoJ's monetary policy meeting minutes and the UK’s Consumer Price Index (CPI) and Producer Price Index (PPI) data due on Wednesday.

DBS Group Research economist Ma Tieying assesses South Korea’s markets after President Yoon nominated Shin Hyun-song as the next Bank of Korea (BoK) governor. She argues Shin’s focus on financial stability does not translate into imminent tightening, seeing rate hikes as unlikely. DBS expects South Korean Won (KRW) rates to reprice lower and highlights persistent sensitivity of the KRW and equities to global risk sentiment.

BoK nomination, KRW rates and assets

"South Korea’s president announced on March 22 the nomination of Shin Hyun-song—head of the Monetary and Economic Department at the Bank for International Settlements—as the next governor of the Bank of Korea, succeeding Rhee Chang-yong when his term ends on April 20. Shin is generally perceived as more hawkish than dovish, reflecting his long-standing focus on financial stability and leverage risks. However, amid elevated geopolitical uncertainty and ongoing oil price volatility, we expect his leadership to lean toward a balanced and pragmatic policy approach rather than outright tightening bias."

"KRW rates markets appear to have overpriced tightening risks. OIS/swap markets are currently pricing a 25bp hike (to 2.75%) within six months and around 100bp of cumulative hikes (to 3.50%) within 12 months—an outlook that appears overly aggressive relative to the macro backdrop and Shin’s policy framework."

"This creates scope for a downward repricing in front-end KRW rates and KTB yields, particularly after the May policy meeting when the BoK will release updated macro forecasts alongside its rate projection “dot plot”. South Korean assets remain highly sensitive to global risk sentiment."

"The KRW has weakened by around 5% month-to-date, breaching 1,500 against the USD, while the KOSPI has declined by more than 10%. Foreign investors recorded net equity outflows of approximately KRW 20.6tn in the first 20 days of March. We expect continued FX and equity volatility, with external factors—especially Middle East tensions and global energy price dynamics—remaining the dominant drivers, given South Korea’s high dependence on energy imports and its cyclical exposure to global trade."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)