Dollar benefits from weak risk appetite 

Risk appetite remains subdued 

Despite US President Trump adopting a more relaxed approach this week on the issue of tariffs, market participants remain concerned about what lies ahead. Risk appetite remains weak, despite recent positive technological advancements, such as Microsoft’s quantum computing chip, creating a feel-good factor, while gold reached a new all-time high yesterday.

Specifically, the S&P 500 index is almost unchanged on a weekly basis, while European indices are slightly in the red ahead of the next key events. Only Chinese equities are comfortably in the green this week, benefiting from continued positive developments on the AI front.

Meanwhile, Fed officials are supporting the message from the last Fed meeting of a “wait-and-see” approach. However, the doves are trying to keep the needle fixed towards rate cuts in 2025, with the market pricing in 40bps of easing this year, slightly below the two rate cuts penciled in at the December Fed dot plot. Interestingly though, yesterday’s commentary from Fed Board member Kugler, a known dove, that the “Fed should not cut interest rates again for some time”, might have alarmed investors. Fed Vice Chair Jefferson and San Francisco President Daly will be on the wires today, and both are expected to put a dovish spin on their rhetoric.

Euro area is in the spotlight

In the FX space, weekly changes have been minimal with the exception of the yen. Both the dollar and the euro have lost a bit of ground this week, while the pound has maintained its weekly gains following today’s strong retail sales report and the mixed PMIs. Oddly, the slightly stronger preliminary Eurozone PMI survey figures failed to reenergize the euro bulls. Most likely, investors’ attention is firmly focused on the Ukraine-Russia conflict and the imminent German election.

Sunday’s German federal elections are crucial for both Germany and Europe. With the German economy underperforming in recent years, new initiatives and leadership are needed to restart Europe’s strongest economy. Similarly, with the US attempting to end the Ukraine-Russia war on its own terms, Europe is desperately seeking to reclaim its place on the geopolitical stage.

Despite the polls showing a comfortable lead for the CDU/CSU party, there is a sizeable risk of a very strong performance from the AfD. Such an outcome would increase the “Gerexit” risk and could make the negotiations for the next coalition even tougher, as three parties would need to come together to form the government. In 2017, negotiations for the next coalition between CDU/CSU, FDP and the Greens lasted six months. A risk-off reaction could push German equities lower, with the euro suffering as well on Monday morning. The initial exit poll results will be published on Sunday at 17:00 GMT, with the first estimate of the allocated Bundestag seats expected within the hour.

Yen loses ground as government bond yields jump 

The recent series of positive Japanese economic figures continued today. The January national inflation report came in stronger than expected, with the headline inflation rate surging to 4% and the core indicator showing a decent 3.2% annual change. Additionally, the preliminary Manufacturing PMI survey for February edged slightly higher.

Despite this solid data, the yen is on the back foot today as Japanese yields continue their journey higher. The 10-year yield has climbed to its highest level since 2009, sparking concerns about Japan’s fiscal position, with both PM Ishiba and Finance Minister Kato quickly warning about the impact of higher yields. It must be rather frustrating for Governor Ueda et al that, after almost three decades, Japan is finally experiencing inflation and rate hikes, only for politicians to erect barriers to their efforts.