Dollar a touch softer at the off
The dollar is under a little pressure this morning amid the latest instalment of the Trump tariff turmoil. Shortly after the Supreme Court on Friday struck down his IEEPA-imposed (mostly reciprocal) tariffs, the US President slapped a temporary (150 day) 10% tariff on all countries using alternative legislation, raising it to 15% in less than 24 hours. How the new levy interacts with the trade deals the US has agreed recently is unclear. Indeed, the EU has asked for “full clarity” from the US, noting that “the current situation is not conducive to delivering fair (and) balanced…trade and investment” as agreed between the two sides in the deal reached in August last year. The euro and sterling are trading at around $1.1815 and $1.3515 against the dollar respectively this morning (up from around $1.1750 and $1.3450 before the Supreme Court announcement), leaving EURGBP at just under £0.8750.
US government bond yields increased on the week as the market pared back expectations for Fed rate cuts – about 55bps is now priced in for this year versus 65bps previously – with 2- and 10-year yields rising by circa 8bps and 4bps respectively. In the UK, bond yields at the long end of the curve fell further with 10- and 30-year yields declining by another 7bps or so, while German yields were marginally higher in the 2-year area but marginally lower further out the curve. In equity markets, European and US stocks chalked up solid gains with the Euro Stoxx 600 and S&P 500 ahead by about 2% and 1% respectively. Asian stocks are mostly in the red overnight though, and European indices have opened lower this morning also.
Friday’s GDP report showed the US economy grew by 0.4% q-o-q (or 1.4% at an annualised rate) in Q4 2025, less than the consensus forecast of 0.7% (2.8%) and a moderation from 1.1% (4.4%) in Q3. Government spending made a negative contribution to growth in Q4, reflecting the impact of the government shutdown in October-early November, but this should reverse in the current quarter. On a y-o-y basis, GDP grew by 2.2% in the fourth quarter, while for 2025 as a whole growth averaged 2.2%, a slowdown from 2.8% in 2024.
Staying with the US, headline PCE inflation – the Fed’s target measure of inflation – came in slightly higher than forecast in December at 2.9%, up from 2.8% in November. Core inflation was also ahead of expectations at 3%, up from 2.8%, driven by an acceleration in core goods inflation to 2.0% from 1.2% in November, while core services inflation was unchanged from November at 3.3%.
Economic growth in the UK looks to have picked up in the opening months of 2026 judging by the latest PMIs, have remained sluggish in the final quarter of 2025 (at just 0.1% q-o-q). The composite PMI remained well above the 50 expansion-contraction threshold in February, nudging up to 53.9 from 53.7 in January. The manufacturing index rose slightly to 52.0, above the 50 level for a second month in a row, while the services index slipped to 53.9 from January’s 54.0. Meanwhile, the PMIs for the Euro area showed the composite index rebounded in February, rising to 51.9, having fallen in each of the two previous months, consistent with ongoing economic growth in the zone.
Looking to the week ahead, markets will obviously be watching for (and responding to) any further developments on the tariffs front. Economic data due include consumer confidence (Tuesday), weekly jobless claims (Thursday) and producer prices (Friday) in the US; the European Commission’s Economic Sentiment Indicator for the Euro area (Thursday); and both consumer and business confidence in the UK (Friday). Members of the Bank of England MPC discuss the latest Monetary Policy Report at a meeting of the Treasury Committee on Tuesday, while a number of ECB and Fed officials are scheduled to speak over the course of the week.