EUR/USD should continue to be pulled in both directions, as it was between 1.08 and 1.0950 last week. The hope of a spending boost for the German economy is offset by recession fears driven by the escalating trade tensions between the EU and the US.
The CDU/CSU and Social Democrats (SPD) have reached an agreement with the Greens to reform Germany’s debt brake, which will significantly boost spending on defence and infrastructure over the next decade. This would require a two-thirds majority vote at the special sessions of the outgoing Bundestag on March 18th and the Bundesrat on March 21st. While these parties hold the required majority, they need to address internal disputes and prevent defections to ensure the needed majority. Fitch warned that the “ReArm Europe” plan would lower the EU’s debt rating headroom due to additional debt at the EU level.
However, the EU and US are engaged in a tit-for-tat tariff war, which the Bundesbank alerted could tip the externally dependent German economy into recession. The European Central Bank also warned that maintaining stability would be a formidable task because of the exceptionally high level of uncertainties driven by Trump’s policies.
Investors remain wary of “Trumpcession” risks from the Trump administration’s aggressive stance on trade and implementation of tariffs and counter-tariffs. US Treasury Secretary Scott Bessent dismissed the correction in US equities as healthy. Bessent did not rule out a US recession, adding that the administration was focused on an optimistic outlook in the long term based on major policies such as extending tax cuts, deregulation, anti-immigration, and energy security. The futures market is looking for US stocks to open weaker on Monday after Bessent’s comments.
On a positive note, the US averted a government shutdown with a six-month continuing resolution that funds federal operations through the end of September. According to estimates, Republican lawmakers still need to resolve their differences in the decision to suspend or raise the debt limit to prevent the US government from defaulting on its debt obligations by summer.
At the FOMC meeting on March 18-19, the market will not buck the Fed’s guidance for the Fed Funds Rate to stay unchanged at 4.25-4.50%. The focus will fall on the Summary of Economic Projections. Given that countries have retaliated against Trump’s tariffs with their own duties, the Fed will likely lift its inflation forecast and lower its GDP growth projection. Before the Fed’s blackout period, Fed Chair Jerome Powell said the Fed would separate the signal from the noise regarding the net effect of Trump’s policies on the US economy. Today, consensus expects advance US retail sales to rebound by 0.6% MoM in February after its 0.9% decline in January. Powell reckoned that the Fed was well positioned to wait for greater clarity, hinting that the Fed need not increase its projection for two rate cuts this year to the three discounted in the futures market.
Despite its negative tone, we remain cautious about the DXY Index. Following its 6.3% plunge over the past two months, the DXY appears oversold per its 14-day RSI readings amid signs of stabilizing US bond yield differentials against their counterparts.
Quote of the Day
“There comes a time in the life of every nation when it stands at the crossroads of history and must choose which way to go.”
Lal Bahadur Shastri
March 17 in history
The first modern submarine was successfully tested off Staten Island in 1898.
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