Dollar in Freefall, Euro and Pound Rally (17-21 February)

The dollar fell sharply as U.S. retail sales dropped 0.9% (vs. expected 0.1%), reinforcing Fed rate cut expectations despite CPI and PPI exceeding forecasts.

The euro neared $1.05, and the British pound hit $1.2585, its highest in two months.

Gold reached a new all-time high, while silver hit a three-month high, supported by demand from electrification and China’s 357 gigawatts of new solar and wind power in 2024. UK GDP grew 0.1% in Q4 2024, and the Bank of England cut rates to 4.5%, lowering its 2025 growth forecast to 0.7%.

U.S. 10-year Treasury yields remained flat, while 2-year yields declined slightly. Japan's 10-year yield climbed to 1.35%, marking its sixth weekly increase. Trump announced new tariffs but left room for negotiations.

US CPI

Annual inflation in the U.S. rose to 3% in January 2025, up from 2.9%, surpassing expectations. Energy prices increased 1% year-over-year after a 0.5% decline in December, driven by smaller drops in gasoline (-0.2% vs. -3.4%) and fuel oil (-5.3% vs. -13.1%). Used car prices rebounded 1% after a 3.3% decline, while transportation costs accelerated to 8% from 7.3%. Monthly CPI climbed 0.5%, exceeding the expected 0.3%, with shelter inflation at 0.4%, contributing nearly 30% of the overall increase. Core inflation unexpectedly rose to 3.3% annually (3.1% expected) and 0.4% monthly.

UK GDP

The British economy expanded 0.1% in Q4 2024, outperforming expectations of a 0.1% contraction. Services grew 0.2%, construction 0.5%, but production declined 0.8%, marking its fifth consecutive quarterly drop. Manufacturing fell 0.7%, led by transport equipment (-2.3%) and pharmaceuticals (-4%), while mining and quarrying plunged 2.5%. Exports dropped 2.5%, driven by lower fuel, machinery, and transport equipment sales, while imports rose 2.1%, mostly due to non-monetary gold. Fixed capital formation declined 0.9%, with transport investment plummeting 22.9%. Government spending rose 0.8%, mainly in public administration, defense, and healthcare, while household expenditure remained flat.

German CPI

Germany’s annual inflation slowed to 2.3% in January 2025, down from 2.6%, aligning with preliminary estimates. Food inflation dropped to 0.8% from 2.0%, while core inflation fell to 2.9%, the lowest in three months. Energy prices declined 1.6%, with electricity down 3.6%, motor fuels -0.1%, and heating oil -1.2%. On a monthly basis, consumer prices fell 0.2%, reversing December’s 0.5% increase. The EU-harmonized CPI remained at 2.8% year-over-year but declined 0.2% month-over-month after a 0.7% rise in December.

Jobless Claims

Initial U.S. jobless claims dropped by 7,000 to 213,000 in early February, below the 215,000 forecast. Continuing claims fell 36,000 to 1,850,000, significantly lower than the expected 1,880,000, continuing the decline from a three-year high. The four-week moving average for initial claims edged down to 216,000. On a non-seasonally adjusted basis, claims fell 10,095 to 231,006, with notable declines in Pennsylvania (-2,975) and New York (-2,919).

US PPI (MoM) (Jan)

U.S. producer price inflation was 3.5% year-on-year in January 2025, unchanged from the previous month and surpassing market expectations of 3.2%. This marks the highest rate since February 2023.

US Retail Sales (MoM) (Jan)

Retail sales in the U.S. dropped 0.9% in January 2025, far worse than the expected 0.1% decline, following a revised 0.7% gain in December. This marks the sharpest drop since March 2023, driven by severe weather and the Los Angeles fires. The biggest declines came from sporting goods, hobby, musical instrument, and book stores (-4.6%), motor vehicles and parts dealers (-2.8%), and nonstore retailers (-1.9%). Sales also fell at furniture stores (-1.7%), building material and garden equipment (-1.3%), clothing stores (-1.2%), health and personal care stores (-0.3%), and food and beverage stores (-0.1%). In contrast, sales rose at gasoline stations (0.9%), food services and drinking places (0.9%), general merchandise stores (0.5%), and miscellaneous retailers (0.2%). Core retail sales, which exclude food services, auto dealers, building materials, and gasoline stations, dropped 0.8%, affecting GDP calculations. These figures are not adjusted for inflation.

Currencies

The dollar dropped sharply this week as U.S. retail sales fell 0.9%, far worse than the expected 0.1% decline, raising concerns about weak consumer spending. Control sales, used for GDP calculations, also declined 0.8%. Harsh weather and wildfires in Los Angeles likely contributed to the downturn. While both CPI and PPI exceeded forecasts, PPI components linked to the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, showed signs of cooling. Fed Chair Powell reiterated before Congress that there is no urgency to adjust interest rates. Meanwhile, former President Trump signed an executive order directing officials to propose new country-specific tariffs, but implementation could take months. Investors remain hopeful that negotiations may prevent these tariffs.

The euro edged toward $1.05, its highest level since late January, as weak U.S. retail sales reinforced expectations of Fed rate cuts later this year. The 0.9% decline in sales, compared to the expected 0.1%, fueled speculation that economic weakness may push the Fed to ease monetary policy. Market attention also remained on Trump’s proposed reciprocal tariffs, which could be introduced in April. In addition, diplomatic efforts to end the war in Ukraine continued in Munich, where Trump pledged to accelerate peace talks following discussions with Russian President Putin and Ukrainian President Zelenskyy.

The British pound climbed to $1.2585, its highest in two months, after Trump suggested that reciprocal tariffs may not be implemented until April, giving markets hope for further negotiations. UK GDP grew 0.1% in Q4 2024, surpassing expectations of contraction and outperforming the Bank of England’s forecast. The economy is now slightly larger than when Labour took office in July, providing some relief to the government. However, concerns remain, as the Office for Budget Responsibility’s upcoming economic projections in March are expected to show lower growth forecasts. The Bank of England recently cut interest rates by 25bps to 4.5%, marking its third rate cut since August 2024, while downgrading its 2025 GDP forecast to 0.7%.

The Japanese yen weakened against the dollar, which saw a sharp drop after Trump delayed implementing reciprocal tariffs, easing fears of trade tensions. Additionally, U.S. PPI data suggested that the upcoming core PCE inflation report may show further cooling, reinforcing expectations for Fed rate cuts. Japan’s Economy Minister Ryosei Akazawa stated that Japan would respond appropriately to any U.S. tariffs. Meanwhile, the Bank of Japan’s hawkish stance continued to support the yen. While uncertainty remains over a potential rate hike in March, further rate increases are expected later this year.

Commodities

Gold hit a record high as safe-haven demand grew on Fed policy uncertainty and U.S. trade war concerns. Trump’s push for a Ukraine ceasefire lifted European risk assets, while expectations of a Fed rate cut increased after U.S. retail sales fell 0.9% in January.

Silver rose to a three-month high, driven by strong industrial demand and a rebound in ISM Manufacturing PMI. China’s 357 GW solar and wind expansion, India’s INR 1 trillion renewable investment, and Indonesia’s 17 GW solar pledge further boosted demand. U.S. tariff plans also supported precious metals.

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