As we feared, the first day of March kicked off with more weakness for currencies and equities. At the start of the NY session, investors were hopeful that stocks would recover on the back of stronger data but between the Fed's latest comments and President Trump's sweeping tariffs on steel and aluminum imports, stocks u-turned and ended the day sharply lower. This reversal stripped away earlier gains in the FX market sending USD/JPY below 106.50, GBP/USD to 6 weeks lows, AUD/USD to 2 month lows and USD/CAD to 2 month highs. Trump's plan to impose 25% tariffs on steel and 10% tariffs on aluminum imports fulfills the President's promise of tough sanctions but also infuriates countries like China who could retaliate, initiating a trade war. Hawkish comments from Fed President Powell and FOMC member Dudley also revived concerns about the negative impact of tighter monetary policy. In his testimony to the Senate today, Powell talked about the prospect of higher wages and further labor market gains but it was Dudley who got everyone excited when he said that four 25bp rate hikes "would still be gradual." This suggests that there will be upward revisions to the Fed's dot plot forecasts later this month. Normally USD/JPY should benefit from the prospect of tighter monetary policy especially when the ISM manufacturing and personal income reports surprise to the upside but nothing matters more right now than the risk of trade wars ahead. If USD/JPY breaks 106 (and it should), the next stop should be 105.

There was nothing exceptional about today's move in EUR/USD outside of the fact that it held support at 1.2165. The single currency shot higher on reports that the European Central Bank won't change their guidance when they meet next week and will instead postpone the announcement until the summer. Given the recent deterioration in Eurozone data this would not be a surprise but it is at odds with the consistently positive comments from ECB officials. Unfortunately despite today's recovery the EUR/USD is not out of the woods. On a technical basis, it remains below the 50-day SMA and on a fundamental basis this weekend's Italian election and German SPD vote results pose a significant risk to the currency.

Sterling on the other hand fell for the third consecutive trading day ahead of Prime Minister May's big Brexit speech. According to her spokesman, May had a constructive meeting with European Council President Tusk but no one is buying it. In the best case scenario, May appears conciliatory and eager to have a deeper discussion on the EU's terms, fostering hope that Brexit negotiations will get back on track. If she dismisses their proposals outright (like she did yesterday) or provides no meaningful specifics, investors could express their disappointment by sending GBP/USD towards 1.36. Today's stronger than expected PMI manufacturing and mortgage approvals report failed to help the currency and the same will be true of tomorrow's PMI construction report as Brexit will be the key focus.  

USD/CAD came within striking distance of 1.29 as stocks fell and oil prices tumbled.The loonie shrugged off a stronger current account balance in favor of softer manufacturing activity. Markit Economics' Canadian manufacturing PMI index dropped to 55.6 from 55.9 in the month of February. Friday will be an important day for the loonie with Canada's monthly and quarterly GDP reports scheduled for release. Growth in December is expected to have slowed as retail sales and trade activity weakened towards the end of the year. However on a quarterly basis, growth is expected to accelerate and this less volatile reading should have a greater impact on USD/CAD than the monthly report. The only wrinkle is that the forecasts are high with economists calling for growth to accelerate to 2% from 1.7%. The worst performing currency today was the Australian dollar, which was hit hard by a combination of weaker data, risk aversion and a rising U.S. dollar. According to the latest reports, manufacturing activity slowed in February while private capital expenditure fell -0.2% in Q4. This is important because not only did economists anticipate a rise but the decline reflects weaker business investment. In contrast, the New Zealand dollar was one of the day's best performers. Aside from benefitting from AUD/NZD selling, it was supported by stronger terms of trade. Consumer confidence and building permits are due for release this afternoon.

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