Markets Weekly podcast

Julien Lafargue (JL): Welcome to a new edition of Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.

It was another challenging week in financial markets last week, with the S&P 500 almost reverting back to correction territory although Treasuries were mostly firmer, as the US yield curve steepened. And looking at our screens this morning it looked like the S&P 500 could, indeed, go back to correction territory by the end of Monday.

Meanwhile, in Europe, as we pointed out recently, the ‘sugar high’ from the German stimulus plan has started to fade and the STOXX 600 posted a weekly decline of 1.4%. Of course, the catalyst for the weakness was, first and foremost, the announcement by President Donald Trump of permanent tariffs on autos and some auto-parts that are not produced in the US. And this was apparently some kind of appetiser to what’s to come on Wednesday, also known as ‘Liberation Day’.

Now, we’ll discuss that in greater detail, but if we focus on the actual data that we got out of the US last week, well, it was sort of a mixed bag. Starting with US inflation, the core PCE, which is the Fed’s favourite inflation measure, was slightly hotter than expected in February at 2.8% year over year. However, the headline figure, so the one that includes more volatile components such as food and energy, was in line at 2.5% year over year.

Similarly, headline durable goods orders came in better than expected, but core capital goods orders, ie when you exclude defence and airlines, posted a surprise contraction in February. Even the PMIs, in fact, were mixed, with manufacturing unexpectedly contracting while the activity on the service side expanded much, much faster than expected.

So, there is definitely a lot to digest when it comes to the US, whether it’s all this noise around tariffs or the mixed economic data, and that’s why I’m very pleased to be joined today by Bhaskar Gupta, who’s the Head FX Distribution in the UK for Barclays Private Bank.

And we’re going to talk everything FX, because this is a market that has, of course, been impacted by everything happening in the world more so probably than any other market. So, Bhaskar, thanks for coming back to the podcast, and maybe I can start by asking you a very easy question to put you at ease: is the dollar doomed?

Bhaskar Gupta (BG): Hi, Julien. Thanks for having me on the podcast. Well, that’s a very good question to start with. As you mentioned, the US dollar and the US economy do have big question marks hanging over them. As we’ve seen over the last few weeks, the Trump administration is rewriting all its rulebooks, not just in terms of their trade policy but also their diplomatic relations, you know, with friends and foes alike.

And all of this, especially the tariffs and even the retaliatory tariffs, will have an eventual impact on growth, inflation and other economic variables along with the whole idea of US ‘exceptionalism’ now being questioned. So, yes, the dollar is weaker as a result. Cable has moved up from $1.22 to $1.29 to the pound. The euro has moved up from $1.02 to $1.09 just in the span of a few weeks, but we don’t really think that the dollar is doomed.

In FX, you see everything is relative, relative to another currency. So, what happens to the dollar pricing depends a lot on what’s happening to other economies too. And let’s not forget about the dollar ‘smile’, you know, wherein the dollar tends to outperform both in scenarios of US outperformance and in periods of risk aversion, something that we are going through right now.

So, for now, we have a mixed outlook on the dollar. While, overall, we expect the dollar to stabilise around current levels, we expect it to strengthen against the likes of the euro, the Chinese yuan and most EM currencies for that matter. However, against the pound we expect it to slightly weaken, but that’s only a smidge, nothing spectacular.

So, a lot will depend on how the trade policies shape up and how much of an impact they have on growth and inflation. And even the Fed’s current cautious stance will keep the dollar weakness in check, so we do not really expect the dollar to be doomed but, you know, if at all, strengthen from here a bit.

JL: Interesting. And you mentioned the pound briefly, and I didn’t mention it in my introduction, but last week the FTSE 100 was the one major developed market equity index that was, in fact, up. And this came as Chancellor Rachel Reeves delivered a Spring Statement that really didn’t have any major surprises. Indeed, I think, as widely suggested by the press in the days leading to the event, the Chancellor simply announced a series of measures designed to restore the fiscal headroom to £9.9 billion. And, crucially, I think those measures came in the form of spending cuts rather than new taxes, which is something that financial markets liked.

But, it wasn’t all rosy, if you think about last week in the UK because the OBR, in fact, slashed its 2025 GDP growth forecast in half, from 2% to 1%. And not only that, but the projections for 2026 and 2027 remained very upbeat compared to what most economists expect, which means that the Chancellor’s plan may prove to be too optimistic. I don't know, Bhaskar, if you share that assessment. But, what is your view on the pound? Do you think it can recover further, given those growth projections?

BG: Yes, obviously those growth projections are on one side of the equation, and, you know, so much goes into making a currency rate, so many variables that they all sometimes act against each other. But on the pound we do have a constructive outlook, both against the euro and the dollar. So, the UK does have greater resilience, when it comes to the direct tariffs threat as compared to the eurozone. So, we are quite constructive for sterling against the euro and that’s a central tenet of our view. And we think that this has yet to be fully priced in the euro/sterling rate, so there’s upside in sterling to that extent.

Even the Bank of England’s rate-cutting cycle is expected to remain shallow, expected to remain slow. Governor Andrew Bailey indicated so in the last meeting, two weeks back. So, all that will give a bit of a backstop to the currency. In addition, the inherent ‘carry’ in sterling and closer UK/EU ties will keep the currency supported. And also, like you mentioned, in the Spring Statement last week, the Chancellor has shown some fiscal prudence, which has been received well by the market.

So, barring any major surprises, we expect sterling to trade positively from here. In fact, holding sterling, or going long sterling, is one of our top trade ideas for now.

JL: That’s very interesting, Bhaskar, and I think it’s somewhat of a contrarian view, at least based on my conversations with clients and investors. Not many of them have a positive outlook when it comes to the UK economy, UK assets in general, and the pound.

Now, I want to get your thoughts on two more currencies, because I think that they’re relevant to our audience. You touched on it when you spoke about the dollar and spoke about the pound, but I just want to get a sense of how you view the euro, which has been quite strong on the back of this new-found optimism that is linked to the German stimulus plan. And I also want to hear your thoughts on what’s more of a safe-haven currency in the current context, that could be relevant to people, the Swiss franc.

So, let’s start with the euro. What do you think about the euro?

BG: Yeah, sure, Julien. Like you mentioned and like we discussed, the euro has outperformed exceptionally well over the last few weeks and it’s been contrary to the majority opinion. The German fiscal spending plan, you know, has provided a major boost to the euro, resulting in the move from $1.02 to $1.09, but we think that rally is now a) done, and b) fully priced in at current levels, while the German fiscal spending is priced in but that tariff risks are only partially so, and the European economy still, overall, faces many growth challenges which will not be addressed by more spending alone.

So, we do expect (9.22) the euro to trade lower towards, probably, the middle of its recent range at around the $1.05, $1.06 level. So, these could be good levels for anyone looking to hedge some euro/dollar downside. That’s on the euro.

And then coming to the Swiss franc, we expect it to stay mostly coupled with the euro, and we don’t expect much volatility out there. The ‘Swissy’ is currently impacted by forces pulling it in opposite directions. You know, while its appeal as a safe-haven asset is keeping it supported, in the current scenario, where there’s some demand for safe-haven assets. And, at the same time, the Swiss National Bank cutting rates to 2.25% and the ‘carry trade’ coming back into play. Investors are using the Swissy as a funding currency, which is putting downward pressure on it. So, it’s been pulled in equally from both sides.

On balance, we don’t expect the Swissy to be very volatile, true to its nature, and expect it to trade around current levels of around 0.88 against the dollar, probably around 0.94 against the euro, so stable on that front.

JL: And in the current market environment stable is not a bad thing, if you’re looking for more peaceful nights, let’s say. Look, that was great. Before we conclude, any other thoughts maybe on emerging market currencies? Any view on that? Anything you would like to highlight that could be interesting?

BG: No, nothing stands out. We do expect gradual depreciation in most EM currencies, whether it’s the Chinese yuan, Indian rupee, Brazilian real, South African rand, just the gradual depreciation in them which has been seen over many years. Dollar/Turkey stands out as an exception.

JL: Well, I was about to ask if you had a view. It was a tricky question, so I wasn’t sure if I would ask it, but since you’re mentioning it, I think it’s great because we’ve seen a lot of moves. So, what’s your thought on Turkey?

BG: I mean, you know, no currency conversation can be complete without discussing Turkey. So, we have seen that political turmoil and it’s again one of those currencies which has been impacted by headlines rather than by economic factors, but we expect that to continue. It’s a huge, huge carry currency, but that’s not going to compensate you for the risk that you are taking. We are bearish on the Turkey currency, so we expect it to move towards 40, 42.5. It will be knee-jerk moves, nothing market related, but bearish on that one. So, yeah, we think the dollar will appreciate against the EM currencies.

JL: OK. Great. Well, I guess Turkey is a great reminder of how a carry trade works, until it doesn’t. And when it doesn’t it can be pretty painful. Excellent. Well, thank you so much, Bhaskar, for this brief overview. We’ll definitely get you back through the quarter to get an updated view from you. I’m sure we’re going to see some moves in FX markets, potentially starting this week, with ‘Liberation Day’ on Wednesday.

But, in terms of other things to look for this week, beyond what’s going to be said on Wednesday in Washington, we’re going to get the ISM manufacturing PMI on Tuesday as well as the JOLTS job openings figure that same day. And after Liberation Day, so once the US has been ‘liberated’, we are going to get the ISM service PMI, and a speech from Fed chair Jerome Powell on Friday.

And I think the key piece of news from this week will be the US jobs report on Friday, and that has the potential to totally flip whatever happened going into Friday, and after Liberation Day, because at the end of the day this is hard data and this is a reflection as to how the US economy is responding to all this noise coming from Washington.

So, we’re going to have a lot to discuss next week. We will back but, in the meantime, as always, we wish you the very best in the trading week ahead.