EUR/USD surges as Germany boosts spending and ECB prepares to cut rates

WHERE WE STAND – The times they are a-changin’, as Bob Dylan once sung.

Trump now cheers move in Treasuries rather than those in equities; China is boosting its budget deficit to count the effect of US tariffs; and, even that bastion of fiscal prudence, Germany, is set to splash the cash.

It was that German cash-splashing that stole the show yesterday, amid reports that incoming Chancellor Merz plans debt brake reform in order to setup a 500bln EUR ‘special’ defence fund, well above the 200bln that had previously been rumoured. Clearly, President Trump’s message that the US will no longer ride to Europe’s rescue in the realm of defence has been received loud and clear.

How will all this be paid for? I hear you ask. In short, debt, and a hell of a lot of it! No surprise, then, that Bunds tumbled across the curve yesterday, with benchmark 10-year yields rising as much as 25bp, the biggest intraday jump since just after the fall of the Berlin Wall, to touch their highest level since 2023. The DAX also tore higher, gaining well over 3%, with defence names predictably leading the rally, while the EUR surged too, with the common currency notching fresh YTD highs.

Interestingly, 1-week EUR/USD risk reversals now sit at their highest level in four and a half years, showing not only how every man & his dog has suddenly become very bearish on the buck, but also the warm reception that Germany finally opening the spending taps has received. I’d caution against some of the euphoria here, though, given that the multiplier effect of this spending is likely to be relatively low, and considering that it won’t exactly be a ‘silver bullet’ to solve all of the German economy’s ills. I’m loathe to call tops/bottoms in a market as choppy as this, but with the EUR now north of its 200-day moving average, momentum favours further gains here.

Anyway, away from the most exciting fiscal development in a decade in the eurozone, there were other things going on yesterday.

US growth jitters persist, despite better than expected ISM services PMI figures, with the index having unexpectedly risen to 53.5 in February, from a prior 52.8. That said, the survey was still a bit stagflationary in nature, with the prices paid index jumping to 62.6. The lack of distinct market reaction to the upside surprise was telling, though – if the dollar can’t rally on good data, then it probably can’t rally at all.

The same can be said of the equity complex, where nervousness was on display once more yesterday, with selling rallies remaining the preferred strategy, despite the move higher on the back of Canada/Mexico auto tariffs being tinned. Equities continue to face a pretty grim backdrop, amid extremely high policy uncertainty, incoherent government policies, and softening economic data, all giving the bears the upper hand from a tactical perspective.

On that note, I find it very telling that both Treasury Secretary Bessent, and Commerce Secretary Lutnick, have been ‘rolling the pitch’ for an economic slowdown of late. Bessent, yesterday, flagged that the economy is “lousy” and that incoming figures are currently “Biden data”, trying to absolve Trump of responsibility for the tumble in consumer and business confidence. When both are actively talking down their own economy, it suggests a doubling-down on the ‘short term pain, long term gain’ strategy, in turn lessening the chances of market headwinds lifting in the near future.

LOOK AHEAD – My least favourite day of the month up ahead – ECB day!

Lagarde & Co will deliver another 25bp deposit rate cut this lunchtime, lowering the deposit rate to 2.50%, while maintaining guidance that future moves will be ‘data dependent’, with decisions to be taken on a ‘meeting by meeting’ basis. The key question for the ECB will be whether policy is still labelled as “restrictive”, with the Governing Council’s hawks, including the influential Schnabel, having previously raised doubts over such an assertion. Removing that description, which isn’t my base case, would be an implicit hawkish message, hinting strongly at a slower pace of rate reductions moving forwards.

Meanwhile, the US delivers weekly jobless claims data, though neither the initial nor the continuing claims print pertain to the survey week for the February NFP print, due tomorrow. Final Q4 unit labour costs, as well as remarks from the Fed’s Waller and Harker, may also be of some interest.

Lastly, on the earnings front, Broadcom (AVGO) report after the close today, with the figures of significant importance for the AI names, particularly after the late-Jan emergence of Deepseek made risks around the theme considerably more two-sided.