Earlier, ECB President Christine Lagarde said during a conference in Washington that the current configuration of interest rate policy remains “in a good place” and is consistent with the euro area’s macroeconomic conditions. According to her, inflation has slowed significantly from its 2022 peak, when it exceeded 10.0% year-on-year, and is now holding close to the 2.0% target.
Lagarde noted that the current level of borrowing costs provides a sufficiently restrictive financial environment to bring consumer price growth back to forecast levels over the medium term. At the same time, she pointed out that economic activity remains subdued, although preliminary data show that GDP growth accelerated to 0.3% quarter-on-quarter and 1.3% year-on-year in the fourth quarter, while the labour market remains relatively resilient, with unemployment holding near 6.2%, close to historic lows.
She stressed that the Governing Council will continue to base its decisions on incoming macroeconomic data, assessing price dynamics, wage growth, and the transmission of monetary policy to the real economy. A key event in the coming days will be the release of preliminary data on Germany’s harmonised consumer price index for February, expected later this week. Economists forecast a monthly increase of 0.5% following a –0.1% decline in January, bringing the annual rate back to a stable 2.1%. The impact of these figures on the ECB’s policy outlook is expected to be limited, as price pressures remain close to the 2.0% target. At the same time, markets will continue to monitor comments from US Federal Reserve officials for additional signals on the timing of the first rate cut. Minutes from the January Federal Open Market Committee (FOMC) meeting confirmed that policymakers remain cautious and see no need for an immediate rate cut, given inflation’s persistent hold above the 2.0% target. Nevertheless, improved economic growth prospects and labour market recovery were noted, while Governors Christopher Waller and Steven Miran argued in favour of a –25 basis point adjustment.
Language referring to elevated risks to employment was also removed from the statement, having appeared in the previous three releases. According to the CME FedWatch Tool, the probability of a minimum rate cut from the current 3.50–3.75% range at the March meeting is now estimated at just 5.0%, with the first such move not expected before June. Overall, investors anticipate a total reduction of 50 basis points this year. On Monday, Christopher Waller emphasised that his vote will depend solely on upcoming labour market data due early next month, while acknowledging the possibility of weaker employment statistics that could influence the Committee’s decision.
GBP/USD
During the Asian session, the pound is extending bullish momentum and testing the 1.3520 level for an upside breakout, while investors await new catalysts for price movement and the fundamental backdrop continues to weigh on the currency. Former EU Trade Commissioner Peter Mandelson, who previously served as UK ambassador to the United States, was arrested as part of an investigation into his alleged ties with US financier Jeffrey Epstein. Investigators are examining claims that around 15 years ago Mandelson may have passed on confidential government information and engaged in lobbying related to banking regulation. The arrest came just days after the detention of the King’s brother, Andrew Mountbatten-Windsor, in a separate case with a similar context, also linked to contacts with Epstein.
The creation of a specialised coordination group to investigate such cases points to tighter oversight of senior officials and greater transparency in government processes, affecting assessments of institutional and political stability. Meanwhile, market participants have focused on retail sales data, which showed a 1.8% month-on-month increase in January versus a forecast of just 0.2%. At the same time, the CBI retail sales balance fell sharply from –17.0 to –43.0 points, far worse than the expected –27.0.
Preliminary data also showed that the February composite PMI edged up from 53.7 to 53.9, above expectations of 53.3. Manufacturing and services PMIs rose from 51.8 to 52.0 and from 54.0 to 53.9, respectively, versus forecasts of 51.5 and 53.5. These figures reinforce concerns about economic overheating and rising inflation risks, strengthening the case for tighter policy by the Bank of England.
At the same time, MPC member Alan Taylor reiterated his support for short-term policy easing, forecasting two to three rate cuts until a neutral level is reached. Markets currently price in more than an 80.0% probability of a rate cut at the March 19 meeting, with total easing this year potentially amounting to 50 basis points.
AUD/USD
The Australian dollar is gaining strongly during the Asian session on February 25, once again attempting to hold above the key resistance level at 0.7100. Support comes from consumer inflation data, which reinforce expectations of possible monetary tightening by the Reserve Bank of Australia (RBA). The trimmed mean CPI for January, calculated by the RBA, rose from 3.3% to 3.4% year-on-year, slightly above neutral forecasts, while the broader CPI remained at 3.8%, defying expectations of a slowdown to 3.7%. On a monthly basis, however, inflation slowed sharply from 1.0% to 0.4%, which can still be attributed to seasonal factors. At 10:40 (GMT+2), markets will focus on a speech by RBA Governor Michele Bullock, who may again highlight persistent inflation risks despite cooling labour market conditions. At its February meeting, the RBA raised the policy rate to 3.85% and signalled that reducing price pressures remains a priority, noting that inflation is expected to return to the midpoint of the 1.0–2.0% target range only by mid-2028. The RBA refrained from providing guidance on future policy, with Bullock stressing that “the door remains open” to further rate hikes, while awaiting confirmation from macroeconomic data.
US investors and forex traders are also watching for changes, as the domestic macro backdrop remains stable, supported by inflation data and labour market reports. In January, the personal consumption expenditures index accelerated from 2.8% to 3.0% year-on-year, versus a preliminary estimate of 2.9%, and from 0.2% to 0.4% month-on-month, against expectations of 0.3%. Core PCE rose from 2.8% to 2.9% year-on-year and from 0.2% to 0.4% month-on-month. Initial jobless claims fell from 229.0K to 206.0K, below forecasts of 223.0K, while continuing claims edged down from 220.0K to 219.0K, with total claims at 1.869M versus 1.860M expected. Faster growth in personal spending supports a neutral monetary policy stance favoured by Fed Chair Jerome Powell. However, Powell’s four-year term ends in May, and new leadership could adopt a more dovish approach, as repeatedly urged by President Donald Trump. Markets do not rule out three 25 bp rate cuts this year, with the first move likely only in July or September. At the March 18 meeting, rates are expected to remain in the 3.50–3.85% range, according to the CME FedWatch Tool.
USD/JPY
The US dollar is trading mixed, holding near 155.75 and close to its February 10 highs. A key catalyst for the sharp shift in sentiment was a report by Mainichi Shimbun stating that Prime Minister Sanae Takaichi expressed doubts during a February 16 meeting with Bank of Japan Governor Kazuo Ueda about the appropriateness of further rate hikes. Markets interpreted this as direct political interference in the central bank’s independence, undermining expectations of imminent policy tightening. This is notable given that Takaichi’s recent election victory had previously been seen as supportive of fiscal discipline. Investors are now focusing on her long-standing commitment to ultra-loose monetary policy and expansionary fiscal measures, bringing concerns about policy imbalance back into focus. As a result, market expectations have shifted sharply: whereas a rate hike as early as April had previously been priced in, only 20.0% of economists now expect tightening in the second quarter, with consensus moving toward June or even July. The situation is compounded by new external challenges facing Japan’s economy. China’s Ministry of Commerce has added 40 companies to its export control list, posing additional risks to supply chains and industrial output, and further pressuring the yen through deteriorating trade prospects.
XAU/USD
Gold prices are returning to growth during the Asian session on February 25, reversing the previous day’s bearish move and once again testing the $5,200 per troy ounce level for an upside breakout. A key driver of renewed demand is the risk of escalating military conflict between the United States and Iran if a nuclear deal is not reached. A new round of talks is scheduled for tomorrow in Geneva, while US forces continue to build up their presence near Iran’s coast. Reports also emerged this week that non-essential personnel were evacuated from the US embassy in Beirut ahead of potential strikes on infrastructure aimed at pressuring Tehran to accelerate decision-making. Iranian authorities, in turn, have stated their readiness to respond decisively to any aggression, considering adversary bases and assets as legitimate targets.
