The euro experienced a sharp rally as Germany signaled a departure from its strict fiscal policies, triggering a seismic shift in European yields and boosting investor confidence in the common currency. Meanwhile, Sweden’s krona surged, earning a reputation as the “gangster” currency among G10 peers.
Euro Breaks Resistance on German Fiscal Expansion
The euro skyrocketed after Friedrich Merz, Germany’s incoming chancellor, proposed a €500 billion infrastructure fund over the next decade—equivalent to 11-12% of Germany’s GDP. Additionally, he announced plans to bypass debt brake restrictions for defense spending exceeding 1% of GDP, alongside Germany’s call for increased EU-wide defense expenditures.
Despite the challenge of securing Bundestag approval before March 25—given the centrist coalition lacks a two-thirds majority—the markets have priced in expectations that the measures will be implemented. Speculation over further EU-level fiscal stimulus following today’s summit has fueled additional euro strength.
European Bond Yields Surge, Driving Euro Higher
Germany’s 10-year bond yields posted their biggest single-day jump since 1990, soaring by 30 basis points and extending gains by another 9 basis points. This dramatic shift narrowed the yield spread between German bunds and U.S. Treasuries to 145 basis points, down from 220 basis points at the peak of U.S. economic exceptionalism hype last year.
As a result, EUR/USD surged past key resistance levels, even testing 1.0800, a significant reversal zone. If bullish momentum persists—especially after the ECB meeting and U.S. jobs report later this week—a breakout toward 1.1200 and potentially 1.2000 could be on the horizon.
ECB Policy: Market Underestimating Hawkish Shift?
The European Central Bank (ECB) is set to announce its policy decision later today. While markets anticipate a rate cut, the pricing of future ECB cuts remains subdued, with only a 20-basis point reduction in expected rate cuts this year. Investors will closely watch whether the ECB fully shifts to a neutral stance, countering expectations for an additional 40 basis points of easing.
JPY: Yen Takes a Backseat as European Yields Dominate
The surge in European yields overshadowed the yen’s rally, with EUR/JPY spiking sharply. However, Japan remains focused on preventing excessive yen depreciation. Japanese policymakers could seek to push USD/JPY below 130 to avoid scrutiny from the Trump administration over currency levels.
With Japanese wage negotiations set to conclude this month—showing wage demands exceeding 6% for the first time since 1993—the Bank of Japan (BoJ) may accelerate rate hikes. However, the market is still only pricing in one additional hike (+29 basis points) for 2024, suggesting room for further policy surprises. USD/JPY appears set for a drop toward 140.00, depending on how the euro’s dominance plays out.
CAD Resilient Despite U.S. Tariffs
The Canadian dollar continued its rally, even as U.S. tariffs on Canadian imports went into effect. Prime Minister Justin Trudeau has vowed to stand firm by imposing retaliatory counter-tariffs, despite President Trump postponing auto import duties for another 30 days. While CAD risks persist—especially if Trump escalates the trade dispute—market sentiment suggests that the impact of tariffs may have been overestimated.
SEK: The “Gangster” Currency Leads the G10
Sweden’s krona has surged in response to the EU’s fiscal expansion, given Sweden’s close economic ties to European demand. However, SEK’s momentum accelerated after a hot inflation report, which showed core inflation (ex-energy) rising 0.9% MoM and 3.0% YoY, surpassing expectations of 2.7%.
EUR/SEK plunged below the crucial 11.00 level, while USD/SEK is now targeting 10.00—a psychologically significant threshold. If the SEK rally continues, it may indicate a fundamental shift in the valuation outlook for the currency.
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