USD: Souring US sentiment continues to weigh - ING

Yesterday, the FX market reacted to unprecedented moves in European rates. German yields spiked 30bp after the German fiscal announcement, the largest intraday move in 25 years. The implications for the dollar are not secondary. Even more surprising than the huge bund move was the total disconnect with US yields. Treasuries barely budged yesterday: another signal that markets are sinking their teeth on the repricing of US exceptionalism relative to Europe, ING's FX analyst Francesco Pesole notes.

DXY to stabilize in 104-105

"The US has granted a USMCA exemption to autos, which have heavy cross-border supply chains with Canada and Mexico and has been identified as potentially the most vulnerable sector to the fresh 25% duties. Meanwhile, Canada's retaliation continues to appear more aggressive than Mexico's, reinforcing our perception that Mexico is closer to a deal to potentially pause tariffs than Canada, which could lead to MXN outperforming CAD."

"In this sense, US data is more relevant than protectionism news this week. The whisper number for tomorrow's US payrolls is now close to 120k (consensus: 160k) following a soft ADP print (77k vs 140k consensus) yesterday. The ISM services actually bucked the trend of recent data disappointment yesterday, coming in stronger than expected at 53.5, with prices paid accelerating. But any positives for the dollar were likely offset by more negative expectations ahead of payrolls."

"Today, the US calendar is lighter, aside from the release of January's trade deficit, which is expected to have widened further and could trigger a more hawkish response on tariffs by the US administration. We would resist the temptation to call for an immediate rebound in the dollar just yet given the upcoming payrolls risk event. But US longs have largely been obliterated so far in March, and our view is that the dollar move is overblown. The reality of prolonged US tariffs and their impact on Europe argues for a USD rebound in the coming weeks, but for now a stabilisation in 104-105 in DXY may be the best dollar bull can hope for."