US faces stagflation: weak growth, rising inflation, legal tariff rollback shocks dollar, while ECB-Fed divergence drives euro strength.
The US Economy’s Stagflationary Trap
The United States is currently grappling with a jarring economic disconnect that has left currency traders in a state of high alert. The latest data presents a classic stagflationary headache: growth is stalling just as inflation is finding its second wind. With fourth-quarter GDP limping in at a mere 1.4%—decidedly lower than the 3.0% projected—the “US exceptionalism” narrative is facing its sternest test yet. While a 43-day government shutdown explains some of the drag, the underlying weakness suggests a consumer base starting to buckle under the rising cost of living and a cooling labor market. Paradoxically, the Federal Reserve’s preferred inflation gauge, the Core PCE, has ticked up to 3.0%, remaining stubbornly far from the 2.0% target. This creates a policy paralysis for Jerome Powell: cutting rates to jumpstart growth risks letting inflation spiral, while holding rates high risks deepening the slowdown.
Judicial Shocks and the Tariff Rollback
Adding a layer of unprecedented legal drama to the fiscal landscape, the US Supreme Court has effectively dismantled a pillar of the administration’s trade policy. By ruling that the President cannot use the International Emergency Economic Powers Act (IEEPA) to levy broad tariffs without Congressional approval, the Court has stripped away a key structural driver of “imported” inflation. The immediate market reaction saw the US Dollar Index (DXY) crater as traders priced in a future with fewer trade barriers and, potentially, more room for the Fed to eventually ease policy. While the administration may seek alternative legal avenues to keep duties in place, the ruling serves as a massive “disinflationary” shock, weakening the Greenback’s yield advantage and providing a sudden, upward tailwind for the Euro.
The Central Bank Standoff: Lagarde vs. Powell
In this environment of high-stakes volatility, the individual stances of central bank leaders have become the primary compass for the EUR/USD pair. On one side, the ECB under Christine Lagarde remains laser-focused on its price stability mandate, showing little appetite for premature easing as long as inflation remains a threat. Across the Atlantic, the Federal Reserve is navigating a transition of its own, with outgoing officials like Raphael Bostic maintaining a hawkish line, insisting that no rate cuts should be on the table for 2026. This policy divergence is the “hidden” engine of the current market; as the US economy faces fiscal and legal headwinds, the Euro stands to benefit from an ECB that appears more stable and less prone to the political and judicial shocks currently rocking Washington.
Top upcoming economic events:
1. 02/22/2026 – Retail Sales (QoQ)
This high-impact release for the New Zealand Dollar (NZD) provides a direct look at consumer spending health. Since consumption is a primary driver of economic activity, a strong quarterly growth figure can signal inflationary pressures, potentially influencing the Reserve Bank of New Zealand’s future interest rate decisions.
2. 02/23/2026 – ECB’s President Lagarde speech
As the head of the European Central Bank, Christine Lagarde’s speeches are closely scrutinized by traders for clues regarding the Euro (EUR) zone’s monetary policy. Her comments regarding inflation targets and the timing of future rate adjustments often cause significant volatility in European markets.
3. 02/24/2026 – Consumer Confidence
This US Dollar (USD) focused report measures how optimistic or pessimistic consumers are regarding their expected financial situation. High confidence typically translates to higher spending and economic growth, making it a “leading indicator” that the Federal Reserve watches to gauge the strength of the US economy.
4. 02/25/2026 – Consumer Price Index (YoY)
This is the most critical data point for the Australian Dollar (AUD) this week. As a primary measure of inflation, a reading higher than expected could force the RBA to maintain a hawkish stance (higher rates), while a lower reading might suggest that inflation is finally cooling off.
5. 02/25/2026 – President Trump speech
Given the significant influence of US executive policy on global trade, taxes, and regulation, any speech by President Trump is classified as high-impact for the USD. Markets will be listening for updates on fiscal policy or trade tariffs that could shift global investor sentiment.
6. 02/25/2026 – RBA Governor Bullock speech
Following the inflation data released earlier in the day, Governor Bullock’s remarks will be essential for interpreting how the Reserve Bank of Australia intends to react. Her tone—whether “hawkish” (favoring high rates) or “dovish” (favoring lower rates)—will likely drive AUD price action.
7. 02/26/2026 – Tokyo Consumer Price Index (YoY)
Tokyo’s inflation data is widely considered a leading indicator for nationwide inflation in Japan. For the Japanese Yen (JPY), this high-impact event is crucial as the Bank of Japan looks for sustained inflation to justify further departures from its historic ultra-easy monetary policy.
8. 02/27/2026 – Gross Domestic Product (QoQ)
This release for the Swiss Franc (CHF) measures the total value of all goods and services produced in Switzerland. As the broadest measure of economic activity, the GDP growth rate determines the overall health of the Swiss economy and dictates the SNB’s long-term policy outlook.
9. 02/27/2026 – Gross Domestic Product Annualized
This is the heavyweight event for the Canadian Dollar (CAD). The annualized GDP provides a clear picture of how fast the Canadian economy is expanding or contracting. It is the definitive “report card” for the economy and is the main driver for the Bank of Canada’s interest rate path.
10. 02/27/2026 – Producer Price Index ex Food & Energy (YoY)
Known as “Core PPI,” this USD metric measures inflation from the perspective of manufacturers and wholesalers. Because producer price increases are often passed on to consumers later, this is a vital “early warning” signal for future consumer inflation (CPI) trends in the United States.
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