The kneejerk reaction is a swift rebound of the euro and the equity futures on hope of higher spending by the new German government would tackle the economic weakness of past years. The EURUSD jumped past the 1.05 in the early hours of trading in Asia and could see a continued support above this psychological mark, the German DAX futures jumped more than 1% and the Eurostoxx futures are also positive at the time of writing.

Trend and momentum indicators are positive for the European stocks that have been performing beautifully since the start of this year on the convergence trade, also supported by encouraging earnings, a more supportive European Central Bank (ECB) stance than the Federal Reserve’s (Fed) and also on thinking that the global easing in financial conditions would benefit to the European cyclical stocks. But the RSI indicator remain near the overbought territory, warning that it could soon be time for a minor downside correction – which could be an interesting dip buying opportunity for European stock investors as the rising geopolitical tensions with the other side of the Atlantic Ocean is expected to further boost the ECB support and the defensebudgets.

Across the Atlantic, things were looking pretty bad last Friday. The US stocks were hit by an ugly selloff on weaker-than-expected economic data and exploding inflation expectations. In fact, the US 5-10 year consumer inflation expectations hit the 3.5% mark – the highest since 1995 – on prospects of massive tariffs from Trump government and worsening trade relations with the rest of the world. More than half of the surveyed also think that unemployment will rise over the next year.

This being said, it’s good to note that the spike in bad expectations was almost fully driven by respondents that qualify themselves as Democrats. But hey, the facts are the facts and massive tariffs, mass firings and plans of mass deportation will certainly have an impact. As such, the sight of softer-than-expected economic data and the spike in inflation expectations – that are dangerous because they tend to be self-fulfilling – sent the US indices severely lower on Friday.

The S&P500 tanked 1.71%, Nasdaq 100 dropped more than 2% while the Dow Jones index fell 1.69%, as well. Small and mid-cap indices were hit heavier: the S&P400 for example tanked nearly 2.40% and is down by almost 10% since the November peak while the small caps tumbled nearly 3% and are down by more than 10% since the November peak – meaning that they are now in the correction territory – as the Trump optimism is being eaten by the tariffs and explodes costs (and cost expectations) to an extent that small businesses could hardly afford. And the Fed is no longer looking like it could continue to lower interest rates as inflation expectations are exploding. So yes, the aggressiveness of Trump’s America First policies could backfire.

This week, the US will release its latest GDP and PCE updates. The US GDP is expected to have grown 2.3% in Q4, down from 3.1% printed earlier. Sales will likely remain strong for now, while the PCE index – the Fed’s favourite gauge of inflation due Friday – could print an uptick and further temper the Fed rate cut expectations. Interestingly however, the uptick in inflation expectations that triggered a sizeable selloff in US equities last Friday couldn’t give a sustainable support to the US dollar. The US dollar gained on Friday but is pulled to the lowest levels since December this morning in Asia.

The improved euro appetite and the sharp gains in the Japanese yen on expectation that the Bank of Japan (BoJ) would continue hiking rates are weighing on the dollar appetite along with the trade worries. I also believe that the positive correlation between the rising geopolitical tensions and the dollar purchases is reversing for good as investors outside the US realize that pushing the US dollar higher would only make America stronger to hit the others stronger.

The US dollar index slipped below the 100-DMA and is about to test an important Fibonacci level, the 106 major retracement on September to January Trump rally. A move below this level will force the index into the medium-term bearish consolidation zone and pave the way for further weakness.

In energy, crude oil cleared the 100-DMA support without much pain and tumbled more than 3% on Friday. The global trade uncertainties and Trump’s ‘drill baby drill’ policies continue to weigh heavier than the geopolitical uncertainties in oil prices. Support is seen near the $70pb this morning but risks remain tilted to the downside. The upside potential looks limited into the $72.50/73.15 area that shelters the minor 23.6% Fibonacci retracement on the January to February pullback and the 50-DMA.