AUD/USD, GBP/USD: Riding Fiscal Tailwinds as Risk Appetite Roars

• AUD/USD nears key uptrend resistance as risk appetite surges
• GBP/USD clears 200DMA, momentum skewed higher despite overbought risks
• Germany and China ramp up fiscal stimulus, boosting cyclical assets
• Markets eye ECB decision and US payrolls for next major catalyst

Summary

China and Germany—two of the world’s largest economies—are ramping up fiscal spending to jump-start stagnating growth, providing an unexpected tailwind for cyclical assets weighed down by persistent negativity around escalating geopolitical tensions between the US and its major trade partners. Throw in a tariff compromise on auto manufacturing across North America, and it’s created a rare window for cyclical currencies like the Australian dollar and British pound to thrive.

Germany Ignites Fiscal Thrusters

Germany is set to unleash hundreds of billions of euros on defence and infrastructure spending, scrapping its strict borrowing rules in a seismic policy shift. Chancellor-in-waiting Friedrich Merz has vowed to amend the constitution—which caps the structural budget deficit at 0.35% of GDP—to exempt defence spending, while also planning a €500 billion infrastructure fund over the next decade for transport, energy, and housing.

Justifying the move, Merz argued Germany needed to do “whatever it takes” to protect itself and Europe, echoing the famous line used by former ECB President Mario Draghi at the height of the euro area debt crisis over a decade ago.

EUR/USD surged to four-month highs, while benchmark 10-year German bund yields spiked 30bp, the largest daily increase since the fall of the Berlin Wall.

China Moves to Boost Consumption

Germany wasn’t alone in priming the fiscal thrusters on Wednesday, with China ramping up fiscal spending to levels not seen in decades to support economic activity.

Policymakers increased the annual budget deficit to 4% of GDP, a percentage point higher than a year earlier. ¥300 billion was earmarked for consumer subsidies on EVs, appliances, and other goods. Plans to expand access to child, aged, and disability care were also flagged, though specifics were noticeably absent. The annual growth target was left unchanged at “around” 5%.

The push to foster spending comes as trade tensions with the US escalate, threatening China’s export-driven growth model. On Tuesday, US levies on Chinese imports were doubled to 20%, adding to existing tariffs. With the risk of an escalating trade conflict, Beijing is becoming increasingly reliant on domestic demand to drive growth, making consumer sentiment a crucial swing factor.

Trump’s Tariff Rollercoaster Continues

Donald Trump has granted automakers a one-month exemption from new 25% tariffs on Mexican and Canadian imports, easing pressure after industry leaders warned of severe cost spikes that would have to be passed on to consumers. The reprieve buys time for carmakers to adjust and consider shifting more production to the US, a key Trump policy priority.

Though only a temporary reprieve, it again fuels speculation—rightly or wrongly—that tariffs are being used by Trump as a negotiating tactic rather than a permanent policy solution.

AUD/USD Outlook

Source: TradingView

AUD/USD took out multiple minor levels on Wednesday as risk appetite roared, pushing it within touching distance of key uptrend resistance. RSI (14) has obliterated its downtrend, indicating shifting price momentum, skewing directional risks higher despite the bullish signal not yet being confirmed by MACD.

On the downside, support may be found at 0.6331 and again at 0.6300. Above, key uptrend resistance dating back to October 2022 is located around 0.6400. AUD/USD bears defended the level successfully in late February, but recent price and momentum signals suggest bulls will be looking for round two. If the uptrend were to break, look for a potential extension towards 0.6450 or the 200-day moving average.

Fundamentally, there’s nothing left on the domestic data calendar this week to interest AUD/USD traders, leaving headlines and key offshore events to dictate direction.

GBP/USD Outlook

Source: TradingView

GBP/USD rode on the coattails of the EUR/USD surge on Wednesday, benefiting from its close trade relationship with the euro area and the subsequent economic tailwinds from increased fiscal spending across the continent.

The bullish break above the 200-day moving average during the session is noteworthy, helping cable take out resistance at 1.2803 and 1.2870 with ease. Momentum indicators remain entirely bullish, with RSI (14) and MACD trending higher, skewing the directional bias upwards, though RSI has now crept into overbought territory—one reason to be selective when assessing near-term bullish setups.

On the downside, watch for bids to emerge from 1.2870 and around 1.2800. Above, resistance may be encountered at 1.3045 and 1.3158.

Key Events Ahead

Later Thursday, the ECB will deliver its March interest rate decision. A 25bp increase is as close to a done deal as you can get, putting greater emphasis on the bank’s rate guidance and forecasts. In light of recent fiscal developments, the risk is that the ECB sounds less dovish, potentially casting doubt on the need to take rates below 2% by the end of 2025.

On the data front, Friday’s payrolls report is the standout event. Despite the name, the unemployment rate matters most, given its influence on Fed policy. If payrolls and unemployment send conflicting signals, markets will likely follow the latter.

-- Written by David Scutt

Follow David on Twitter @scutty