Important calendar events
The dollar remained steady on Thursday, and the index hovered close to 104.3, its lowest value since November. US treasury yields were also steady, with the US 10-year bond yielding approximately 4.28%.
The US Federal Reserve held interest rates steady at its January meeting after delivering three consecutive rate cuts in 2024. FOMC policymakers voted unanimously to maintain the federal funds range to a target range of 4.25% to 4.50%.
The Fed’s latest monetary policy statement did not include an earlier mention that US inflation is moving towards the central bank’s 2% target. Instead, the report stated that price pressures remain elevated, leading to a prolonged pause in rate cuts.
Fed Chair Jerome Powell delivered a mildly hawkish message after the policy meeting, stating that the Fed’s approach will remain data-driven and stressed that the central bank needs to consider potential policy changes under Trump’s administration.
Market odds of rate cuts within the year are on the rise, putting pressure on the dollar and US treasury yields. Markets are currently pricing in at least two rate cuts within 2025, with rising possibility of a third one at the end of the year. Concerns that inflation may rise again if trade wars break out, have pushed the timeline of policy normalization back to 2026.
US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Trump has threatened that he will announce reciprocal tariffs on many countries, which would raise US import taxes to match those imposed by the country’s other trading partners. In his address to the US Congress early on Wednesday, Trump confirmed that he plans to impose reciprocal tariffs, which will take effect on April 2.
Trump’s tariff plans change rapidly, causing confusion and volatility in markets. Trump’s plans of imposing 25% tariffs on Canada and Mexico had been postponed for a month after both countries agreed to tighten border activities. On Monday, however, Trump stated that he intends to go ahead with imposing tariffs on his neighboring countries and the tariffs against Canada and Mexico took effect on Tuesday. Trump has also imposed additional 10% tariffs on China starting on Tuesday, bringing Chinese duties to a total of 20%.
Trump’s tariffs may spark global trade wars and are causing turmoil in markets. The Canadian government has announced that they would implement 25% retaliatory tariffs on US imports starting on Tuesday. Trump escalated matters further, threatening Canada with increased reciprocal tariffs. China retaliated to the increased US duties by announcing 10%-15% tariffs on certain US imports, such as farm products, starting from March 10. The saga continued on Thursday as Trump took back the tariffs that he had announced earlier this week on Canada and Mexico. The US President announced late on Thursday that the tariffs would be postponed until April 2, causing further upheaval in markets.
On the data front, US Unemployment Claims dropped to 221K for the week ending March 1, missing initial estimates of 234K and following a 242K print the week before. Thursday’s unemployment data are encouraging for the US jobs sector after the release of disappointing labor data on Wednesday.
ADP employment report released on Wednesday showed that the US private sector added only 77K jobs in February, falling short of expectations of 140K and the January’s print of 186K. ISM Services PMI rose to 53.5 in February from 52.8 in January, exceeding market expectations of 52.6.
ISM Manufacturing PMI dropped to 50.3 in February from 50.9 in January, against expectations of a 50.5 reading. February’s print remained above the threshold of 50.0 that denotes industry expansion, but the lower print indicates that the US manufacturing sector is expanding at a reduced pace. Meanwhile, ISM Manufacturing Prices rose to 62.4 in February from 54.9 in January against expectations of 56.2, indicating that inflationary pressures in the US are rising.
Preliminary GDP data showed that the US economy expanded by 2.3%, following 3.1% expansion in the third quarter of 2024 and falling below market estimates of 2.7% growth. In addition, the US economy expanded by 3.0% in the second quarter of 2024 and by 1.4% in the first quarter.
Headline inflation in the US rose by 3.0% year-on-year in January after rising by 2.9% in December against expectations of a 2.9% print. Monthly inflation rose sharply by 0.5% in January after rising 0.4% in December, against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.4% in January, exceeding expectations of 0.3% and following a 0.2% rise in December. Core CPI rose 3.3% year-on-year in January, against a 3.2% gain in December.
Markets this week will continue to focus on Trump’s economic policies and trade tariffs, and Trump’s statements are likely to cause volatility in the price of the dollar.
The US Nonfarm Payrolls or NFPs for February are scheduled to be released on Friday. The NFP data on Friday are highly anticipated, after Wednesday’s weak labor data. The US jobs sector is deteriorating, which may prompt the Fed to lower interest rates sooner than expected.
The Euro lost its upward momentum on Thursday after the ECB decided to lower interest rates and EUR/USD traded sideways, oscillating around the 1.079 level. If the EUR/USD pair declines, it may find support at 1.036, while resistance may be encountered near 1.093.
The ECB lowered its benchmark interest rate by 25 basis points on Thursday, bringing its main refinancing rate down to 2.65% from 2.90%. ECB rate cuts put pressure on the Euro, but this week’s rate cut was fully priced in by markets and its effect on the currency was muted.
The Monetary Policy Statement issued after the conclusion of the meeting included the ECB’s assessment that its monetary policy is becoming meaningfully less restrictive. This was interpreted by markets as a hint that the central bank is approaching a point of policy normalization and future ECB rate cut expectations dropped. The ECB also raised its inflation outlook for 2025, however, indicating that the central bank is prepared to deal with rising inflationary pressures.
In her speech after the policy meeting, ECB President Christine Lagarde stressed that the latest rate cut was necessary to ensure economic stability in the Euro area. Lagarde also reiterated her former statement that the central bank’s policy will remain data dependent and warned that the ECB will need to stay vigilant in these uncertain times.
Hopes of political stability in Germany boosted the Euro this week. Germany is the Eurozone’s leading economy and an official government has not yet been formed after more than a week since the German Federal elections. It seems likely, however, that Germany’s conservatives led by prospective Chancellor Frederich Merz and the Social Democratic Party will form a coalition. On Wednesday, the leaders of the two parties agreed on a restructure of Germany’s debt that will widen the country’s borrowing limit, boost defence spending and economic growth.
Meanwhile, tariff threats on European imports to the US are putting pressure on the Euro. US President Donald Trump stated last week that he intends to impose 25% tariffs on European cars and other goods.
On the data front, Retail Sales data released on Thursday for the Eurozone showed a rise of 1.5% year-on-year in January, missing expectations of 1.9%, while December’s print was revised upward to 2.2%.
EU CPI Flash Estimate data released on Monday showed that Eurozone inflation remains above the ECB’s 2% target and may prevent the ECB from cutting interest rates further. Eurozone inflation rose to 2.4% year-on-year in February after rising by 2.5% in January, exceeding expectations of a 2.3% print. Core CPI, which excludes food and energy, dropped to 2.6% in February from 2.7% in January but also came in higher than the 2.5% reading anticipated.
Manufacturing PMI data released on Monday showed that the Eurozone manufacturing sector remained in contractionary territory in February, with a print of 47.6, which was considerably below the threshold of 50.0 that denotes industry expansion. February’s print, however, exceeded January’s print of 47.3, indicating that the EU manufacturing sector is improving slightly.
Preliminary Flash GDP data showed that the Eurozone economy remained stagnant in the final quarter of 2024 after expanding by 0.3% in the second quarter, raising concerns of stagflation in the EU. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.
GBP/USD lost its bullish momentum on Thursday and traded close to the 1.288 level. If the GBP/USD rate goes up, it may encounter resistance at 1.304, while support may be found near 1.256.
BOE policymakers cut interest rates by 25 basis points in February and the Official Bank Rate was reduced from 4.75% to 4.5%. Seven out of nine MPC members voted in favor of a 25 basis point rate cut, while surprisingly, the other two members were more dovish, voting for a 50bps rate cut.
Bank of England Governor Andrew Bailey has hinted at further rate cuts, but has stressed, at the same time, that the BOE will need to decide on its policy on a meeting-by-meeting basis and has refused to commit to a timeline or magnitude of future rate cuts. Markets are currently pricing in over 50 bps of easing by the end of 2025. The BOE currently anticipates that the British economy will grow by 0.75% by the end of 2025 and inflation will rise from 2.5% to 3.7%.
Bailey appeared before the Treasury Select Committee on Wednesday, together with other MPC members. Most BOE members adopted a cautious stance on Wednesday, stating that the central bank’s rate outlook should be data-based. Bailey admitted that UK inflation is likely to pick up again in the coming months but stated that inflationary pressures will be less severe this time around.
The British economy expanded by 0.4% in December, following expansion by 0.1% in November and exceeding expectations of a 0.1% print. Preliminary GDP data for the fourth quarter of 2024 showed that the British economy expanded by 0.1% against estimates of 0.1% contraction and following economic stagnation in the third quarter of 2024.
Price pressures in the UK are rising, reducing the odds of a BOE rate cut in February and putting pressure on the Sterling. Headline inflation in the UK rose by 3.0% annually in January, up from 2.5% in December, against expectations of a 2.8% print. Core inflation, which excludes food and energy, rose by 3.7% year-on-year in January from 3.2% in December, which was in line with expectations.
The Yen gained strength on Thursday and USD/JPY traded in a downtrend, dropping from 149.1 to 147.8. If the USD/JPY pair declines, it may find support at 145.8. If the pair climbs, it may find resistance at 151.3.
The BOJ raised its interest rate by 25 basis points in January, from 0.25% to 0.50%, its highest level since 2008. In addition, the BOJ adjusted its inflation projections upward, to reflect the depreciation of the yen and rising oil prices, hinting at more rate hikes down the road. Policymakers expect Japan’s inflation to rise to 2.4% in 2025, up from previous estimates of 1.9%, and above the central bank’s 2% target.
BOJ Governor Kazuo Ueda hinted that the central bank will continue to raise interest rates if Japan’s economy continues to improve and the BOJ 2% inflation target is reached. Ueda emphasized, however, that the timeline of future rate hikes will depend on economic and inflationary conditions. Markets currently anticipate that the BOJ will raise interest rates to a peak interest of 1.00% over the next two years.
On Wednesday, BOJ Deputy Governor Shinichi Uchida hinted at a possible rate hike, boosting the Yen. Uchida stated that rate hikes are likely to proceed in line with market expectations, signalling a rate hike shortly, despite global trading concerns.
US President Donald Trump stated this week that Japan’s depreciating currency is causing a trade imbalance between Japan and the US, which is unfair to the US. Trump’s comments on the Yen’s weakness are raising concerns that the US President is considering imposing trade tariffs on Japan.
Inflation in Japan is on the rise, raising the odds of future rate hikes and providing support for the Yen. The headline Tokyo CPI inflation rose to 3.4% annually in January from 3.0% in December. National Core inflation in Japan rose by 3.2% year-on-year in January from 3.0% in December against expectations of a 3.1% print. In addition, BOJ Core CPI rose to 2.2% year-on-year in January from 1.9% in December.
Preliminary GDP data for the final quarter of 2024 showed that the Japanese economy expanded by 0.7% against expectation of 0.3% growth. Final GDP data for the third quarter of 2024 showed that Japan’s economy expanded by 0.3%, down from 0.7% in the second quarter.
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Written by:
Myrsini Giannouli
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