Important calendar events
The dollar edged higher on Monday, and the index rose from 103.7 to 103.9. US treasury yields on the other hand declined, putting pressure on the dollar, with the US 10-year bond yield dropping from 4.30% to 4.21%.
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. The Fed is expected to keep interest rates steady in March. Last week, Powell stated that there is no urgent need to cut interest rates, indicating a pause in rate hikes.
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, while the first rate cut is not priced in before June. Concerns that inflation may rise again if trade wars break out have pushed the timeline of policy normalization back to 2026.
The Fed entered its blackout period this week ahead of the monetary policy meeting next week on the 19th. The blackout period prevents FOMC members from commenting on the central bank’s policy rate ahead of a policy meeting.
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 to impose reciprocal tariffs on many countries, which would raise US import taxes to match those imposed by the country’s other trading partners.
Trump’s tariffs may spark global trade wars and are causing turmoil in markets. Import taxes will raise the price of many products, fueling inflationary pressures. Other nations are likely to reciprocate with tariffs of their own, starting global trade wars, which may lead to economic deterioration and rising inflation in many countries.
Trump’s economic policies are raising concerns that the US economic growth will slow down. Many analysts are already expressing concerns that the US will enter recession. Trump tried to downplay recession risks in an interview with Fox News over the weekend. Trump carefully avoided the word recession, stating instead that the US economy is in a period of transition.
On the data front, disappointing US labor data released last week put pressure on the dollar. The US jobs sector is deteriorating, which may prompt the Fed to lower interest rates sooner than expected. US Nonfarm Payrolls or NFPs released on Friday came in at 151K, rising above January’s 125K print but falling short of the 159K anticipated.
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 inflation report due this coming week is highly anticipated by traders and is expected to create volatility in the price of the dollar. CPI data due on Wednesday are expected to show that US inflation rose by just 0.3% in February, after rising by 0.4% in January, which will bring annual inflation down to 2.9% from 3.0% previously.
EUR/USD traded sideways on Monday, oscillating around the 1.084 level. If the EUR/USD pair declines, it may find support at 1.036, while resistance may be encountered near 1.093.
Last week the Euro experienced its highest weekly gain against rival currencies since 2009 according to a report by Bloomberg.
The ECB lowered its benchmark interest rate by 25 basis points last week, 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 sign 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 defense spending and economic growth.
On the data front, German Balance of Trade data released on Monday, which represents the Difference in value between imported and exported goods, were disappointing. German Trade Balance dropped to 16.0B in January from 20.7B in December, against expectations of a 21.0B reading. German industrial production expanded by 2.0% in January, exceeding expectations of 1.6% growth and December’s 1.5% contraction.
Revised GDP data showed that the Eurozone economy expanded by 0.2% in the final quarter of 2024 after expanding by 0.3% in the second quarter, against original estimates of 0.1% growth. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.
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.
GBP/USD dropped from 1.293 to 1.287 on Monday as the dollar gained strength. 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 50 basis points 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%.
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 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.
This coming week British GDP data are due on Friday and are expected to show that the British economy expanded by just 0.1% in January after expanding by 0.4% in December.
USD/JPY remained in a downtrend on Monday, dropping from 147.6 to 147.4. 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 Yen gained strength on Monday as global economic concerns raised demand for safe-haven assets such as the Yen.
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.
Markets anticipate that the BOJ will raise interest rates at least one more time this year. The BOJ is expected to raise interest rates by approximately 75 basis points in the next two years, which will bring the central bank’s peak rate to 1.25%. Last week, 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, signaling a rate hike shortly, despite global trading concerns.
Economic activity data released on Monday for Japan was disappointing, putting pressure on the Yen. Average Cash Earnings rose by just 2.8% in January, missing expectations of 3.2%, while December’s print was also revised downward to reflect 4.4% growth.
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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