Dollar dips as Trump refrains from announcing tariffs

Important calendar events

• JPY: BOJ Core CPI
• GBP: Claimant Count Change, Average Earnings Index, Unemployment Rate
• EUR: German ZEW Economic Sentiment, EU ZEW Economic Sentiment, ECOFIN Meetings 

USD

The dollar dipped on Monday, and the dollar index dropped from 109.2 to 108.1. US treasury yields remained the same, with the 10-year bond yielding 4.63%. Monday was a Bank holiday in the US observance of Martin Luther King Day. 

Donald Trump’s Presidential inauguration at the US capitol attracted market attention on Monday. Trump was sworn in as the 47th president of the United States with the whole world anxiously expecting his inaugural address to the US nation. 

The dollar plummeted Monday, as the newly elected US President refrained from immediately announcing trade tariffs. The dollar had been gaining strength on expectations that Trump’s fiscal policies and trade tariffs would boost economic growth and at the same time reignite inflationary pressures. Concerns that global inflation will rise, boosted demand for safe-haven assets in the previous weeks, causing the price of the dollar to rise. 

Trump was widely expected to impose new trade tariffs immediately after taking office. Trump, however, refrained from issuing tariffs on his first day in office, raising speculation that the tariffs will be more moderate than originally speculated. The absence of a tariff plan gave rise to a risk-on sentiment on Monday and the dollar plummeted. 

The US Federal Reserve cut interest rates by 25 basis points at its latest meeting to a target range of 4.25% to 4.50%. Fed Chair Jerome Powell delivered a hawkish message after the policy meeting, emphasizing the need to be cautious about further rate cuts. Powell stated that the Fed’s approach will remain data-driven and hinted that the pace of future rate cuts will be slower, as inflation in the US remains above the central bank’s 2% target. 

US inflation data last week came in lower than anticipated, indicating that disinflation in the US is progressing, which may affect the Fed’s rate outlook. After the release of lower-than-expected PPI data on Tuesday, soft Consumer Price Index (CPI) data on Wednesday drove the dollar down. Headline inflation rose by 2.9% year-on-year in December from 2.7% in November, which was in line with expectations. Monthly inflation rose by 0.4% in December against 0.3% in November, as expected. Core CPI, however, which excludes food and energy, rose by just 0.2% in December following a 0.3% rise in November and against expectations of a 0.3% print. Core CPI rose 3.2% year-on-year in December, below estimates for a 3.3% increase and November’s 3.3% gain. 

Final GDP data for the third quarter of the year showed that the US economy expanded by 3.1% in the third quarter of 2024, up from 2.8% estimated earlier. In addition, the US economy expanded by 3.0% in the second quarter of the year and by 1.4% in the first quarter of the year. 

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EUR 

EUR/USD surged from 1.027 to 1.042 on Monday as the dollar weakened. If the EUR/USD pair declines, it may find support at 1.017, while resistance may be encountered near 1.053.

The ECB lowered its benchmark interest rate by 25 basis points in December, bringing its main refinancing rate to 3.15%. This was the fourth rate cut for the ECB this year, which started its easing cycle in June and has already lowered interest rates by a total of 100 bps. More importantly, ECB President Christine Lagarde hinted at further easing in the coming months as Eurozone inflation nears the central bank’s target while the economy remains weak.

Lagarde’s press conference after the policy meeting was dovish, raising expectations of further rate cuts. The central bank is currently expected to cut interest rates up to five more times next year, to a total of 125bps, until neutral policy settings are reached. Expectations that the ECB will return to a more normalized policy setting sooner than the Fed are putting pressure on the EUR/USD rate. 

The minutes of the latest ECB meeting confirmed that ECB policymakers are likely to continue lowering interest rates, putting pressure on the Euro. Most ECB members agreed that interest rates should be lowered gradually if the progress of disinflation in the EU meets the central bank’s projections. 

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 December from 2.2% in November. Every month, Eurozone inflation rose 0.4% in December after dropping 0.3% in November. Core CPI, which excludes food and energy, remained steady at 2.7% in December. 

Flash GDP data showed that the Eurozone economy expanded by 0.4% in Q3 of 2024, rising from 0.2% in Q2. The Eurozone economy also expanded by 0.3% in the first quarter of 2024. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.

TRADE EUR PAIRS

GBP 

GBP/USD skyrocketed from 1.217 to 1.234 on Monday as the dollar plummeted. If the GBP/USD rate goes up, it may encounter resistance at 1.250, while support may be found near 1.209.  

Economic data released last week for the UK were disappointing, indicating that the country’s economic outlook is declining. Monthly GDP data showed that the British economy expanded by just 0.1% in November, disappointing expectations of 0.2% growth and following contraction by 0.1% in October. Final GDP data for the third quarter of the year have previously shown that the British economy is stagnating. Earlier forecasts indicated slight economic growth by 0.1% in the third quarter of 2024, but the British economy is being stifled by high interest rates and cannot expand. 

Inflation data released last week showed that price pressures in the UK are easing, raising the odds of a BOE rate cut in February and providing support for the Sterling. Headline inflation in the UK rose to 2.5% year-on-year in December, dropping from 2.6% in November, against expectations of a 2.6% print. Core inflation, which excludes food and energy, also came in lower than expected, rising by 3.2% annually in December, against a 3.5% reading in November and 3.4% anticipated. 

The BOE kept interest rates steady at its latest policy meeting, having cut interest rates twice already this year. MPC members voted 6-3 to keep rates on hold, with three members in favor of cutting interest rates. 

Bank of England Governor Andrew Bailey has stated that the central bank needs to adopt a gradual approach to future rate cuts. Bailey has also stressed that the BOE’s policy outlook will remain data-driven and refused to commit to a timeline or magnitude of future rate cuts.  

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JPY

USD/JPY dropped from 156.2 to 155.4 on Monday as the dollar weakened. If the USD/JPY pair declines, it may find support at 154.9. If the pair climbs, it may find resistance at 158.2. 

The BOJ maintained its current monetary policy guidelines steady and its interest rate at 0.25% at its latest policy meeting. BOJ Governor Kazuo Ueda stated that Japan’s economic and inflationary outlook remains uncertain and stressed that the central bank’s policy will remain data-driven. In a recent speech, Ueda reaffirmed the BOJ’s commitment to continue raising interest rates if Japan’s economy continues to improve and the BOJ's 2% inflation target is reached. Ueda cautioned, however, that the timeline of the rate hike will depend on economic and inflationary conditions. Last week, Ueda commented that wage growth in Japan is progressing satisfactorily, driven by structural labor shortages.

Market odds that BOJ officials will raise interest rates at the policy meeting this week on the 24th are on the rise, boosting the Yen. The BOJ is also expected to adjust its inflation projections upward this week, to reflect the depreciation of the yen and rising oil prices.

Odds of a BOJ rate hike at the next policy meeting this week are rising, but the exact timing of the next BOJ rate hike is still uncertain. Markets are pricing in a 25-basis points rate hike by the end of March, which will raise Japan’s interest rate from 0.25% to 0.50%.

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 3.0% annually in December, up from 2.6% in November. Headline inflation in Japan rose by 2.7% year-on-year in November from 2.3% in October against expectations of a 2.6% print. In addition, BOJ Core CPI rose to 1.7% year-on-year in November from 1.5% in October against expectations of 1.5%. 

Final GDP data for the third quarter of the year showed that Japan’s economy expanded by 0.3%, exceeding initial estimates of 0.2%, but down from 0.7% in the second quarter. The Japanese economy is expanding, after shrinking by 0.5% in the first quarter of the year.

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Written by:
Myrsini Giannouli

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