Important calendar events
The dollar exhibited high volatility on Monday and the dollar index skyrocketed from 108.4 to 109.6 on Monday’s opening over Trump’s tariff threats over the weekend. The dollar pared gains during the day, however, and the dollar index fell back to 108.4. US treasury yields edged higher, with the US 10-year bond yield rising from 4.55% to 4.57%.
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 BRICS countries with massive tariffs of up to 100% if they try to replace the dollar with any other currency or if they create a new currency for international trade. On Saturday, Trump announced that he would impose 25% tariffs on Canadian and Mexican goods, except Canadian energy exports, which will be subject to a 10% tariff. In addition, Trump threatened to impose a 10% duty on imports from China to the US.
On Monday, Trump posted a new list of threats and grievances on his social media concerning Canada, China, and several other countries. Trump’s comments triggered a risk aversion sentiment boosting the safe-haven early on Monday. Later on Monday, however, Trump took back some of his tariff threats, demonstrating that they are used to intimidate other countries into submission. Trump stated that he would postpone imposing tariffs on Canada and Mexico for a month, still holding the tariffs as a threat against them. The dollar retreated somewhat after Trump withdrew the tariffs.
Trump is imposing steep trade tariffs on other countries, which can potentially raise price pressures in the US. Concerns that US inflation will rise again are raising the likelihood that interest rates will remain at restrictive levels for longer, lowering expectations of future rate cuts.
The US Federal Reserve held interest rates steady at its January meeting, which was concluded on Wednesday, 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%, which was in line with expectations.
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, which points to a prolonged pause in rate cuts. The Fed’s statement highlighted that the US labor market remains robust and that the economy is expanding at a satisfactory pace.
Fed Chair Jerome Powell delivered a mildly hawkish message after the policy meeting, boosting the dollar. Powell stated 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 another rate cut before summer dropped after Powell’s speech, with markets pricing in a rate cut in June at the earliest. Several Fed policymakers commented on Trump’s policies on Monday. FOMC member Susan Collins said the Fed should be patient on rate cuts due to tariff uncertainty. Fed’s Raphael Bostic stated that although the US labor market remains robust, tariff uncertainty may lead to uncertainty in inflation, which is likely to force the Fed to adopt a wait-and-see attitude. On a similar note, Fed policymaker Austan Goolsbee stressed that economic uncertainty will likely trigger a pause in rate cuts.
On the data front, the US ISM Manufacturing PMI index exceeded expectations on Monday, indicating that the US Manufacturing sector is improving. The ISM Manufacturing PMI index rose to 50.9 in January from 49.3 in December, beating market expectations of 49.8. The US Manufacturing sector is no longer in contractionary territory and has started to expand, as evidenced by a print above the threshold of 50.0. ISM Manufacturing Prices rose to 54.9 in January from 52.5 in December against expectations of a 52.6 print. This is a key inflation measure, indicating that price pressures in the US are rising.
Advance GDP data for the fourth quarter of 2024 showed that the US economy expanded by 2.3%, following a 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 the year and by 1.4% in the first quarter of the year.
Disinflation in the US is progressing, which may affect the Fed’s rate outlook. 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.
EUR/USD plummeted from 1.035 to 1.025 at Monday’s opening as the dollar surged. The currency rate recovered most of its losses later in the day, however, rising back to 1.034. 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 last week, bringing its main refinancing rate down to 2.90% from 3.15%. The central bank is currently expected to cut interest rates up to four more times in 2025, 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.
In her speech after the policy meeting, ECB President Christine Lagarde stressed that EU policymakers will not commit to a predefined rate cut path and that the central bank’s policy will remain data-driven.
Lagarde also commented on the Eurozone GDP data released earlier on Thursday that showed that the EU economy is stagnant, stating that the ECB expects the economy to remain weak for some time. She also hinted that the trade tariffs that the US might impose may hinder economic growth and warned that increased friction in global trade could weigh on the Eurozone’s economy. Lagarde, however, denied that there is a danger of stagflation, the toxic economic mix of stagnating economy and high inflation. Lagarde admitted that inflation in the Eurozone is expected to hover around the current levels in the short term but appeared confident that inflation will come down to the central bank’s 2% target within the year.
US President Donald Trump posted tariff threats on his social media last week and again on Monday, causing market turmoil. Trump has threatened to impose trade tariffs on the EU although he did not mention any specifics. Trump’s comments triggered a risk aversion sentiment and demand for safe-haven assets rose, boosting the dollar.
On the data front, EU Final Manufacturing PMI data on Monday were optimistic, providing support for the Euro. The EU Final Manufacturing PMI index rose to 46.6 in January from 46.1 in December. The Euro Area Manufacturing sector remains in contractionary territory as evidenced by a print below 50.0 but the rate of contraction is slowing down.
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 2.5% year-on-year in January from 2.4% in December against expectations of a 2.4% print. Core CPI, which excludes food and energy, remained steady at 2.7% in January against expectations of a lower reading of 2.6%.
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. Preliminary Flash GDP data disappointed expectations of 0.1% growth in Q4 of 2024, raising concerns about 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 dropped sharply from 1.240 to 1.224 early on Monday, but rallied later in the day, rising to 1.242. If the GBP/USD rate goes up, it may encounter resistance at 1.252, while support may be found near 1.224.
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.
This week markets will focus on the BOE monetary policy decision on Thursday. The BOE will likely resume its easing cycle this week and reduce interest rates by 25 basis points from 4.75% to 4.5%.
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.
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.
USD/JPY exhibited high volatility on Monday, rising to 155.8 in early trading, then dropping to 154.3 and rising back to 155.3 at the end of the day. If the USD/JPY pair declines, it may find support at 153.1. If the pair climbs, it may find resistance at 156.2.
The BOJ raised interest rates by 25 basis points after the conclusion of its monetary policy meeting in January. The BOJ raised its interest rate 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.
In a speech to Japan’s Parliament on Friday, however, Ueda appeared to go back on his previous hawkish stance. Ueda stated on Friday that the underlying inflation in Japan is still somewhat below 2% and hinted that the central bank should maintain an accommodative policy to support price trends. Market odds of future BOJ rate hikes dropped slightly after Ueda’s comments on Friday.
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. Headline inflation in Japan rose by 3.0% year-on-year in December from 2.7% in November, which was in line with expectations. 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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