Important calendar events
The dollar rallied after the release of the US inflation report on Wednesday. The dollar index rose from 103.4 to 103.6. US treasury yields also gained strength, with the 10-year bond yield rising from 4.28% to 4.31%.
The dollar gained strength on Wednesday after US CPI data showed that US inflation is cooling faster than anticipated. Headline inflation in the US rose by 2.8% year-on-year in February after rising by 3.0% in January against expectations of a 2.9% print. Monthly inflation rose by just 0.2% in February, after rising by 0.5% in January, against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.2% in February, which was significantly lower than January’s reading of 0.4% and fell below expectations of 0.3%. Annual Core CPI rose by 3.1% in February, below the 3.2% estimate, down from 3.3% in January.
US labor data released on Tuesday were optimistic, providing support for the dollar. JOLTS job openings rose to 7.74M in January from 7.51M in December, exceeding market expectations of 7.65M.
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.
After the release of soft US inflation CPI data on Wednesday, markets will focus on PPI data on Thursday. Producer Price Index data on Thursday will provide a clearer picture of the US inflation outlook. PPI data on Thursday are expected to show a 0.3% rise in February, down from 0.4% in January.
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. On Tuesday, the White House announced a global 25% tariff on global steel and aluminum imports to the US that would take effect on Wednesday. Moreover, Trump announced on his social media that he would impose a double tariff of 50% on aluminum and steel products from Canada. Trump backpedaled on his threats to impose double tariffs on Canada, however, just a few hours later. In return, Canada suspended 25% levies on electricity sent to certain northern US states.
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.
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, which points 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.
Fed rate cut expectations rose after the release of the US inflation report on Wednesday. Markets are currently pricing in three rate cuts in 2025, with the first rate cut in June, compared to just two rate cuts the week before.
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.
EUR/USD remained flat on Wednesday, oscillating around the 1.084 level. If the EUR/USD pair declines, it may find support at 1.053, while resistance may be encountered near 1.100.
Markets this week are expected to experience some volatility as US tariffs take effect. Market reaction, however, has so far been muted this week, after experiencing high volatility for over a month due to Trump’s tariff threats. On Tuesday, the White House announced a global 25% tariff on global steel and aluminum imports to the US that would take effect on Wednesday.
The EU was quick to retaliate, with tariffs on US imports to the EU. European Commission President Ursula von der Leyen announced on Wednesday will impose counter tariffs on 26 billion euros worth of US goods. Tariffs will be imposed on a variety of US products, including beef, poultry, bourbon, peanut butter and jeans. Ursula von der Leyen stated that the EU deeply regrets having to adopt this measure, as the tariffs will likely raise inflation and cost jobs throughout the globe.
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.
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 remained bullish on Wednesday, rising from 1.294 to 1.296 even as the dollar rallied. If the GBP/USD rate goes up, it may encounter resistance at 1.304, while support may be found near 1.267.
The Sterling gained strength on Wednesday as the British government chose not to retaliate against the US on steel and aluminum imports. After the EU announced retaliatory tariffs against the US, the UK stands out by not reacting to Trump tariffs. The British government expressed disappointment on Wednesday over the announcement of 25% US tariffs on steel and aluminum but did not impose taxes on US imports to the UK.
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 point 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 extended gains on Wednesday, rising from 147.7 to 148.4 as the dollar gained strength. If the USD/JPY pair declines, it may find support at 146.5. If the pair climbs, it may find resistance at 150.2.
Concerns that Japan will not escape from US tariffs put pressure on the Yen on Tuesday. US President Donald Trump announced heavy tariffs on certain products on Tuesday. Japan’s trade minister Yoji Muto had a meeting with representatives from the White House but stated that he did not receive a response that Japan would be exempt.
Final GDP data released on Tuesday for Japan were disappointing, putting pressure on the Yen. Final GDP data for the final quarter of 2024 showed that the Japanese economy expanded by only 0.6% against expectations of 0.7% 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.
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.
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Written by:
Myrsini Giannouli
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