Important calendar events
The dollar remained steady on Monday, and the index hovered close to the 106.8 level. US treasury yields remained the same, with the US 10-year bond yielding 4.48%, as Monday was a Bank Holiday in the US in observance of Presidents' Day.
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.
Markets odds of rate cuts within the year are currently between 25 and 50 basis points as inflationary pressures remain high. 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.
If Trump goes through with these heavy tariffs, global inflation is likely to rise and the economic outlook will worsen, thus promoting a risk aversion sentiment that boosts safe-haven assets. 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.
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.
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 2024 and by 1.4% in the first quarter.
This week markets 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. Traders are also awaiting the release of the minutes of the latest Fed meeting on Wednesday, which may provide information on the central bank’s policy outlook.
EUR/USD traded sideways on Monday, oscillating around the 1.047 level. If the EUR/USD pair declines, it may find support at 1.027, while resistance may be encountered near 1.053.
The ECB lowered its benchmark interest rate by 25 basis points in January, 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.
EU CPI Flash Estimate data 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. Core CPI, which excludes food and energy, remained steady at 2.7% in January.
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 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 edged higher on Monday, rising from 1.258 to 1.260. If the GBP/USD rate goes up, it may encounter resistance at 1.272, while support may be found near 1.233.
BOE policymakers cut interest rates by 25 basis points last week 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 delivered a speech that had dovish undertones, hinting at further rate cuts. Bailey, however, stressed that the BOE will need to decide on its policy on a meeting-by-meeting basis and refused to commit to a timeline or magnitude of future rate cuts. Market expectations of future BOE rate cuts rose after the policy meeting, pricing in 65bps 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 stressed that even though the BOE anticipates a rise in inflation in the coming months, this does not warrant a more restrictive monetary policy.
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 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. Core inflation, which excludes food and energy, rose by 3.2% annually in December, against a 3.5% reading in November.
This week UK CPI data on Wednesday are expected to show that headline inflation rose by 2.8% annually in January, up from 2.5% in December.
USD/JPY edged lower on Monday, dropping from 152.2 to 151.5. If the USD/JPY pair declines, it may find support at 150.9. If the pair climbs, it may find resistance at 154.8.
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.
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. In addition, BOJ Core CPI rose to 1.7% year-on-year in November from 1.5% in October.
Preliminary GDP data were released on Monday for the final quarter of 2024 and showed that the Japanese economy expanded by 0.7% against the 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.
This week, national Core CPI data due on Friday are expected to show that inflation in Japan rose to 3.1% annually in January.
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Written by:
Myrsini Giannouli
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