Written by the Market Insights Team
Firm demand for traditional safe havens remains intact with the Japanese yen at multi-week highs, and gold within grasp of a fresh record high. Investors remain on edge in the wake of the sell-off in tech shares, whilst US President Trump’s relentless tariff rhetoric is weighing on trade-sensitive and commodity-linked FX. Attention shifts to the Bank of Canada and US Federal Reserve’s policy meetings today as well as an important speech from the UK Chancellor on fresh plans to stimulate economic growth.
Dollar higher before the Fed
Boris Kovacevic – Global Macro Strategist
Overshadowing a Federal Reserve (Fed) rate decision is nearly impossible, regardless of how uneventful a particular meeting might seem. Yet, this week’s relentless tariff rhetoric from Trump and the disruptive “DeepSeek shock” in the AI space have managed to steal the spotlight. Yesterday’s trading session has once again proven just how volatile a politically driven market environment can be. A comment from Trump on favoring much bigger tariffs than suggested by one of his officials was enough to driver investors into the arms of the Greenback, which appreciated against all G10 currencies on Tuesday. The February 1st deadline is getting near, which will likely be the start of the first tariff rollout. The President also announced new levies on chips, pharmaceuticals, and steel.
Still, Wednesday’s Fed decision remains crucial in shaping the trajectory of global monetary policy in the months ahead. Policymakers are widely anticipated to hold rates steady, marking a pause in the easing cycle that began in September. This decision comes amid a complex backdrop, with officials navigating the dual pressures of escalating trade tensions and the disruption in the AI sector that has sparked a sharp equity market sell-off. However, the Fed’s maneuvering space is limited. Markets are fully pricing in an unchanged rate stance, and the resilience of the labor market makes any deviation risky. Inflation has trended favorably over the past year, but the pace of disinflation has recently moderated, suggesting the Fed has little reason to pivot aggressively.
With a robust US economy and the potential for new tariffs looming, it would likely take a significant global market meltdown to push the Fed toward a dovish stance in the first half of 2024. This balancing act between risk sentiment and monetary policy was evident this week. The equity market turmoil prompted a slight uptick in the probability of rate cuts being priced into upcoming meetings. The Fed’s ability to balance these competing forces will be critical in determining whether the current pause evolves into a prolonged hold or a shift back to easing later in the year.
Past peak pessimism but no optimists in sight
Boris Kovacevic – Global Macro Strategist
Markets have aggressively priced in rate cuts from the ECB this year, reflecting concerns over the Eurozone’s sluggish outlook. Growth remains fragile, business confidence is weak, and consumer spending lacks momentum. Against this backdrop, traders expect the ECB to ease policy significantly to support demand. However, inflationary pressures, both domestic and global, are complicating this narrative.
While Eurozone inflation has cooled from its peak, underlying price pressures remain sticky, particularly in services and wages. Survey based inflation expectations have bottomed and are starting to pick up again. Meanwhile, global factors, including supply chain constraints, commodity price risks, and potential trade disruptions, could reignite inflationary risks. The ECB must weigh these concerns carefully.
These factors will come into focus in the coming months. However, for now, EUR/USD remains stuck in the shadow of developments in the US. The yearly high reached around the $1.0530 mark have given way to selling pressure ahead of the Fed meeting. The euro slumped to the low $1.04s and is awaiting new impulses from the upcoming central bank decisions and tariff threats. The development so far this year has been in line with our assumption of a bottoming euro-dollar without much room for significant upside movement. This seems to be confirmed by falling risk premia in the bond market. The French yield spread over Germany has fallen from last year’s peak of above 90 to the current 72 basis points as investors start adding French bonds to their portfolio.
Chancellor’s speech to guide sterling
George Vessey – Lead FX & Macro Strategist
Given the recent instability in UK assets and the disconnect between sterling and gilt yields, Rachel Reeves’ speech today has drawn some market attention. With limited fiscal headroom, pressure has mounted on her to tighten spending plans while simultaneously seeking new investment channels to stimulate economic growth. Investor perception will be critical—a well-received strategy could bolster sterling, while uncertainty could lead to further volatility in UK assets.
One of the key proposals is the so-called “surplus release”, which would allow corporate pension scheme surpluses—worth tens of billions of pounds—to be unlocked and reinvested in British businesses and infrastructure. Additionally, markets anticipate a confirmation of government support for major infrastructure projects, including a potential third runway at Heathrow Airport. These measures aim to revitalize a sluggish UK economy by attracting investment and fostering long-term growth.
Sterling and gilt reactions will hinge on how effectively Reeves communicates these objectives. If her proposals are perceived as pro-growth yet fiscally responsible, gilt yields are likely to rise in an orderly fashion, reflecting optimism about long-term economic prospects. In this scenario, a positive recoupling of yields and sterling could push GBP/USD beyond $1.25 and GBP/EUR towards €1.20. However, if Reeves fails to provide clarity or markets lose confidence in the execution of these plans, the pound could face renewed downside risks.
It’s not what you do, but what you say
Kevin Ford – FX & Macro Strategist
Mid-week brings crucial events that could trigger significant market movements. Surprisingly, it’s not rate decisions or earnings but press conferences and earnings calls that will be key.
Today, the Bank of Canada (BoC) will cut rates by 25 basis points, bringing the lending rate to 3%. More importantly, Tiff Macklem, Governor of the BoC, will hold a press conference. He will be asked questions on US tariffs and the Central Bank’s response. Expect Governor Macklem to reiterate their mandate to keep inflation low, stable, and predictable. If Canada retaliates immediately, he will explain the risks to inflation and how the Central Bank might use its tools, (i.e., interest rates), to balance inflation and stable growth.
Regarding monetary policy, expect no surprises from the Fed today. This will be the first pause after consecutive rate cuts since September. However, the focus will be on Powell’s statements. He will be asked about the recent rise in household inflation expectations. Expect Powell to remain vague and categorize risks to inflation and unemployment as balanced. More importantly, he will respond to Trump’s recent comments demanding immediate interest rate drops and lower oil prices. Expect Powell to be diplomatic while firmly committing to Fed independence.
Finally, after today’s closing, Tesla, Meta, and Microsoft kick off quarterly earnings reports from Big Tech. Big oil is expected this week as well. The focus will be more on their earnings calls than the earnings themselves. Market participants worldwide are eager to hear what their CEOs think about the costs of building world-class AI, as Deepseek’s AI model has seemingly disrupted US Big Tech’s massive AI spending.
GBP/EUR in top 5% of 7-day range
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 27-31
All times are in GMT
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
