- Fed holds rates. The Federal Reserve kept rates steady at 4.25%-4.50%, aligning with expectations. Powell emphasized that while inflation is easing, it’s too soon to discuss rate cuts, disappointing markets hoping for 2025 guidance.
- ECB – more easing. The ECB unanimously approved a 25bps rate cut, reinforcing confidence in the disinflation trend. Markets now expect steady reductions until July, bringing the deposit rate to 1.75%.
- US resilience. The US economy grew at a 2.3% annualized rate, driven by strong consumer spending. Meanwhile, the eurozone teeters on the edge of recession, with weak GDP growth and contracting manufacturing.
- Double shock. Trump’s tariff threats and the “DeepSeek shock” in AI overshadowed the Fed’s meeting, driving volatility. A Trump comment on aggressive tariffs pushed investors into the dollar.
- Trade war. The Trump administration confirmed a 25% tariff on Canadian and Mexican goods starting February 1st, but markets lack clarity on broader trade policy. Investors remain uncertain about the full impact on global trade.
- UK budget. The UK government plans significant investment to spur growth, while markets await the BoE’s rate decision. Investors will watch for clues on future cuts, with inflation and wage data shaping expectations.
- US jobs. January’s employment data, including NFP, jobless claims, and ISM PMI, will be key for Fed policy expectations. Strong job numbers could delay rate cuts, while weakness may reinforce a dovish outlook.
Global Macro
Macro and policy divergence
Fed pauses. The Fed held rates steady at 4.25%-4.50%, which was in line with expectations. However, the tone from both the statement and Powell’s press conference made it clear that rate cuts aren’t on the horizon just yet. While the Fed acknowledged that inflation is showing signs of easing, Powell emphasized that it remains too high, and the central bank needs to see more sustained progress before considering any cuts. Markets were hoping for clearer guidance on potential rate cuts in 2025, but Powell quickly shot that down, stating it’s still “premature” to discuss easing.
ECB cuts. The European Central Bank seems to have cemented its confidence in the ongoing disinflation process by unanimously approving a 25 basis point rate cut during its January meeting. Overall, the ECB’s latest meeting and press conference signaled a slightly more dovish stance than anticipated, reducing fears of a slowdown in rate cuts. Current expectations point to a 25bps reduction at each meeting until July, bringing the deposit rate to 1.75%. This would be consistent with the broad consensus on the neutral rate within the council.
US outperforms. The consumer was once again the beacon of hope for the US economy, helping drive GDP to a 2.3% annualized growth rate. While slightly below the 2.6% consensus, strong household spending and resilient demand may keep the Federal Reserve cautious on easing policy too much so early into the year. The eurozone economy remains fragile in the meantime, with stagnating growth and rising risks of a technical recession. Q4 2024 GDP data showed near-zero growth, and leading indicators, such as PMI surveys, continue to signal contraction in the manufacturing sector.
Global Macro
Tariff talk doesn’t go away
Double shock. Overshadowing a 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.
Tariffs incoming. The upcoming tariff deadline on February 1st has clouded the outlook for markets. Investors remain baffled by the lack of clarity regarding potential tariff rollouts from the Trump administration. Just two days ago, the White House confirmed its intention to impose a 25% levy on Canadian and Mexican goods starting February 1st. However, the absence of concrete details has made it difficult for markets to fully price in this scenario.
Canada in focus. Governor Tiff Macklem acknowledges the Bank of Canada’s (BoC) limitations in countering external shocks like a trade war with the US. However, he is aware of how Covid-like stimulus measures can impact the BoC’s primary mandate of maintaining inflation stability. As February 1st approaches, tariffs were the central topic during the BoC rate decision press conference.
UK budget debate. Reeves outlined plans to revive desperately needed economic growth with promises to move “further and faster” to unlock investment and use net zero as an industrial opportunity — even as she backed a third runway at Heathrow airport. She also pointed out that the government is investing 2.6% of gross domestic product on average over the next five years, equivalent to capital spending of £100 billion, far higher than the 1.9% outlined by the previous government.
Week ahead
The macro volatility continues
Global markets enter next week navigating a mix of economic data, central bank signals, and geopolitical risks. With volatility still levels elevated across asset classes before the February 1st tariff deadline, investors will be closely monitoring macro releases and political developments that could shift sentiment.
The spotlight will be on the January employment data, with the ADP jobs report, jobless claims, and the highly anticipated Nonfarm Payrolls (NFP) report due. A strong labor market print could challenge expectations for early Fed rate cuts, while any signs of weakness may reinforce dovish sentiment. Wage growth data will also be crucial, as the Fed remains focused on inflationary pressures from the labor market. The ISM PMIs could give further hints on how the US economy is developing.
A host of Fed officials, including Governor Waller and Vice Chair Jefferson, are scheduled to speak as well. Any deviation from the Fed’s data-dependent stance will be closely scrutinized. In Europe, ECB policymakers will weigh in on the inflation trajectory and the timing of potential rate cuts, particularly after January’s meeting revealed a more divided governing council.
After the Fed and ECB were unable to rattle markets, investors are turning their attention to the Bank of England. While the BoE is expected to keep rates on hold, investors will scrutinize the tone of the statement and Governor Bailey’s remarks for clues on when the first rate cut might come. Recent cooling inflation and slowing wage growth could push the BoE closer to an easing stance. Markets will also watch the vote split. If more policymakers favor cuts, expectations for a May or June move will strengthen, impacting gilts and sterling volatility.
FX Views
Dollar rebounds as anxiety builds
USD Finding a floor. The lack of aggressive executive tariff orders during the first week of Trump’s presidency led to some market relief, away from the heavily positioned dollar, which suffered its worst week in over a year that week. However, the dollar’s haven dynamics have been back in action amidst turmoil in tech stocks following the DeepSeek saga, plus revamped universal tariffs risks supported by Trump’s comments. The US dollar index retraced from 6-week lows, although it has barely recovered half of its previous week’s losses. Limiting the dollar’s recovery is the weight of falling yields. The yield on the US 10-year note remains close to its lowest in over a month as markets assess the latest economic data and Fed rhetoric for hints on the monetary policy outlook. Trade risks open up the possibility of dollar sentiment remaining positive for a while, evidenced by Bloomberg’s fear-greed gauge of momentum that compares buying to selling strength of USD, being in favour of the currency for an unprecedented 17-straight weeks.
EUR Back on the defensive. After its biggest weekly rise in over a year, the euro’s positive momentum struggled to gain traction as hawkish Fed rhetoric, soft European inflation data, and persistent risk-off sentiment continued to favour the dollar. EUR/USD remains firmly below its 200-day moving average (1.0770), reinforcing the broader bearish bias. First support sits at 1.0380, with a decisive break lower opening the door toward 1.0200. On the upside, initial resistance is seen at 1.0450. Momentum indicators remain bearish, suggesting a downside break is more likely unless the euro can reclaim the 1.0480-1.0500 zone. The euro’s recent misfortunes are more linked to expectations about the US economy and what the Fed does than the ECB or the region’s own prospects. Moreover, the flip-flopping in tariff rhetoric is another driver of the risk-sensitive common currency. The development so far this year has been in line with our assumption of a bottoming EUR/USD without much room for significant upside movement. But options traders are bracing for a deeper euro slide, with demand for puts that pay out if the euro weakens more than doubling this month.
GBP Lacking conviction. The pound has been at the mercy of risk sentiment this week, extending to a 4-week high against the USD on Monday before reversing course amidst a global equity selloff and renewed universal tariff risks rattling markets. GBP/USD has broken above a 4-month descending trend line, but has failed to convincingly reclaim $1.25, with its 50-day moving average acting as a firm upside barrier. Like the euro, the pound’s recent misfortunes are more linked to expectations about the US economy and what the Fed does. The decoupling in UK-US rate differentials and GBP/USD since November is arguably a tariff risk premium, but we think it’s also linked to the lack of investor confidence in UK fiscal policy. The Chancellor’s speech this week did little to sway those fears. Apart from the CAD, GBP is still ranked as one of the most vulnerable G10 currencies over the next six months. That said, GBP/EUR has risen for seven days on the trot and is over 1% higher than its 5-month low of €1.18 reached last week. The UK is less exposed than the Eurozone to Trump’s tariffs, plus rate differentials favour the pound, suggesting a retest of €1.20 could occur in the short term. The BoE is expected to cut rates by 25bps next week, but will it be a dovish cut due to the weak domestic backdrop or a hawkish cut due to Trump’s inflationary risks?
CHF Safe haven play. The Swiss franc enjoyed a haven bid this week as Trump’s tariff threats and an AI stock selloff unnerved investors globally. EUR/CHF suffered its worst week in seven, pulling back from 5-month highs with the 200-day moving average at 0.95 proving a tough resistance barrier. The pair’s direction is at the mercy of risk sentiment, despite dovish SNB policy dynamics, via the interest rate and the FX-intervention risk channels, remaining convincingly CHF bearish. The highly uncertain tariff, economic and geopolitical contexts and associated market jitters make defensive FX views more compelling at this stage. This is supportive for the franc. Moreover, speculators are still running net short positions which, if unwound, would amplify any franc upside. The haven bid is unlikely to evaporate completely, but a more cautious line on trade tariffs presents one of the major downside risks to the franc in the short-term, as well as the dovish rhetoric from the SNB.
CNY Bearish momentum builds for CNY despite holiday lull. In January, China’s manufacturing PMI was 49.1, below the forecasted steady 50.1. The PMI for non-manufacturing was 50.2, which was much lower than the 52.2 forecast. While the property-related sub-indices in the non-manufacturing PMI deteriorated, the services sector saw a significant slowdown despite its propensity to gain from demand tied to holidays. These all highlight how essential it is to have more robust policy assistance. From a technical lens, USD/CNH has ticked up again, sitting above the 50-day EMA support handle of 7.2952. According to our baseline, the risk is skewed to the upside, but potential policy intervention draws a line at 7.50. Due to China’s Chinese New Year vacation, no economic data will be released.
JPY Bearish reversal pattern tests key support. The BoJ’s cautious approach to rate hikes, worries about the persistence of inflation, and the effects of global uncertainty were all underscored in the minutes of its December meeting. The majority of members opted to keep interest rates at 0.25%, citing concerns about wage growth, despite some members pushing for an increase to 0.5%. As a result, the central bank maintained the key rate at Dec’s meeting. However, during the January meeting, it overcame this hesitancy and hiked 25bps. The USD/JPY confirms a bearish trend reversal and finds some support at the 50-day moving average 154.91 and close to the Sep channel. We opined there is potential for more mean reversion, which might sustain values close to 153.00. Data on consumer spending will be monitored by markets with a keen eye.
CAD Awaiting tariff clarity. A week that was anticipated to bring volatility due to significant macro data and central bank action, the USD/CAD remained within a narrow range of 1.4472 to 1.4331. This stability underscores that tariff threats are the primary market driver. Over the past seven weeks, the Loonie has traded sideways, fluctuating between a high of 1.4516 and a low of 1.4217, a range of 299 basis points, as it awaits clarity on the trade policy front.
On Wednesday, the Bank of Canada (BoC) reduced rates by 25 basis points, marking the sixth consecutive cut since June 2024, bringing the overnight lending rate to 3%. Meanwhile, the Federal Reserve maintained steady rates at 4.5% as expected, avoiding commentary on President Trump’s demands for lower rates. US inflation data met expectations, with core PCE aligning with forecasts.
Since late December 2024, the USD/CAD has traded above the 20-, 50-, and 100-day moving averages, with the 50 SMA at 1.428. USD buyers target 1.4280, while CAD buyers aim for 1.450. Investors will monitor potential weekend tariffs on Canada and Mexico. Softer tariffs could relieve the Loonie, while 25% tariffs might push the USD/CAD to 1.46.
AUD Base formation signals potential recovery. At only 0.2% q/q and 2.4% y/y, Australia’s Q4 CPI inflation slowed the most since early 2021, while the trimmed mean increased by just 0.5% q/q and 3.2% y/y, much below the RBA’s forecast. In February 2025, we opined the RBA may implement its first rate cut of 25 basis points. Keep in mind that last month, the RBA changed course and became more dovish, which paved the way for an early rate cut. Following a retest of the October 2022 low of 0.617, the AUD/USD breaks out of a short-term base pattern, and weakened again by risk aversion. The key overhead resistance is still between 0.6349 and 0.6338. For hints of economic growth, markets will monitor retail sales and construction approvals.
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*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.
