- A one-month extension for US-Mexico-Canada talks provided temporary relief, but uncertainty remains. The US imposed 10% tariffs on China, prompting Beijing to retaliate on 80 products starting February 10th.
- Weaker ISM services data (54 → 52.8) boosted safe-haven demand, while employment surged. Job openings fell, factory orders declined, and economic optimism missed expectations.
- The BoE cut rates by 25bps to 4.5% in a divided 7-2 vote. Despite the dovish move, an upgraded inflation outlook and a GDP forecast cut (1.5% → 0.7%) added uncertainty.
- The French government survived a no-confidence vote, clearing the way for its budget approval. The French risk premium dropped from 90 to 70bps, while equities are up 7% YTD.
- Political risks have lowered expectations for aggressive rate cuts. Chicago Fed President Goolsbee reinforced a cautious view, with only two cuts currently priced in.
- Markets expect ECB rate cuts of 87bps in 2024, but sticky inflation may slow the pace. Higher-than-expected Eurozone inflation has fueled market doubts.
- Despite the elevated political uncertainty and a cautious Fed, global equity markets managed to extend gains due to lower bond yields and a weaker dollar.
Global Macro
Tariff talk overshadowing macro
Delayed. The one-month extension for negotiations between the U.S., Mexico, and Canada has eased some immediate market tension, but the damage in terms of prolonged policy uncertainty is already done. This is underscored by reports that a highly anticipated call between Xi and Trump, scheduled for Tuesday, did not take place. As a result, the Trump administration proceeded with a 10% tariff on China, prompting Beijing to retaliate with additional levies on roughly 80 products, set to take effect on February 10th.
Uncertain. In this environment of heightened political uncertainty, staying attuned to daily developments is crucial for understanding market reactions. The uncertainty has already influenced investor expectations, leading to a reduced outlook for rate cuts this year—a view echoed by Chicago Fed President Austan Goolsbee today. While monetary easing is still expected, the two rate cuts currently priced into options markets are a far cry from the more aggressive expectations seen just a few months ago.
Exempt. Will Britain Face Tariffs? Probably not, due to its goods trade deficit with the US. While it has a services trade surplus, tariffs mainly target goods. The US has trade deficits with the EU ($209bn), China ($279bn), Mexico ($152bn), and Canada ($68bn), but a $9.7bn surplus with the UK, making Britain less of a target. However, the UK isn’t immune to economic fallout—slower EU growth and rising interest rates could strain its economy, increasing borrowing costs and limiting fiscal flexibility.
Inflationary. Risk assets may get support from the ECB, expected to cut rates by 87bps this year. However, easing depends on US tariffs and European inflation. Investors trimmed rate-cut bets after ECB Chief Economist Philip Lane warned of slower inflation decline. Stronger-than-expected Eurozone inflation (2.5% in January, core at 2.7%) suggests markets may have overestimated cuts. We expect inflation to exceed 3% soon.
Global Macro
Mixed US data and BoE meeting
Mixed. Economic data painted a mixed picture. Safe-haven demand rose after a weaker ISM services print (54 → 52.8), though employment surged at its fastest pace since Sept 2023, supporting a positive nonfarm payrolls outlook. Job openings fell (8.16M → 7.6M), factory orders declined for a second month (-0.9% m/m), and the Economic Optimism Index missed expectations. Despite these weaker indicators, markets remain focused on political developments, keeping the U.S. exceptionalism narrative intact—for now.
Ambiguous. The Bank of England (BoE) cut rates by 25bps to 4.5% in a 7-2 vote, revealing sharp divisions within the MPC. Dissenters Swati Dhingra and Catherine Mann pushed for a 50bp cut, with Mann’s shift from hawkish to dovish surprising markets. Despite this dovish signal, the BoE raised its inflation outlook, adding a hawkish twist. Meanwhile, its 2025 GDP growth forecast was slashed from 1.5% to 0.7%, reflecting last year’s weak performance and a softer H1 2025 outlook.
Survival. The French government survived a no-confidence vote on Wednesday, paving the way for the passage of its delayed annual budget. While this outcome was largely anticipated and priced in, it remains a positive development. The French risk premium—measured by the spread between German and French bond yields—has declined from its peak of around 90 basis points to 70. Meanwhile, French equities have outperformed both US and broader European markets, posting a year-to-date gain of 7%.
Week ahead
Pivotal inflation data ahead
Markets will navigate a packed economic calendar this week, with critical inflation readings, industrial production data, and retail sales figures set to shape the macro-outlook. In the US, both the CPI and PPI number will get some attention, due to the current narrative that inflation is accelerating again. A stronger-than-expected print could fuel concerns that inflation remains sticky, potentially affecting Fed rate-cut expectations.
The Eurozone GDP will provide insights into the region’s economic development, with a 0.9% consensus growth rate. Meanwhile, US retail sales are expected to come in flat, signaling potential consumer weakness. A negative surprise could reinforce concerns about slowing demand, while an upside surprise may reignite discussions about inflationary pressures.
The US industrial production is forecast at 0.3%, an improvement from the previous 0.9% print. Given the recent strength in the manufacturing sector, this data will help gauge whether momentum is sustained. Additionally, the initial jobless claims report will be monitored for signs of labor market cooling.
Inflation data will be crucial in shaping expectations for the ECB and Fed’s next moves. Strong US PPI or retail sales data could support the dollar by pushing back rate-cut expectations. Markets have rallied recently, but any upside inflation surprises could dampen sentiment. Stronger industrial production data could support oil and metals, while weaker retail sales may weigh on demand-driven commodities and the dollar.
FX Views
FX in limbo as tariff implications still unclear
USD Giving up gains. The US dollar has given up some of its tariff induced gains despite elevated political uncertainty and somewhat resilient data this week. Inflation data will be crucial in shaping the Fed’s next moves. The Greenback has gained around 4% since the election in November, closely tracking its development following the 2016 election. However, DXY is still about 6% off its 20-year highs reached in 2022. We think that reclimbing those levels would need a clear trade escalation and signs that inflation is rebounding globally. Otherwise, the currency will be stuck in a range +- 3% from current levels. Strong CPI and PPI figures could push back expectations for rate cuts, providing support to the dollar. Meanwhile, markets have trimmed rate-cut bets, with only two cuts currently priced in for 2024, signaling a more cautious Fed stance.
EUR Regaining some ground. The Eurozone faces heightened risks from the US-China trade tensions, with both the US-imposed 10% tariff on Chinese imports and China’s retaliatory measures threatening global trade. The delay in US tariffs on Mexico and Canada provided some relief, allowing euro buyers to re-enter the market. This push helped EUR/USD climb past the $1.0350 mark, lifting the currency slightly above its year-to-date starting point. However, the euro remains weak on a longer-term basis, trading around 3.5% lower compared to 12 months ago and 7.3% lower versus five months ago. The euro is likely to remain sensitive to global trade developments and any further escalation in US-China tensions. While the temporary relief from tariff delays provides some support, the broader economic environment—shaped by US policy and European inflation—will likely determine the euro’s performance in the near term. The currency’s ability to recover further will depend on both domestic economic data and external geopolitical dynamics.
GBP Safe vibes. Sterling’s low beta to tariff risks makes it look like a good bet as an outperformer versus risk-sensitive G10 while tariff risk premia are driving the market. Trade war scares are still bad for GBP/USD (or vs CHF, JPY), via the risk sentiment channel, but they have generally proven to be good for other sterling crosses. Investors appear to be lower but that the UK is a safer bet while the threat of tariffs is hanging over the EU, with GBP/EUR building on gains and rising to its highest level in three weeks, reclaiming the €1.20 handle – four cents above its 5-year average. Meanwhile, GBP/USD is testing the $1.25, which is also where the 50-day moving average resides – offering a strong barrier to the upside. Aside from global trade risks, the UK’s weak domestic growth backdrop and fiscal concerns are limiting the pound’s recovery hopes. The BoE dovish rate cut this week triggered a sharp move in GBP/USD towards $1.23 as more easing was priced in, but the move was fleeting after supporting comments from Governor Bailey. The downtrend remains intact as long-term moving averages point lower but given its recent break north of a descending trendline – we’re looking for a hold above $1.24 to provide a platform for further gains towards $1.26. Next week’s UK inflation and GDP data could be the data points to provide the impetus for such a move.
CHF Haven hero. The Swiss franc is turning into the favoured traditional safe haven of choice, beating the JPY of late as Trump’s tariff risks continue to unnerve investors globally. EUR/CHF has pulled 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 Yuan pressured at key technical levels amid trade tensions. USD/CNH faces technical resistance at 7.3682 after rebounding near 20-day SMA (7.2950). Recent price action shows clear rejection at resistance, suggesting potential downside pressure. The pair’s technical structure indicates vulnerability to a pullback, particularly given the repeated failures to breach the 7.3682 level. While trade tensions resurface with China’s WTO complaint against US tariffs, the yuan’s immediate direction appears more technically driven. The rejection at resistance could trigger a retest of support levels. Watch for a potential breakdown below the 20-day SMA to confirm bearish momentum. The pair’s inability to sustain moves above resistance suggests building selling pressure. The CPI and PPI will be key to watch.
JPY USD/JPY finds support as BoJ softens hawkish tone. USD/JPY has reached key technical support at 151-152.17 following its retreat from January’s 158.88 peak. The pair’s mean reversion move appears to be stabilizing around these levels, suggesting potential range-bound trading ahead. BoJ member Tamura’s comments about closing gaps between market and central bank views, along with his relaxed stance on rates, have helped ease some of the recent selling pressure. The technical picture shows the pair hovering below the 50-day moving average support, with the current consolidation potentially setting up a new trading range. Focus remains on the 151-152.17 support zone, with any breach potentially triggering deeper corrections. The pair’s ability to hold these levels will be crucial for determining near-term direction. Chart shows Yen has returned ~3% gains YTD. The upcoming current account data will be the data to keep an eye on.
CAD Crisis averted. The USDCAD experienced its most volatile week since the COVID-19 pandemic, with a 523-pip swing from a 22-year high of 1.4793 to a three-week low of 1.4270. Fear gripped the Loonie early in the week as Trump confirmed 25% tariffs on all Canadian imports to the US, except for oil, which faced a 10% tariff. However, PM Trudeau managed to postpone the tariffs by 30 days, pushing the Loonie back below the 1.44 level. Despite ongoing trade policy uncertainty, hopes for an early deal and potential USMCA/CUSMA renegotiation are keeping the USDCAD below the 1.45 level.
Technically, the USDCAD is consolidating around the 1.43 level, trading close to its 50-day SMA at 1.4350. The 100-day SMA at 1.407 indicates the uptrend still holds. However, the Loonie is ending the week below its 20-day SMA at 1.4385, testing its lowest levels in three weeks. Looking ahead, USD buyers are targeting the lower trading range at 1.4260, while CAD buyers aim for 1.4490. On the macro front, the upcoming week seems light, with building permits on Tuesday expected to show a rebound for December, and manufacturing sales data for December to be released by the end of the week.
AUD AUD/USD forms bullish pattern despite mixed business sentiment. The Australian dollar shows promising technical signals despite mixed domestic business confidence data. Aussie is near recent YTD highs. The AUD/USD’s formation of downside exhaustion candlesticks and close above the 20-day SMA (0.6256) suggests waning bearish momentum. Technical analysis reveals a completed falling wedge pattern, a traditionally bullish signal that could support further upside. While negative business confidence (-4) reflects ongoing cost pressures, improved forward-looking indicators like capital expenditure plans and annual outlook provide some fundamental support. The currency pair’s immediate challenge lies in maintaining momentum above key moving averages (20-day SMA 0.6256 then 50-day SMA 0.6308) and capitalizing on the bullish technical setup. Key levels to watch include the recent range resistance and the falling wedge breakout target. Near-term price action suggests potential for continued upward momentum if support levels hold. The NAB’s business confidence will be monitored by the markets.
MXN President Sheinbaum to the rescue. After President Trump confirmed tariffs last weekend, Mexican President Claudia Sheinbaum successfully delayed the new tariffs for a month by committing to increased border security investment. The Mexican peso, which traded as high as 21.29 early Monday, responded positively, recovering to the 20.5 level.
Later in the week, the Bank of Mexico cut the reference rate by 50 basis points to 9.50%. The central bank cited weakening economic activity, with a Q4 contraction, and easing inflation, contributed to the unanimous decision on the rate cut. However, global risks such as persistent core inflation, currency depreciation, geopolitical conflicts, cost pressures, and climate impacts loom large in 2025, with. trade tensions, geopolitical issues and market volatility in the spotlight. Despite these challenges, the Central Bank remains committed to maintaining low and stable inflation.
The Mexican peso is currently sitting on its 50-day SMA at the 20.47 level, consolidating within the trading range of 20.1 to 20.9. The 100-day SMA stands at 20.17, with medium-term support at the 20 level and resistance at 20.9/21. Next week, attention will be on US CPI data on Wednesday, as market participants focus on US-Mexico central bank differentials and new developments in trade tariff talks.
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.
