- Global policy uncertainty. Since Trump’s election, global economic policy uncertainty has surged due to his unpredictable leadership and shifting priorities. Recent headlines suggest a more gradual approach to tariffs than initially feared, aligning with earlier predictions.
- Trade approach. Trump’s administration aims to shake up trade agreements and realign key alliances. His plans to enact a 25% tariff on Canada and Mexico, caused volatility in CAD and MXN, but scaled back threats on China boosted risk sentiment.
- US recession resilience. Despite warnings, the US economy has remained resilient, with GDP expanding, a strong labor market, and robust consumer spending. Bu this sets a high bar for positive surprises.
- Low bar for European surprises. Negative sentiment around the EZ economy has set a low bar for positive surprises, potentially triggering strong market reactions.
- Good news at last. The composite Eurozone PMI increased from 49.6 to 50.2, beating expectations, while the UK’s PMI rose to 50.9, indicating two consecutive years of monthly growth in private sector activity.
- Market reactions. Amidst reports of delayed tariffs, risk sentiment is improving. The US dollar index is set to record its biggest weekly decline in five months. The euro and pound have extended their rebound to fresh multi-week highs.
- Week ahead. Three big central bank decisions are due in the upcoming week with rate cuts expected from the European Central Bank and the Bank of Canada while the US Federal Reserve is expected to hold rates steady.

Global Macro
Protectionism vs. Pragmatism: What will Trump do?
Global policy uncertainty has surged. Since Donald Trump’s election in November, global economic policy uncertainty has spiked due to his unpredictable leadership and shifting political priorities. His administration has vowed to shake up trade agreements, realign key alliances, and take a more aggressive stance in economic negotiations, keeping markets on edge. As a result, investors now face a new reality where sudden policy shifts and increased volatility are the norm. Europe finds itself caught between the US and China, with its two largest economies lacking majority governments and policy uncertainty hitting record highs. Trump is expected to push for trade protectionism and economic nationalism, but the key question is how aggressively he will pursue this agenda.
More measured approach to Tariffs? Recent headlines from the Washington Post and Wall Street Journal, as well as Trump’s call with Xi, suggest that the new administration may take a more gradual approach to tariffs than initially feared. While uncertainty remains, this aligns with our July presidential preview, where we anticipated that Trump’s approach might not be as aggressive as markets had priced in. With no immediate catalysts to drive a major shift away from the dollar, exhaustion could set in, particularly if Trump’s policy stance and the Fed’s expected pause are already fully priced into the market.
Markets react to tariff news. The euro made a strong move higher against the US dollar, recording its best day of the year so far. The euro’s rally was fueled by reports that Trump would delay imposing new tariffs on his first day in office. This suggests that tariff hikes may go through Congress rather than executive orders, easing immediate market concerns. However, Trump made clear that he will not completely abandon his protectionist plans. The president plans to enact a 25% tariff on Canada and Mexico starting on February 1st, which triggered a volatile reaction in CAD and MXN.

Regional outlook: US, EZ, & UK
Good news for Europe at last
Positive European PMIs. The composite EZ PMI increased from 49.6 to 50.2, beating expectations, whilst the UK’s rose to 50.9 vs 50.1 forecast – recording two consecutive years of monthly growth in private sector activity. Are things starting to look up in Europe?
What recession? For the past two years, US recession warnings have been flagged. Yield curve inversions, aggressive Fed hikes, tightening credit conditions, and elevated recession probabilities in economic models all pointed to a looming downturn. Yet, the US economy has remained remarkably resilient, defying predictions of a slowdown and delivering above-trend growth. Instead of contracting, GDP has continued to expand at a healthy pace, the labor market has held firm, and consumer spending has remained robust. The risk of a slowdown remains, but the timeline has been pushed further out.
Low bar for EZ macro disappointments. Investor sentiment around the European economy has been overwhelmingly negative, with recession fears, weak growth prospects, and persistent geopolitical risks dominating the narrative. However, much of this pessimism is already reflected in asset prices, creating an environment where the bar for positive surprises is set exceptionally low. This asymmetry in expectations means that any upside surprise in economic data could trigger a disproportionately strong market reaction this year.
Rising wages, cooling jobs market. UK wage growth accelerated to a six-month high in the three months leading up to November, in line with expectations. However, the unemployment rate unexpectedly rose to 4.4%, accompanied by the sharpest drop in payroll numbers since November 2020, indicating potential softening in the labor market. Higher wages caused traders to pare back rate expectations slightly, but a BoE rate cut in early Feb looks set in stone.

Week ahead
Two rate cuts and a hold expected
Central banks in focus. Three big central bank decisions are due in the upcoming week with rate cuts expected from the European Central Bank and the Bank of Canada while the US Federal Reserve is expected to hold rates steady. The central bank action begins mid-week with the Bank of Canada, with markets looking for a 25-basis point rate cut to 3.00%. Later that day, the Fed is expected to keep rates steady between 4.25% and 4.50% after 100 basis points of cuts over the last four months from the US central bank. In Europe, financial markets see a 97% chance of an ECB rate cut on Thursday with the deposit rate forecast to drop from 3.00% to 2.75%.
Inflation reports to set up next moves. Additionally, key CPI releases from the US, Europe and Australia will be critical in setting up the next moves in these regions. Australia’s December-quarter CPI is expected to rise, with the annual headline number forecast to climb from 2.3% to 2.5%, but markets still expect the Reserve Bank of Australia to cut rates for the first time this cycle in February. That said, the RBA has clearly lagged other central banks. Otherwise, Eurozone inflation and the US personal consumption and expenditure (PCE) index, the Fed’s preferred measure of inflation, are both due on Friday.
US likely to continue dominance. The first read of US December-quarter GDP is due Thursday will be closely watched and will likely confirm the US has led growth in the developed world for the third-year running. This US dominance has been a key factor in the US dollar’s strong performance and an extension of this trend can continue to provide support to the USD in 2025.

FX Views
History may not repeat, but it often rhymes
USD History gives us a warning. The dollar dropped in 2017 during Trump’s first year in office following a strong rally in 2016. Trump’s first week as president has provided a warning signal that history could repeat. The US dollar is set to record its worst weekly decline (-2%) in five months, with selling pressure increasing after Trump declared he’d rather not impose tariffs on China and that the Fed needs to cut interest rates. While interest-rate differentials should act as a brake on dollar declines but shifts in sentiment and short squeezes could override this effect as hedge funds and large speculators have the largest long-dollar positions since 2019. Moreover, the dollar is starting to look very strong now as adjusted for inflation differentials it is back to 1985 levels. Trump may therefore try to find a way to get trading partners to strengthen their currencies under the threat of tariffs. For now, though, the narrative of US exceptionalism remains strong, the tariff threat remains real, and we doubt the Fed will be the one to knock the dollar much lower in its upcoming meeting. But perhaps Trump will.
EUR Light at the end of tunnel. Calls for EUR/USD hitting parity are slowly evaporating as the euro enjoys a wave of positive news flow over the past week. EUR/USD is braced to record its biggest weekly rise (circa 2%) in over a year, flirting with the $1.05 handle – a fresh 5-week high. Trump’s softer tariff talk, coupled with a surprise expansion in Euro-area private sector economic activity, have helped the euro extend its climb from the 2-year low hit earlier this month. The risk premium priced into the euro has thus narrowed but given lingering uncertainty about Trump’s trade hostility against the EU, upside momentum could wane from here. Key pressures, including deteriorating growth prospects and the monetary policy path, could reassert themselves and weigh on the euro in the weeks ahead, but $1.02 appears like a strong floor. The ECB is expected to cut rates in the upcoming week, and we think at least another three cuts will be delivered by year-end..

GBP Performance mishmash. GBP/USD is almost 2% higher over the week but remains trapped in a downtrend channel at this stage, nearly four cents below its 100- and 200-day moving averages. The pound has pounced on broad-based dollar weakness, but better than expected PMI data for the UK is also a reminder not to completely write off the UK economy – or sterling. GBP/USD, it’s trading about 7.5% below its 10-year average near $1.32, which is also close to where UK-US rate differentials suggest the pair should be trading, meaning upside potential could wane from here. Due to the uplift in global risk appetite lately, amid ambiguity over Trump’s tariff plans, there has been increased demand for risk-perceived currencies. Hence, sterling has appreciated against the typical safe havens – USD, JPY and CHF. However, higher-beta FX like NOK, SEK, AUD and NZD have all outperformed the pound over the week. GBP/EUR, down 2% this year, continues to linger near its 5-month low of €1.18 having broken below its key daily moving averages this month. We’re skeptical about whether the downtrend has legs from here unless the gap between ECB and BoE rate cutting bets narrows.
CHF Ultra-dovish guidance. The franc has retreated against the euro but gained against the dollar over the last week. The swissy endured selling pressure along with other safe haven assets as global risk sentiment improved thanks to the lack of clarity on tariffs by the Trump administration. CHF selling also ramped up after the SNB’s chief Schlegel reiterated his position that policymakers will return borrowing costs to below zero again if circumstances require it. His ultra-dovish monetary policy guidance, was backed by risks to inflation undershooting the SNB’s target. Recent data showed Switzerland’s producer and import prices dropped by 0.9% y/y in December 2024, easing from a 1.5% decrease in the previous month. This marked the twentieth consecutive month of fall but the softest since October 2023. The SNB’s tolerance for additional franc strength could become increasingly questionable in a disinflation Swiss context.

CNY Yuan faces pressure amid policy challenges. China’s Vice Premier emphasized the country’s commitment to balanced trade, aiming to boost imports and reduce trade surpluses. This aligns with recent efforts to improve conditions for foreign businesses, including intellectual property protections and streamlined cross-border operations. However, global trade tensions and domestic economic challenges remain key risks. USD/CNH has seen increased downside momentum after failing to breach the 7.369 resistance level. A close below 7.3077 has opened the door for further declines, with immediate support at 7.2242. A sustained break above 7.3682, however, could reignite bullish momentum toward 7.4616. Markets will keep focus on China’s manufacturing and non-manufacturing PMIs for clues on economic recovery.
JPY BoJ tightens policy, Yen gains momentum. The Bank of Japan (BoJ) raised its policy rate by 25 basis points to 0.50% in a widely anticipated move, marking a continuation of its gradual shift toward policy normalization. The decision, supported by an 8-1 vote, reflects the central bank’s confidence in improving wage trends and underlying inflation nearing its 2% target. While the BoJ maintained its GDP forecast, it revised its inflation outlook higher, signaling readiness for further tightening if economic conditions align with expectations. The lone dissenting vote came from Nakamura Toyoaki, who expressed concerns about corporate earnings power. USD/JPY has fallen to a near monthly low, trading near the 155.30 level as of this writing. USD/JPY has confirmed a short-term bearish reversal after breaking below key support near 156.00. The pair now targets 50-day EMA 154.91 and 200-day EMA 151.94 as potential key support zones, with momentum indicators suggesting further downside. Intervention risks could rise if USD/JPY approaches the 160 level again. Traders will focus on Tokyo core CPI and industrial production data for further cues on the yen’s trajectory.

CAD. Tariff threats shape weekly market trends. The Loonie experienced a volatile week, with most movement occurring early on. USD/CAD traded as low as 1.4261 amid gradual tariff insinuations before Trump’s inaugural day. However, this relief was brief, as Trump later announced a 25% tariff on Canadian exports starting February 1st. USD/CAD surged to a five-year high of 1.4516, the week’s peak. It has since stabilized around 1.44, with market participants viewing the tariff threats as part of negotiating tactics, unlikely to materialize before April 1st, when Trump’s trade cabinet will recommend tariffs on major trade partners.
Markets largely ignored Canadian CPI data, which came in slightly below expectations at 1.8% YoY, below the Bank of Canada’s 2% target. Additionally, November retail sales underperformed, highlighting consumer weakness. Since late December 2024, USD/CAD has traded sideways between 1.426 and 1.451, remaining above the 20-, 50-, and 100-day moving averages, with the 50 SMA at 1.425. Looking ahead, USD buyers target the lower range of 1.4280, while CAD buyers aim for 1.450. The upcoming week, investors are focused on the Bank of Canada (BoC)’s rate decision, with expectations of a 25-basis point cut to a 3% overnight lending rate, as the BoC rushes towards neutral rate.
AUD Stabilizing amid mixed signals. Australia’s December Westpac-Melbourne Institute leading index edged lower to 0.25% from 0.33%, signaling subdued growth prospects for early 2025. While this marks an improvement from the negative trend of the past two years, the outlook remains clouded by geopolitical uncertainties and the timing of potential RBA rate adjustments. Stabilizing commodity prices and a recovery in housing approvals offer some optimism, but sustainability is uncertain. AUD/USD is attempting to establish a base near its October 2022 low of 0.6170 but remains confined within a bearish trend channel from September 2024. Resistance at the 0.63 level is critical; a break above could shift sentiment, while downside risks target 0.6015-0.6050. The markets will monitor NAB Business Confidence and inflation data for further direction.

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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.