Written by the Market Insights Team
Wait and see
Kevin Ford – FX & Macro Strategist
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. Governor Macklem referred to the accompanying Monetary Policy Report (MPR), which examined potential scenarios of how GDP and Canadian inflation would react to a 25% tariff across the board, with retaliation. Such a scenario would significantly harm GDP while simultaneously driving up inflation, for both countries! During the press conference, the Governor emphasized that if this scenario were to occur, the BoC cannot favor one over the other. The outcome will depend on how the economy responds, but he reaffirmed the BoC’s main mandate of achieving inflation stability, targeting an inflation rate close to 2%.
Regarding the Loonie, the report indicates that the widening interest rate differential between the US and Canada contributes modestly to the USDCAD depreciation, which is mainly driven by threats and uncertainty. Softer tariffs would benefit the Loonie, while stiff tariffs could further depreciate it. In the meantime, the option market shows the nervousness around threat uncertainty, with the Loonie trading back above the 1.44 level.
Ultimately, do tariffs make sense? No. The US has a trade surplus with Canada, excluding oil and gas. A reasonable deal would allow the US to obtain oil at a discount for refining and selling overseas. However, the Trump administration deems the oil and gas trade deficit with Canada unacceptable and has imposed tariffs on other nations, such as Colombia, to enforce compliance with his ‘America First’ agenda. Trump has made it clear: comply or face tariffs. For now, as Powell and Macklem said repeatedly yesterday, we’ll wait and see.
Technicals still not supportive
Boris Kovacevic – Global Macro Strategist
EUR/USD remains under pressure ahead of today’s ECB policy decision, trading near 1.0405 after yesterday’s modest decline. The pair struggled to gain traction as hawkish Fed rhetoric, soft European inflation data, and persistent risk-off sentiment continued to favor 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 eurozone economy remains fragile, 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. Meanwhile, the U.S. economy remains robust, with GDP expanding at a solid pace, fueled by resilient consumer spending, tight labor markets, and AI-driven corporate investment. This stark growth divergence keeps EUR/USD under pressure as investors favor the higher-yielding, stronger-performing U.S. economy.
The European Central Bank (ECB) continues to lean toward rate cuts throughout 2025, possibly cutting in every meeting but one in H1, as inflation cools faster than expected. German CPI (2.8% YoY, below expectations) and slowing wage growth suggest the ECB may move sooner than previously anticipated. In contrast, the Federal Reserve remains more patient, with policymakers pushing back against more rate cut bets, citing sticky inflation and strong economic momentum. This divergence favors the USD over the EUR, keeping rate differentials negative for the euro. Yesterday’s Fed pause and today’s likely ECB cut will cement this divergence.
Fed not ready to pivot
Boris Kovacevic – Global Macro Strategist
The Federal Reserve held rates steady at 4.25%-4.50% yesterday, 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. He pointed to strong U.S. economic data—robust labor market, stable consumer spending, and resilient growth—as reasons to remain cautious. Essentially, the Fed is sticking to a data-dependent approach, meaning their next moves will depend on how inflation and the economy evolve.
Market reactions were fairly subdued after the statement, with most moves reversing following Powell’s speech. Stocks dipped but regained some ground, though the S&P 500 and Nasdaq still closed lower, as investors digested the idea that rates might stay high for longer. Bond yields ticked up, particularly the 10-year Treasury yield, as traders scaled back their expectations for immediate rate cuts. Meanwhile, the U.S. dollar saw a modest uptick, continuing to benefit from the favorable rate differentials.
The Fed’s cautious, wait-and-see stance might seem dull for markets, but it’s likely a good thing for stability. As new data comes in, the Fed will adjust its views accordingly. For now, there’s no indication of imminent cuts, especially in the next two meetings, leaving markets in a bit of a holding pattern.
Sterling indifferent to Reeves’ speech
George Vessey – Lead FX & Macro Strategist
Considering the anticipation leading up to UK chancellor Rachel Reeves’ speech, it ended up being a bit of a damp squib. Market participants appear unenthused by the latest UK growth plans, with little to no reaction in either gilts or sterling. GBP/USD remains pressured in the lower echelons of $1.24, three cents from its 1-year low, whilst GBP/EUR hovers atop the €1.19 handle – still over 1% lower year-to-date though.
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. It’s worth remembering that the two-year inflation breakeven rate has risen more than 80 basis points since Reeves unveiled her autumn budget. This relates to concerns around increased spending and borrowing costs, but it also coincided with Trump’s election victory, which raised inflation fears globally, driving yields and the US dollar higher.
GBP/USD’s failed attempt to meaningfully reclaim $1.25 keeps the downside bias intact for now, especially as risk sentiment remains subdued and volatility elevated due to persistent tariff headlines. However, from a technical perspective, the pair looks to have broken out its 4-month downtrend but will need to hold above $1.24 to confirm that.
Pound outperforms euro across the board
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 27-31
All times are in GMT
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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.
