USD: Tame reading puts March rate cut in play
The latest U.S. Consumer Price Index (CPI) report reveals a stabilizing inflationary environment, with the headline rate holding steady at 2.7% year-on-year and the monthly core reading coming in at a lower-than-expected 0.2%. This cooling signal couples effectively with last Friday’s soft labor data, which showed non-farm payrolls growing by only 50,000 jobs—well below consensus—and the unemployment rate at 4.4%. Critically, the 3-month annualized CPI has dropped to 2.1%, positioning the trend just above the Federal Reserve’s long-term target. While headline inflation remains sticky, real average hourly earnings rose by 1.1% year-on-year, exceeding the 0.8% forecast and suggesting that wage growth is now meaningfully outpacing price increases. Together, these reports suggest that while a rate cut on January 28 remains unlikely with odds near zero, the deceleration firmly puts a March cut on the table as the U.S. Dollar moves slightly lower on the news.
A detailed look at the price basket shows that while the core reading was tame, several components experienced significant upward pressure. The shelter index rose 0.4%, a bounce back that doubled the 0.2% increases recorded in October and November, though this was not enough to propel the broader core CPI higher. More striking was the recreation index, which surged 1.2% in December—marking its largest one-month increase since the index was created in 1993. Additionally, food at home (groceries) saw a monthly price rise of 0.7%, its biggest gain since the inflation peak of August 2022. These surges were partially offset by a modest 0.3% rise in energy and a 0.3% monthly headline CPI increase, which was exactly in line with market expectations.
Counteracting these spikes, the report highlighted significant pockets of disinflation, particularly in the automotive and household sectors. It was a favorable month for vehicle owners as motor vehicle maintenance and repair costs fell 1.3%, while insurance costs remained flat and used car prices dropped 1.1%. Furthermore, apparel costs rose 0.6%, possibly providing a hint of where tariffs are beginning to impact consumer prices. The surprise core reading—predicted by only 11 of 73 forecasters—sent stock futures higher and two-year Treasury yields down. With the core year-on-year rate holding at 2.6% against expectations of an uptick to 2.7%, the data clears the path for a more dovish Federal Reserve outlook this spring.
CAD: Looking past the noise
A turbulent start of the week, as a “sell-America” sentiment resurfaced following the Trump administration’s escalation against the Federal Reserve. Fed Chair Powell’s resolute response to the weekend grand jury subpoenas—which he frames as a transparent attempt to pressure the Fed into aggressive rate cuts—suggests the central bank will stand its ground, potentially causing the administration’s legal tactics to backfire. Longer yields climbed, showing that the move perversely defeats the administration’s goal of lowering mortgage rates while at the same time adding a layer of volatility to the greenback. While investors started the week trimming exposure to US assets in the wake of this friction, markets are largely expected to look past the political noise, much like the “Cook episode” of 2025, provided there is no further escalation in the subpoenas’ legal reach.
Despite headline-grabbing rhetoric regarding potential military strikes in Iran and the administration’s unconventional focus on Greenland, market focus remains tethered to underlying macro developments and a “run the economy hot” policy shift. Geopolitics are currently being viewed through the lens of 2025: a factor to monitor, but one that rarely dictates the primary trend unless a full-scale regime change is pursued.
The recent US CPI release has provided some relief for the CAD. The data is being interpreted as “Fed dovish,” especially since the PCE deflator is now trending toward 2.5% YoY. This clears a path for the Fed to adopt a more accommodative stance, even though both the Fed and the BoC are expected to hold rates steady at their January meetings.
The USD/CAD daily chart shows a pair in a state of consolidation, currently trading near 1.3878 as it attempts to penetrate the Ichimoku Cloud. This area represents a resistance cluster, with the 50-day Simple Moving Average (SMA) at 1.3891 and the 100-day SMA at 1.3901 acting as immediate ceilings that have capped recent recovery attempts. While the RSI sits at 58.82, suggesting there is still room for upward momentum before reaching overbought territory, the pair remains trapped between these overhead levels and the support provided by the 200-day SMA at 1.3839. A decisive daily close above the 1.3900 psychological handle would be necessary to shift the bias from neutral to Loonie bearish; however, until the pair clears the dense resistance of the cloud and the surrounding moving averages, the Canadian dollar appears likely to remain defensive.
EUR: Dollar resilience caps euro ambition
The euro benefited from softer USD sentiment following yesterday’s events. Alongside safe‑haven demand for the Swiss franc, recent 2025 developments remind us that the euro tends to outperform when sentiment sours around US‑centric risks. The currently muted safe‑haven role of the Japanese yen further amplifies demand for the common currency.
That said, the bar has been set high throughout 2025 when it comes to threats to the Fed, and yesterday’s episode may struggle to move FX meaningfully from here. With no immediate escalation, EUR/USD failed to break resistance at $1.1695, and it’s now re-testing the 50-day moving average.
Euro moves remain overly dependent on the dollar. With a broadly neutral ECB outlook and stretched long positioning, as highlighted in yesterday’s piece, there is limited scope for the common currency to rally on its own merit.
Barring any escalation on the Powell–Trump fuse, we see last week’s lows at $1.1625 as the next key target for the pair this week.
Market snapshot
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Calendar: January 12-16
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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.
