It’s been a topsy-turvy week in financial markets amidst conflicting tariff talk and a plethora of central bank decisions. But Trump is hogging the limelight yet again, reiterating he will impose 25% tariffs on Canada and Mexico by tomorrow. The Canadian dollar fell to a fresh 5-year low yesterday as a result. Risk-sensitive currencies like the GBP and EUR are struggling are down around 0.5% and 1% respectively this week., while safe haven peers like the USD and JPY have outperformed. The countdown to tariffs has already begun, but will Trump actually deliver on his threats?
ECB cuts pushes equities to record highs
Boris Kovacevic – Global Macro Strategist
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 yesterday. While adhering to a meeting-by-meeting strategy, concerns over weaker economic growth make an additional rate cut in March highly probable, with further reductions expected in the coming months.
The ECB’s position is supported by wage growth meeting projections and survey data indicating a stable inflation outlook.. Notably, the ECB did not address the recent spike in energy prices or rising inflation expectations, implying that these factors are not seen as major obstacles to disinflation. Although GDP stagnated in the fourth quarter, the ECB maintained that the recovery remains intact, driven by higher real incomes, looser financial conditions, and stronger foreign demand. However, significant risks persist, including the potential impact of trade tariffs, higher long-term interest rates, and labor market vulnerabilities.
During the press conference, ECB President Christine Lagarde refrained from delving into discussions on the neutral interest rate. However, her previous remarks suggesting a neutral range between 1.75% and 2.25% imply that a rate cut in March is very likely, with another possible in April as the ECB moves away from its restrictive stance. As the policy rate nears 2%, debates among policymakers are expected to intensify.
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. EUR/USD took both rate decision by the Fed and ECB without notice and was anchored around the $1.04 level for the second consecutive day. However, the European equity benchmark STOXX 600 hived itself to new highs and it on track to record the sixth straight weekly gain.
Uncertainty about growth and tariffs
Boris Kovacevic – Global Macro Strategist
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 too so early into the year. The largest drawdown in activity came from non-residual investment, which fell 2.2% due to Boing-related issues. Consumer spending and residential investment surged by 4.2% and 5.3%. Nonetheless, the below-consensus figure could raise questions about the sustainability of the US exceptionalism thesis.
Looking ahead, growth is expected to moderate in 2025. Inventories and aircraft investment should rebound, but trade could become a two-sides issue as businesses front-load imports ahead of tariffs and a stronger dollar weakens export. Despite these challenges, consumer strength remains a key support for expansion. This assumption will hold true as long as the labor market doesn’t falter. For now, this does look unlikely. Yesterday’s initial jobless claims fell by 16k to 207k and therefore came in well below expectations of 220k.
Adding to market uncertainty, the upcoming tariff deadline on February 1st has further clouded the outlook. 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.
The Greenback has regained its footing after a two-and-a-half-week decline that saw the US Dollar Index drop by 3% at its lowest point. Despite the Federal Reserve’s Wednesday meeting being perceived as slightly more dovish than anticipated and GDP figures falling short of expectations, the dollar remains dominant in the FX market. Barring a significant loss of economic momentum, this is unlikely to change—especially in the current politically charged and volatile environment.
Pound lacking conviction, BoE in focus next week
George Vessey – Lead FX & Macro Strategist
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. Yesterday’s US GDP data, for example, was strong, but missed expectations which weighed slightly on the dollar. 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. That said, gilts had already stabilised over recent weeks anyway, and leading macro indicators (PMI and CBI surveys) have surprised to the upside, offering the pound some much-needed support on the domestic front.
Fiscal consolidation in March and a drop in services inflation through the second quarter could leave sterling vulnerable though. This is because Bank of England (BoE) easing bets should increase in this scenario. The BoE is expected to cut rates by 25bps next week, but only two more cuts are priced in this year.
Gold and yen enjoy safe haven flows
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.
