USD: Growth stays solid, but inflation fears return
The US economy experienced a significant deceleration in growth during the final stretch of 2025, with fourth-quarter gross domestic product increasing at an annualized rate of 1.4%. This figure represents a sharp moderation from the 4.4% expansion recorded in the third quarter and fell short of all economist forecasts in recent surveys. A primary driver of this slowdown was a record-long government shutdown that occupied nearly half of the three-month period, which the Bureau of Economic Analysis estimates stripped approximately 1% point from the quarterly GDP. Despite this weak quarterly finish, the broader picture for 2025 remained resilient, as the economy expanded 2.2% over the full year, overcoming a difficult first quarter marked by a massive surge in pre-tariff imports.
The mid-year recovery that bolstered the annual figures was largely attributed to a shift in trade and monetary policy. As the US administration backpedaled on its reciprocal tariffs announcements and the Federal Reserve starting cutting rates, the stock market climbed to record highs, providing the financial cushion for wealthier Americans to maintain their spending levels. Also, factory activity only began to show signs of life toward the end of the year after a long period of stagnation, and the inflation rate remained a persistent challenge, keeping the issue of affordability at the forefront of the national conversation heading into the midterm elections.
Inflation data released alongside the GDP figures confirmed that price pressures remain stubborn. The core personal consumption expenditures price index, which is the Federal Reserve’s preferred gauge for underlying inflation, rose 0.4% in December alone. This monthly increase was the largest in nearly a year and pushed the annual core PCE, which excludes volatile food and energy costs, to 3%, up from the 2.8% level seen at the start of 2025. This upward trend suggests that despite the overall moderation in growth, the path toward the Fed’s long-term targets is becoming increasingly non-linear and more gradual than market participants had initially anticipated.
This combination of shutdown-impacted growth and rising core inflation creates a difficult environment for future monetary policy. The persistent nature of price increases, paired with a labor market and consumer base that have shown historical resilience, may force the Federal Reserve to maintain restrictive interest rates for a longer duration. As investors and market participants digest these figures, the US dollar has stayed steady, as inflation worries return.
CAD: Loonie steady on mixed data
Canada ended the 2025 calendar year with retail figures that proved more resilient than economists initially feared. While the headline December print showed a modest pullback of 0.4% this was actually slightly better than the anticipated 0.5% decline. More importantly the core numbers excluding automobiles managed a small gain of 0.1% which stands in contrast to the projected contraction. The broader picture for the year remains positive with total sales climbing 4.0% in 2025 and an early look at January suggests a significant rebound is already underway with an advance estimate of 1.5% growth.
The real surprise in the recent batch of data came from the pricing side where both industrial and raw material costs surged well beyond expectations. January saw industrial product prices jump by 2.7% which dwarfed the 0.2% forecast and signaled a sharp reversal from previous months of contraction. Raw materials saw an even more dramatic spike of 7.7% against a much smaller expected increase of less than 1%. These figures point to renewed inflationary pressures at the producer level which may complicate the path forward for monetary policy as these higher costs eventually work their way through the supply chain to consumers.
In FX the Canadian Dollar has maintained a relatively steady stance. The Loonie traded within a defined range between 1.36 and 1.371 against the US Dollar throughout the week. While the hotter than expected inflation numbers typically provide a boost to the currency by stoking expectations for higher interest rates the mixed retail performance kept gains in check. Traders appear to be weighing the strength of the January rebound against the cooling seen in December as they look for a clearer signal on the overall health of the domestic economy. Also, a hotter than expected PCE coming from the US should keep bid the US Dollar, which could cap any short-term advancements on the Loonie.
EUR: Rates attempt a grip on EUR/USD
EUR/USD traded lower throughout the week and is now hovering below the 1.18 mark. A technical clean‑out after the ferocious rally that pushed the pair to highs last seen in 2021 partly explains the move lower. But widening rate differentials, along with heightened geopolitical tensions (see USD section), really forced the issue this week, attempting to overshadow the still‑soft sentiment around the dollar.
On the US side, strong ADP weekly change and firm industrial production data reinforced the narrative of a more stable labour market and resilient economic activity – messages that the Fed minutes packaged up and amplified. On the euro side, the headline was Lagarde stepping down earlier than expected. The move appears strategically political: it is intended to let leaders Merz and Macron have a say in the next ECB president before France’s 2027 general elections, with far‑right, euro‑sceptic Le Pen currently the favourite. The backdrop naturally reintroduces a degree of risk premium at a time when the “central bank independence” theme is back in focus (see the US, and to some extent Japan). Meanwhile, there were hints of dovishness tied to inflation undershooting, with ECB officials becoming more vocal about it and the rates market beginning to pay closer attention. Overnight Index Swaps now price roughly a 30% chance of a cut by November – telling, given that in December that tenor had a hike priced in.
That said, this week’s widening in rate differentials in favour of the dollar still looks brittle unless incoming data on both sides validates the dovish‑versus‑hawkish contrast between the ECB and the Fed. It is too early to make that call, not least because geopolitics is muddling the rates–FX pass‑through. We therefore refrain from declaring a sustained re‑establishment of 1.18 as well‑known resistance just yet, although that remains our medium‑term outlook as previously argued.
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Calendar: February 16 – 20
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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.
