30/01/2025 Market Watch

Market Watch: Central Banks & Policy Risks Shape Sentiment

The foreign exchange market remains in a state of nervous calm as traders assess the Federal Reserve’s latest signals. The Fed acknowledged the economy’s resilience, allowing it to take a measured approach while keeping policy “meaningfully” restrictive. Meanwhile, disappointing GDP data from Germany, France, and Italy highlight economic weakness in the Eurozone, reinforcing expectations that the European Central Bank will proceed with a quarter-point rate cut. Over in Japan, the Bank of Japan reaffirmed its commitment to gradual rate hikes, contingent on economic conditions evolving as expected.

A key risk event remains the potential U.S. tariff action set for February 1. However, the continued strength of the Mexican peso suggests that these measures may not materialize. The U.S. may instead recognize recent actions by Canada and Mexico as sufficient, allowing it to declare a policy victory without imposing new tariffs. In currency markets, the Japanese yen and Canadian dollar are among the few resisting the U.S. dollar’s strength, while Asian emerging market currencies and the peso are holding firm. In contrast, central European currencies are mostly weaker.

In the bond market, European yields are down 5-7 basis points, while the U.S. 10-year Treasury yield is testing the 4.50% level, which could serve as a base ahead of key events next week, including a refunding announcement and employment data. Equities remain broadly positive, with markets in Japan and Australia advancing, while Europe's Stoxx 600 extends its rally for a third straight session. U.S. futures are also holding firm.

Commodities are seeing notable movements, with gold rebounding from its earlier decline and trading near $2780, just shy of its record high from October. Meanwhile, WTI crude for March delivery briefly touched a new yearly low around $72.00, aligning with its 200-day moving average. These price actions reflect broader market uncertainties as investors position themselves ahead of key developments.

United States of America

The Federal Reserve kept its policy rate unchanged, acknowledging that inflation remains elevated while upgrading its view of the labor market from “low unemployment” to “solid.” The central bank maintained a patient stance, emphasizing that there is ample time to assess economic and political developments ahead of the next FOMC meeting on March 19.

Today’s key focus is the first official estimate of Q4 GDP. The Atlanta Fed’s model projects 3.2% growth, while analysts surveyed by Bloomberg expect 2.7%. However, a larger-than-expected trade deficit in December could weigh on the final number. Meanwhile, weekly jobless claims are set for release but may take a backseat to GDP data and next week’s January nonfarm payroll report, which is currently forecasted at around 150,000 jobs.

In currency markets, the U.S. Dollar Index continued its rebound, reaching nearly 108.30—exceeding the 38.2% retracement level from its recent pullback. The next key level to watch is 108.55 (50% retracement), but for now, the index is consolidating within a tight range between 107.80 and 108.00.

Key Points:

• The Fed left interest rates unchanged, maintaining a cautious approach.
• Inflation remains a concern, but the labor market is now considered “solid.”
• Q4 GDP estimates vary, with projections ranging from 2.7% to 3.2%.
• A wider-than-expected trade deficit in December could impact growth.
• The U.S. dollar remains firm, with technical levels in focus.

Australia

The Australian dollar has declined for three consecutive sessions and remains under pressure. It has retreated nearly 2% from last Friday’s high of approximately $0.6330, finding support around $0.6210. While it is holding steady today, initial resistance is seen near the $0.6250 level.

Upcoming data releases, including import/export price indices, PPI, and private sector credit, are unlikely to significantly impact the currency. Instead, broader U.S. dollar movements and market expectations for rate cuts by the Reserve Bank of Australia (RBA) are driving sentiment. Futures pricing now reflects around 85 basis points of easing for the year, up from just over 60 basis points when the Australian dollar bottomed on January 13.

Key Points:

• The Australian dollar has fallen for three straight sessions, down nearly 2% from last week’s high.
• Support is around $0.6210, with resistance near $0.6250.
• Economic data releases are unlikely to shift market sentiment.
• The RBA is expected to start easing soon, with futures markets pricing in 85 basis points of cuts this year.
• The U.S. dollar’s strength remains a key influence on the Australian dollar’s direction.

Canada

The U.S. dollar initially pulled back from around CAD 1.4460 to CAD 1.4420 following the Bank of Canada's quarter-point rate cut. It remained within that range until position adjustments in late European trading pushed it briefly to CAD 1.44 before quickly returning to its previous levels. Currently, the pair is trading quietly between CAD 1.4395 and CAD 1.4435.

The Bank of Canada dropped any forward guidance on further rate moves while acknowledging the "substantial" 200 basis points of easing since June. It also flagged the potential risks posed by U.S. tariff threats, warning that they could cloud the economic outlook. In its updated projections, the central bank expects inflation to reach 2.1% by the end of Q1 2025, compared to 1.8% in December 2024. Meanwhile, market expectations for another rate cut at the March 12 meeting remain steady, with swaps pricing in around a 40% chance, though the probability may be slightly lower.

Key Points:

• The U.S. dollar briefly dropped after the Bank of Canada’s rate cut but quickly stabilized.
• Trading remains range-bound between CAD 1.4395 and CAD 1.4435.
• The Bank of Canada removed forward guidance on rate moves but highlighted risks from U.S. tariff threats.
• Inflation is expected to reach 2.1% by Q1 2025, up from 1.8% in December 2024.
• Markets see a 40% chance of another rate cut in March, though the actual likelihood may be lower.

China

The U.S. dollar is recording a higher low against the offshore yuan for the fourth consecutive session, though the overall tone remains consolidative. It continues to trade within Tuesday’s range of approximately CNH 7.2585 to CNH 7.2860, which itself remains inside the broader range established last Friday (CNH 7.2345 to CNH 7.2880).

When onshore yuan trading paused for the extended Lunar New Year holiday, the dollar was near CNH 7.2445. Since then, price action has remained subdued, with no significant breakout in either direction.

Key Points:

• The U.S. dollar is holding a higher low against the offshore yuan for four straight sessions.
• Trading remains within Tuesday’s range, lacking strong momentum.
• The broader range from last Friday continues to define price action.
• The dollar was near CNH 7.2445 when onshore trading halted for the Lunar New Year holiday.

Europe

The euro extended its losses, reaching nearly $1.0380, retracing over a third of its rebound from the January 13 low of $1.0180—the weakest level since November 2022. A break below $1.0355 could open the door for further downside toward the next key support near $1.0315. Meanwhile, resistance is seen around $1.0450-$1.0460.

The European Central Bank is widely expected to cut rates by 25 basis points today after delivering four similar cuts last year. President Lagarde is unlikely to push back against expectations for another cut at the March 6 meeting. Markets currently price in 75 basis points of easing in the first half of 2025, with an additional cut favored in the fourth quarter.

Economic data continues to paint a weak picture. The eurozone economy was flat in Q4, missing expectations, as major economies underperformed. Germany’s GDP contracted by 0.2%, worse than expected. France saw a surprise 0.1% contraction instead of stagnation, while Italy’s economy remained unchanged for the second consecutive quarter.

Key Points:

• The euro fell to nearly $1.0380, retracing part of its recent rebound.
• Key support is at $1.0355, with resistance around $1.0450-$1.0460.
• The ECB is expected to cut rates by 25 basis points, with more easing likely.
• Markets price in 75 basis points of rate cuts in H1 2025, with another cut likely in Q4.
• Eurozone Q4 GDP disappointed, with Germany contracting by 0.2% and France shrinking by 0.1%.

Japan

The U.S. dollar remains within Monday’s trading range against the Japanese yen (JPY 153.70–JPY 156.25), with lower highs recorded for the fifth consecutive session. Both the five-day and 20-day moving averages are trending downward, signaling a gradual loss of momentum.

Bank of Japan Deputy Governor Himino reinforced the central bank’s hawkish stance, highlighting that real interest rates remain negative. The BOJ’s message remains clear—if economic conditions evolve as expected, further rate hikes will follow. Despite some intraday movements, JPY 155 has held firm on a closing basis, except for Monday. Initial resistance is now seen near JPY 154.75.

Looking ahead, Japan will release key economic data tomorrow, including employment figures (unemployment expected to remain at 2.5%), Tokyo CPI (likely stable), and industrial production and retail sales, both of which are expected to soften slightly.

Key Points:

• The dollar remains within Monday’s range against the yen, with lower highs for five straight sessions.
• Moving averages indicate a gradual decline in momentum.
• The BOJ maintains a hawkish stance, signaling more rate hikes if conditions support it.
• JPY 155 remains a key level, with initial resistance at JPY 154.75.
• Japan's upcoming data release includes employment, inflation, industrial production, and retail sales.

United Kingdom

Sterling has shown greater resilience than most G10 currencies in recent days, staying within a tight range despite broader market movements. The pound has yet to test the 38.2% retracement level of its recovery from the January 13 low near $1.21, which stands at around $1.2360. Excluding Monday’s marginal high near $1.2525, GBP/USD remains within last Friday’s range ($1.2350–$1.2500). Today, it is trading in a narrow band between $1.2430 and yesterday’s high of $1.2465.

Economic data from the UK, including consumer credit (in line with expectations), mortgage approvals (stronger than expected), and money supply (a slight increase), had little lasting impact on the market. Traders are now focused on the upcoming Bank of England meeting on February 6. The swaps market has almost fully priced in a quarter-point rate cut, with another expected around mid-year.

Key Points:

• Sterling remains more resilient than most G10 currencies.
• GBP/USD is still within last Friday’s range, staying below $1.2465 today.
• UK economic data had minimal market impact.
• The Bank of England is expected to cut rates by 25 bps on February 6, with another cut anticipated mid-year.