29/01/2025 Market Watch

Market Watch: Tariffs & Central Bank Decisions

Markets are focused on trade tariffs and central bank decisions today. The White House reiterated that tariffs on Canada and Mexico could be announced this weekend, pressuring the Canadian dollar. The Bank of Canada is widely expected to cut rates by 25 basis points and signal a pause. In contrast, the Federal Reserve is almost certain to keep rates unchanged and emphasize its independence. The Mexican peso remains resilient, possibly reflecting skepticism about the tariffs being implemented and its appeal as a carry trade compared to the Canadian dollar, which faces policy divergence. The US dollar is stronger against all G10 currencies except the Japanese yen, while Australia’s softer-than-expected inflation data has increased expectations of a rate cut by the Reserve Bank of Australia next month.

Equity markets in Asia Pacific are mostly closed for the Lunar New Year, but Japanese, Australian, and Indian stocks advanced. In Europe, the Stoxx 600 has climbed to record highs, supported by strong earnings from ASML. US futures are also firm. Bond yields are lower, with European benchmark yields down by 2-5 basis points and Australian yields falling by 5-6 basis points. The US 10-year Treasury yield is slightly softer at 4.52%.

Gold briefly extended its recent recovery, reaching above $2,766 before pulling back to trade below $2,760. Meanwhile, March WTI crude oil met resistance above $74 and is now testing support near $72, aligning with its 200-day moving average.

United States of America

The outcome of today’s FOMC meeting is widely anticipated, with the Federal Reserve expected to keep rates unchanged after cutting by 100 basis points over the past several months. Market expectations have realigned with the Fed’s guidance, pricing in nearly two rate cuts this year, equivalent to around 48 basis points.

During his December press conference, Fed Chair Powell noted that some policymakers factored in assumptions about government policies, while others did not. However, the specifics of any new fiscal initiatives remain uncertain. A key development since the last FOMC meeting has been renewed pressure from the administration for lower interest rates. Despite this, Powell is expected to defend the Fed’s independence and adjust policy based solely on economic conditions rather than political influence.

The Dollar Index faces resistance in the 108.20-108.50 range.

Key Points:

• The Fed is expected to keep rates unchanged after cutting 100 basis points in recent months.
• Markets have priced in nearly two rate cuts (~48 basis points) for this year.
• Powell reaffirmed that Fed decisions are based on economic assessments, not political pressure.
• The Dollar Index is encountering resistance around 108.20-108.50.

Australia

The Australian dollar found buyers after dipping below $0.6240, holding above key technical levels, including the 50% retracement of its mid-January recovery and the 20-day moving average near $0.6230. However, losses have extended slightly below $0.6225, weakening the technical outlook. A break below the $0.6200-$0.6210 range could signal a move toward the monthly low near $0.6130.

Australia’s Q4 inflation slowed to 2.4% year-over-year, down from 2.8% in Q3. Core measures also declined, with the trimmed mean falling to 3.2% from 3.6% and the weighted median easing to 3.4% from 3.7%. Notably, non-discretionary goods prices dropped by 0.5%, while discretionary goods rose by 1.1%.

The futures market now sees a nearly 95% chance of a quarter-point rate cut by the Reserve Bank of Australia next month, up from around 70% at the end of last year, reinforcing expectations of an imminent easing cycle.

Key Points:

• The Australian dollar tested key support but remains under pressure.
• A break below $0.6200-$0.6210 could lead to further declines toward $0.6130.
• Q4 inflation slowed to 2.4% YoY, with core measures also easing.
• The market is pricing in a 95% chance of an RBA rate cut next month.

Canada

While markets are confident that the Federal Reserve will remain on hold, expectations are equally strong that the Bank of Canada will extend last year’s easing cycle with a 25-basis-point rate cut today. This would bring the target rate to 3.0%, the upper end of the central bank’s estimated neutral range (2%-3%). Given that officials delivered consecutive 50-basis-point cuts in Q4 2024, there is a possibility of a more cautious stance, where the central bank signals a pause to assess the impact of past easing.

Despite the rate cut expectations, the Canadian dollar remains more sensitive to trade concerns. The White House recently reiterated that tariffs on Canada and Mexico could be announced as early as this weekend. As a result, the Canadian dollar has fallen to a six-day low, while the Mexican peso has shown some resilience. Many remain skeptical about the February 1 timeline for tariff implementation.

The US dollar is testing resistance at CAD 1.4435, and a decisive break could push it toward the multi-year high of CAD 1.4515, last seen the day after Trump’s inauguration.

Key Points:

• The Bank of Canada is expected to cut rates by 25 basis points to 3.0%.
• There is a chance of a "hawkish cut," signaling a pause to monitor economic effects.
• The Canadian dollar is more influenced by trade concerns than rate policy.
• US tariffs on Canada and Mexico could be announced this weekend.
• USD/CAD is testing 1.4435, with a potential move toward 1.4515 if resistance breaks.

China

The US dollar strengthened yesterday, rising about 0.3% against the offshore yuan—its largest single-day gain this month. However, it remained below last week’s high of approximately CNH7.2880. Today, the dollar is trading within a narrower CNH7.2565-CNH7.2780 range, staying within the previous session’s boundaries.

Against the onshore yuan, the dollar settled just below CNY7.2450 before the extended holiday. Market participants may attempt to keep the offshore yuan aligned with the onshore rate, but if the dollar continues to gain strength, they may have little choice but to let it move higher.

Key Points:

• The US dollar gained 0.3% against the offshore yuan, its largest rise this month.
• It remains below the previous high of CNH7.2880.
• Today’s trading range is CNH7.2565-CNH7.2780, staying within yesterday’s levels.
• The onshore yuan settled below CNY7.2450 before the holiday.
• Further dollar strength could push the offshore yuan higher.

Europe

Markets are nearly certain that the European Central Bank will cut rates by 25 basis points tomorrow, regardless of the Federal Reserve’s decision today. The swaps market has priced in nearly 75 basis points of cuts for the first half of the year, with an additional cut in the second half seen as a 60% probability.

The euro recently stalled near $1.0535, just below the 50% retracement of its losses since the US election. It is now hovering around $1.04, a key support level, and a break lower could push it toward the $1.0355-$1.0380 range.

Two notable developments also emerged. Sweden’s Riksbank cut its policy rate by 25 basis points to 2.25%, signaling a possible end to its easing cycle, though guidance extends only through the first half of 2025. Sweden’s economy grew by 0.2% in Q4 after three consecutive quarters of contraction. Meanwhile, Spain reported Q4 GDP growth of 0.8%, matching the previous quarter and slightly exceeding expectations.

Key Points:

• The ECB is widely expected to cut rates by 25 basis points tomorrow.
• Markets anticipate 75 basis points of cuts in H1 and a possible additional cut in H2.
• The euro is testing support at $1.04, with potential downside toward $1.0355-$1.0380.
• Sweden’s Riksbank cut rates to 2.25% and may have completed its easing cycle.
• Sweden’s economy grew 0.2% in Q4, while Spain’s GDP expanded 0.8%.

Japan

The US dollar found stability against the yen yesterday as firmer US yields provided support. After reaching a new monthly low near JPY153.70 on Monday, the dollar rebounded but stalled near JPY156, remaining below the week's high of approximately JPY156.25.

Today, trading remains subdued within a JPY155.00-80 range. A breakout above JPY156 could trigger a test of last week’s high near JPY156.75. If breached, the dollar’s technical outlook would improve, potentially aligning with a renewed climb in the 10-year US Treasury yield above 4.60%, following Monday’s brief dip below 4.50%.

Key Points:

• The dollar stabilized against the yen after Monday’s low near JPY153.70.
• It remains below JPY156.25, trading within a JPY155.00-80 range.
• A breakout above JPY156 could test last week’s high near JPY156.75.
• A stronger dollar may align with a rebound in the 10-year US yield above 4.60%.

United Kingdom

Sterling posted gains in four of the last five sessions, its strongest performance since late November. The rally extended on Monday, briefly touching $1.2525 before losing momentum. It pulled back to $1.2415 yesterday, with further pressure testing support in the $1.2385-$1.2400 range today.

The Bank of England meets next Thursday, and markets are confident that the easing cycle will resume with a quarter-point rate cut. The swaps market has fully priced in another cut by the end of Q2. For the full year, nearly three cuts (74 basis points) are expected, an increase from about 60 basis points at the end of December.

Key Points:

• Sterling gained in four of the last five sessions but stalled near $1.2525.
• It pulled back to $1.2415, with support around $1.2385-$1.2400.
• Markets expect the Bank of England to cut rates by 25 basis points next week.
• Nearly three cuts (74 bp) are priced in for 2025, up from 60 bp at year-end.