8 min readWeekly recap
US stocks climbed towards record highs and the USD fell lower despite a rocky week for fundamental developments. President Trump announced 25% trade tariffs on all US steel and aluminium imports. He also announced reciprocal tariffs, but these would have a delayed implementation, raising hopes that there was still room to negotiate.
Meanwhile, US inflation rose to 3% YoY and 0.5% MoM. PPI, wholesale inflation was also hotter than expected. However, certain components of the report, including healthcare services and airfares, showed some signs of cooling, which could support a cooler core PCE, the Fed’s preferred gauge for inflation. Federal Reserve Chair Jerome Powell noted that “we are not quite there on inflation” and reiterated that the Fed was in no rush to cut rates.
US stocks recovered towards record highs with the Nasdaq rising 2.5% across the week, its best weekly performance since early December.
News that Trump was starting peace talks between Russia and Ukraine boosted European equities, with the DAX rising to record highs.
Gold booked its 8th straight weekly rise as demand for the safe haven remained solid and as the USD fell across the week.
RBA rate decision (Tuesday)
The markets expect the first 25 basis point rate cut from the RBA next week, pricing in with an 86% probability the RBA will reduce rates to 4.10%. Although this decision might be more finely tuned than the market is giving credit to, it is not a done deal. While wage pressures have eased more than expected, and household consumption growth has been weaker long forecast, which should provide the RBA with some confidence to ease. However, the unemployment rate is still low, and the RBA noted that they needed to see more progress on underlying inflation, which could result in some uncertainty over the pace and timing of the first cut. Headline CPI is 2.4% in Q3, slightly below the 2% to 3% midpoint of the RBA target level.
The market expects the RBA to cut by 83 basis points throughout the year. However, the RBA may need to cut rates further to support the economy should US protectionism hurt the Chinese economy, which could affect Australian exports.
A more dovish sounding and rising RBA – Fed rate divergence could pull AUD/USD lower. The pair trades at a monthly high.
UK unemployment (Tuesday)
Economists expect unemployment in the three-month period of December to guide 4.5%, up from 4.4%. Meanwhile, earnings excluding bonuses are set to rise 5.8%, up from 5.6%. Last month, unemployment unexpectedly rose to 4.4% from 4.3%, and wage growth also increased—the expected slowdown in unemployment airlines with stagnating UK economic growth. The market has been watching wage growth closely, given that it’s a metric that the Bank of England watches closely. Wage growth is intrinsically tied to service sector inflation. Rising unemployment and rising wage growth point to stagflation in the economy, making it difficult for the Bank of England to cut rates further despite the rising cost of living.
This high unemployment and rising wage growth scenario could see the FTSE 100 fall further from its record high.
BoC CPI (Tuesday)
Canadian CPI fell to 1.8% in December, slightly lower than the 1.9% forecast. Investors will be watching closely to see whether the trend continues which could provide clues over when the Bank of Canada may cut rates again. The Bank of Canada cut rates by 25 basis points in January but removed forward gate guidance. This is the last inflation report before the next meeting on March 13. The minutes of the latest BoC meeting showed that policymakers are recognizing the looming threat of potential trade tariffs and what this might do for growth and inflation.
Cooler than forecast inflation could prompt further Bank of Canada rate cuts, lifting USD/CAD higher.
UK CPI (Wednesday)
UK inflation is expected to rise to 2.7% from 2.5% annually, and core inflation is likely to increase to 3.6% in January, up from 3.2%. The data comes after December CPI headlines slipped to 2.5%, and core CPI declined to 3.2%.
Last week, the BoE warned that UK inflation is forecast to rise again to peak at 3.8% in Q3 of this year before easing back to target in the following year. The data comes following February’s BoE meeting split, which saw two members back a 50 basis point cut rather than the smaller 25 basis point move The market is expecting the next BoE cut to come in June, with a total of 56 basis points worth of cuts seen by the end of the year.
Hotter-than-expected inflation could see the market push back on BoE rate cut expectations, boosting GBP/USD, which trades at a monthly high.
FOMC minutes (Wednesday) & Fed speakers
Having heard from Federal Reserve chair Jerome Powell last week and with plenty of Fed officials speaking this week, the minutes of the January meeting may feel a little stale. However, the message remains similar now to at the Federal Reserve meeting, that the central bank is in no rush to cut interest rates again, given the ongoing exceptionalism of the US economy and sticky inflation. Since the meeting, inflation has even ticked higher to 3%. Powell also signaled that the Fed is awaiting clarity or potential changes to fiscal or regulatory policy under Trump. Current market conditions allow the Fed time to assess Trump’s policies and remain in a wait-and-see mode.
The market now expects only one 25-basis-point rate cut this year, which is not fully priced. The minutes would need to sound significantly more hawkish to provoke a price reaction in the US dollar or stocks. The S&P 500 has risen towards its record high despite the more hawkish Fed expectations.
Eurozone PMI (Friday)
Eurozone PMI data is expected to show a modest pickup across the board, with both the composite and the services PMI seen extending further into expansionary territory at 50.5 and 51.5, respectively. Meanwhile, the manufacturing figure will likely remain in contractionary territory at 47. The sub-components of the January release showed costs rising at a faster pace in the service sector, with wages driving the increase. The market will be looking to see whether that trend remains and what this might mean for the ECB, given that they’re expected to cut rates by a further 78 basis points this year. In the latest ECB post-meeting press conference, the central bank expected growth to remain weak soon. The data will also be watched closely for signs of stockpiling ahead of Trump’s potential tariffs.
Stronger than expected Eurozone PMIs could help support the EUR/USD, which has risen towards 1.05 and is trading at a two-week high.
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