8 min readWeekly recap
An unexpected cooling in US underlying inflation, weaker retail sales, and softer jobless claims saw US treasury yields slip lower last week. This pulled the USD southwards, snapping a six-week winning run. US stocks, also helped by a strong start to the Q4 earnings season, booked gains.
The Nasdaq rallied 2.85% last week, the Dow Jones gained 3.7%, and the S&P 500 rose 2.9%, the best weekly performance since November.
The upbeat mood was also seen in Europe, with the DAX and the FTSE 100 rising to record highs, boosted by the prospect of further rate cuts from the BoE and the ECB. The GBP//USD was a notable underperformer amid weak UK data, with the pair falling below 1.22.
Oil prices climbed 1.7% last week as the test sanctions on Russia raised supply fears. Oil trades 10% higher so far this month on supply worries and as investors weigh up the possibility of more sanctions under Trump.
Trump’s inauguration (Monday)
Markets will watch closely as Trump prepares to begin his second term in the White House, setting the tone for the years ahead. Trump is expected to sign over 100 to close to 200 executive orders, some of which are priced in and some of which could generate more volatility early next week. On Monday, the US stock market is closed for Martin Luther King Day, so the immediate reaction will be in the forex market.
The market will be particularly focused on any immediate measures surrounding tax cuts and trade tariffs, what this might mean for the US inflationary outlook, and what this might mean for global economies such as China, Europe, Canada, and Mexico.
Trump will take oath at 17:00 GMT (noon ET).
The USD has eased from its multi-year high but remains above 109 against its major peers.
China
Data from China on Friday was encouraging, with GDP figures of 5.4% year on year, up from 4.6%, marking the highest level of the year and the fastest year-on-year growth of any quarter since Q 2 2023. This week, the Chinese economic calendar is quieter. The loan prime rates will be announced on Monday and come amid efforts to balance economic support as the Chinese economy continues to tackle weak consumer demand deflation under the troubled priority sector. The PBoC is expected to maintain its benchmark lending rates with the one-year and five-year LPR study at 3.1% of 3.6%
The Hans Seng has recovered from its 2025 low last week.
UK unemployment (Tuesday)
UK unemployment is expected to hold steady at 4.3% in the three months to November, and average earnings are forecast to rise to 5.5% from 5.2%. While the official unemployment rate likely held steady in November, it is trending up gradually. However, strong wage growth will likely keep Bank of England policymakers cautious for now.
Recent surveys have shown a dramatic collapse in optimism among chief financial opposite officers. According to Deloitte’s latest survey, business confidence has slumped to its lowest point since Covid. Rachel Reeves’ budget, raising the social security burden on businesses, has seen them scrambling to cut costs. Hiring intentions have nosedived to a four-year low, and employment expectations are the weakest since the pandemic in early 2020. The UK unemployment rate is expected to rise to 4.6% by the end of the year.
These figures come after a series of weaker data last week, including GDP and retail sales, which lifted BoE rate cut expectations. GBP/USD struggles below 1.22, and FTSE 100 reached record highs.
Canada CPI (Tuesday)
Canadian inflation is expected to cool by 0-0.5% MoM in December, down from 0% in November. On an annual basis, CPI is expected to ease to 1.7% YoY from 1.9% in November and remain well within the Bank of Canada’s target of 1 to 3% over the coming months and quarters, averaging at 2.1% this year.
The data comes ahead of the Bank of Canada’s rate decision on January 29th, when the central bank is widely expected to cut rates by 25 basis points to 3%. The central bank has been one of the most diligent in reducing rates, cutting by 1.75% since June 2024. It’s also very close to a neutral rate, which neither restricts nor stimulates the economy.
However, President Donald Trump’s return to the White House and his threat of slapping tariffs as high as 25% on Canadian imports makes it difficult to project beyond here. This week, when Trump takes office, he could provide more clarity. If Canada gets hit with large tariffs and doesn’t retaliate, the disinflationary impact could prompt considerably more easing by the central bank, potentially pulling CAD lower. Hotter inflation data could see BoC rate cut expectations cool, lifting the loonie.
USD/CAD has risen to fresh 4-year highs at the start of the week.
BoJ rate decision (Friday)
This week, the BoJ’s two-day meeting will be held, during which policymakers will decide whether to leave rates unchanged or hike them to 25 basis points. Inflation and wage data have been encouraging and support a decision to lift interest rates at the meeting. The latest comments from Bank of Japan officials have shown increased confidence in sustainable wage growth. The market is pricing in an 80% chance of a 25 basis point rate hike. In the December meeting, the BoJ voted 8-1 to leave rates unchanged.
However, Trump’s inauguration will also be watched closely and could negatively impact the global and Japanese economies. Japan will also release machinery order data early next week and inflation the day before the policy announcement. Inflation is expected to increase sharply in December, with the end of the government’s energy subsidy program likely lifting inflation above 3% year over year.
Hot inflation and a rate hike could boost the yen, helping USD/JPY to fall further.
Eurozone PMIs (Friday)
Eurozone PMIs were stronger than expected in December, with the services PMI returning to expansion while the manufacturing sector remained in contraction. This highlights the ongoing weakness in the eurozone economy after finishing last year in contraction with a composite PMI of 49.6. January expectations are for the manufacturing PMI to rise to 45.2 from 45.1 and services to slip to 51.5 from 51.6. The composite PMI is expected to remain in contraction at 49.4.
The outlook for the eurozone economy also depends on what Trump brings. More aggressive trade tariffs will slow growth and raise disinflationary pressures. The ECB has said it sees inflation cooling to the 2% target ahead of initial forecasts around midway through this year. As a result, the ECB is expected to continue cutting rates more aggressively than the Federal Reserve.
Optimism surrounding rate cuts and encouraging Chinese data has helped the ducks reach fresh all-time highs. However, that could be short-lived if Trump applies aggressive tariffs.
EUR/USD is trading around the 1.03 level, mainly on Fed-ECB diversions and some pricing in of Trump tariffs. The pair would be in danger of falling towards parity if Trump announced immediate and aggressive tariffs.
Earnings season continues
After a solid start to the Q4 earnings season, banks showed impressive profits.
Earnings season continues with figures from big names, including Netflix, Proctor & Gamble, Johnson &Johnson, and American Express, to name a few.
The S&P 500 trades at a two-week high.
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