United States
Recent US economic data has surpassed expectations, projecting a GDP growth of around 3% for Q4. With the guidance from Federal Reserve member Christopher Waller, speculation is building around a potential rate cut in the first half of the year, potentially as soon as the June FOMC meeting. As Martin Luther King Jr. Day approaches, marking the start of the week, the economic calendar features the preliminary January PMI, regional Fed surveys, and existing home sales data. President Trump’s second inauguration is set for Monday, with rumors suggesting numerous executive orders will be announced on “day one,” including potential tariffs, which could cause further market volatility. The dollar continues to be supported by the strong US economic performance, alleviating pressure on the Federal Reserve to ease monetary constraints. Additionally, the Dollar Index has shown robust consolidation, keeping above its 20-day moving average and showing signs of continued strength.
Eurozone
The Eurozone faces several challenges, including Russia’s aggressive stance, trade pressures from China, US tariff threats, and internal political instability. The expectations surrounding the ECB leaning towards reducing the deposit rate by at least 75 basis points in the first half of 2025 continue to weigh on the euro. Germany’s ZEW survey is due on January 21st. It reveals a deteriorating assessment of the current situation throughout 2024, while the expectations component shows signs of optimism. The preliminary January PMI will also be released at the end of the week, indicating whether the composite remains negative, as it has been for much of the second half of 2024. Despite a minor gain last week, the euro’s overall position remains fragile, challenged by growth concerns and interest rate differentials.
United Kingdom
Economic concerns in the UK continue to persist, with skepticism lingering over the government’s fiscal credibility since the Autumn budget. Despite a temporary pullback in UK gilt yields and the prospect of softer inflation data, sterling remains under pressure. The upcoming employment report will be a significant event, as policymakers focus on earnings growth due to its influence on inflation. Sterling’s exchange rate against the dollar remains volatile, experiencing fluctuations due to data releases and broader market dynamics. As wage pressures and economic uncertainties loom, the Bank of England’s policy meeting on February 6th anticipates a 90% chance of a rate cut.
China
China’s economic performance has been consistent with its official targets. Tensions with the US have escalated following new sanctions and a Section 301 investigation initiated by the Biden administration. China has responded with a probe into the alleged dumping of subsidized semiconductor chips under the US Chips Act. With a looming Chinese New Year holiday, the PBOC may inject additional liquidity into the banking system. Meanwhile, the yuan remains under pressure, attributed to a strong US dollar and China’s less-than-stellar economic performance. The PBOC aims for stability in the yuan’s exchange rate to prevent the US from gaining an exchange rate advantage.
Japan
In Japan, the exchange rate remains sensitive to movements in the US 10-year yield and speculation regarding the Bank of Japan’s policy path. There’s an expectation of a rate hike by the BOJ, with an economic forecast update expected in the upcoming meeting. Japan’s economic indicators show moderate improvement, with the PMI rising toward the end of 2024. As the yen reacts to both domestic policy signals and international developments, the BOJ’s upcoming meeting will be under close scrutiny. The yen’s response to any unexpected decisions by the incoming US administration could reveal further dynamics.
Canada
The Canadian dollar gained a reputation as one of the best G10 performers against the US dollar, despite its initial softness at the start of the year. The relationship with US bond yields, particularly the two-year spread, tends to influence its performance. The upcoming Bank of Canada meeting has a potential rate cut on the cards, backed by a recent strong employment report. Business surveys, inflation data, and retail sales reports are key focal points for the coming days. The Canadian dollar’s interaction with oil prices remains statistically insignificant, yet broader market dynamics continue to impact its value against the US dollar.
Australia
The Australian dollar’s recent decline is closely linked with movements in global interest rate differentials, especially with the US. Trade data and PMI releases shape economic expectations in Australia. The currency, which faces technical challenges, continues to show signs of weakening, with its performance impacted by broader market sentiment and economic data releases. Despite recent lows, potential for recovery exists, contingent on both domestic developments and international market trends.
Mexico
Under the administration of President Sheinbaum, Mexico is navigating the complexities of international trade rhetoric, particularly from the US concerning tariffs over Fentanyl and migrant flows. The Mexican economy shows signs of a slowdown, allowing the central bank room to consider rate cuts, aligned with recent benign inflation data. The upcoming GDP and CPI reports will play a crucial role in shaping monetary policy expectations ahead of Banxico’s meeting. The peso continues to face upward pressure from the dollar, extending its advance for the fourth consecutive week and confronting broader challenges from ongoing trade dynamics.
