MarketPulse | Jan 29, 2025 12:49AM ET
This week, we have three of the world’s most significant central bank’s interest rate and monetary policy decisions: the Federal Reserve, the European Central Bank, and the Bank of Canada. The central bank’s decisions follow President Trump’s executive orders and additional tariff threats to Canada, Mexico, China, and other countries.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
The Federal Open Market Committee (FOMC) interest rate decision is the FED’s first meeting in 2025 and the third after Trump’s election victory. The latest FOMC minutes showed that policymakers were concerned about a slower disinflation process than previously anticipated and about the impact of tariffs on inflation. According to the CME FedWatch tool and Bloomberg’s analyst surveys, the expectations for a 25 basis point cut for the January 29th FOMC meeting currently stands at 0.5%, compared to 70% just before the elections.
(Chart). The surveys also reflected that traders share the FED’s official view of two x 25 bps interest rate cuts in 2025. Before the US elections, the surveys showed that participants looked at 3 – 4 interest rate cuts of 25 bps each in 2025 by the FOMC. Traders will pay attention to Jerome Powell’s comments on how tariffs may impact inflation and how the FED would react.
https://ec.europa.eu/eurostat/en/
This week, markets are looking forward to the European Central Bank’s interest rate and monetary policy decision, scheduled for January 30th, 2025. According to Bloomberg analysts’ surveys, 97.2% of participants expect the ECB to cut interest rates by 25 basis points. The surveys also suggest that participants anticipate somewhere between 3 – 4, 25 bps cut in 2025. The EU inflation rate (Eurozone HICP) Y/Y remained at nearly 2.4% throughout 2024 but dropped to 1.72% in September. However, it rose to its 2024 average of 2.7% and has remained there since then.
Last week, President Trump vowed to impose tariffs on the EU; Trump said, “We have a $350 Billion deficit with the European Union, the EU, and other countries also had troubling trade surpluses with the United States”. “The European Union is very bad to us; they are going to be in for tariffs. It’s the only way you’re going to be in for tariffs.” On Wednesday of last week, ECB president Christine Lagard said, “Europe must be prepared and anticipate the potential trade tariffs of newly inaugurated US President Donald Trump.” Lagarde also said she “Expects Trump’s tariffs to be more selective and focused.”
Following Trump’s EU tariff comments, the EUR/USD exchange rate retreated below the resistance level of 1.0445 to 1.0390; however, it remained at this level as traders continued to digest the tariff’s impact on the exchange rate. The divergence between the EU and US plans for interest rate cuts in 2025 may add more pressure on the Euro; however, this remains subject to further details on how the tariff plans develop and its details.
Markets remain on high alert, and volatility is higher than usual as traders react to mixed messages about tariffs. During his election campaign, President Trump proposed a 25% tariff on Canada and Mexico, the USA’s largest trading partners, and a 10% tariff on China and the EU. So far, no formal tariff decisions have been made. The president mentioned multiple times that the primary purpose of tariffs is for the US to have fairer trade agreements with its partners, additional border security, and to block the flow of the Fentanyl drug from China.
Although Trump didn’t impose tariffs on day one as promised during the election campaign on Monday, hours after the inauguration speech, Trump renewed his tariff threats to Canada, Mexico, and China. Market reaction was short-lived as traders continued to wait for more details on how the Trump administration would impose tariffs and which products could be affected. Canada and Mexico have reassured the Trump administration that they will work harder to ensure the US borders are secure per Trump’s request; however, the two nations and China have prepared a list of American goods on which they may impose retaliatory tariffs.
Tariffs are considered an additional cost, impacting goods and services prices and leading to higher inflation. The first mention of tariffs pushed the US dollar higher against most major currencies. EUR/USD dropped to the 1.0180 range, almost to parity. USD/CAD rose above 1.4500, breaking out and closing above critical resistance levels, which held firm in 2015 and again in 2020. However, the price moves didn’t last long as markets continued to wait for more details. EUR/USD rose back above 1.0420, and USD/CAD fell to 1.4360.
Tariffs remain a concern for FX traders as comments continue to impact exchange rates. On Monday, the dollar rose against all its peers. The Japanese Yen, the Euro, and the Canadian Dollar instantly weakened versus the dollar after comments from US President Donald Trump and Treasury Secretary Scott Bessent highlighted concerns about tariffs..
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In conclusion, this week’s central bank decisions and ongoing tariff threats have created a volatile and uncertain market environment. While the FOMC is expected to hold rates steady, the ECB is likely to cut rates amid concerns about US tariffs on the EU. The overall market sentiment remains cautious as investors await further clarity on the trade situation. The technical outlook for EUR/USD and USD/JPY suggests continued volatility, with potential support and resistance levels identified. Traders should closely monitor central bank announcements and news related to tariffs to navigate these uncertain times.
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