January 14, 2025

“The dollar pushed on to fresh 26-month highs yesterday, but another report suggesting that Trump tariffs will be softer and more measured saw it shed some gains overnight. Today, the focus is on inflation data on the US.”

Sam Cornford – Head of Trading

USD

Tariff speculation knocked the dollar off its two-year highs in a kneejerk move overnight, this time following a Bloomberg report suggesting that Trump aides are in the early stages of planning only a gradual phase-in that increases duties in 2-5% increments each month. The market will no doubt be on the lookout for a rebuke from Trump today, who is ostensibly yet to see the plans, and on the data side the focus is on the first of two inflation prints with a PPI report this afternoon. The consensus is for an unchanged 0.4% headline month-on-month figure and an acceleration in the core measure from 0.2% to 0.3% – that should be enough to keep the market content with a firm dollar and the extremely conservative easing bets for 2025. We also get the NFIB Small Business Optimism index, where we have seen a sharp pickup in sentiment over the last quarter. The hiring plans subindex is a closely watched measure here, thanks to its predictive power for non-farm payrolls, and it rose to the highest since mid-2023 at 19.0 last month. Look out for speeches from Schmid and Williams at the Fed too.

GBP

The pound found a floor at the 1.21 level yesterday morning and has since edged higher tentatively ahead of a key CPI release early tomorrow. The UK government bond market continues to draw attention, and PM Starmer was forced to come out in support of the Chancellor yesterday, reassuring markets that she would remain in her job until the next elections. A speech from Starmer on growth and the future of AI fell largely flat given the context of fiscal sustainability concerns and the growing consensus that Reeves will need to announce some spending cuts in March. Tomorrow morning’s CPI print is expected at 2.6%, but as always it is the estimates for core (3.4%) and services (4.8%) inflation that are critical for sterling. The report will be a test of the direction of the relationship between yields and the currency – higher borrowing costs are normally good for the pound, but that has not been the case this month as it squeezes the government’s fiscal headroom.

EUR

The euro has primarily been following dollar movements as the US tariff and inflation stories dominate. The ECB’s Holzmann has given some hawkish counterarguments this morning to Lane’s dovish commentary from yesterday, reminding the market that core inflation remains closer to3% than 2%. The other event worth looking towards today is French PM Bayrou’s speech expected this afternoon, where he is expected to detail his watered-down pension reforms that he is using to gain support from the left and eventually to finally get a budget through.

Markets

Equity trading was relatively soft again yesterday, with the S&P 500 temporarily dropping below pre-election levels before squeezing out a 0.2% gain on the session. The main European gauge fell 0.5%, but futures are pointing to a strong open this morning following reports that Trump’s tariffs may be phased in gradually. French CAC 40 futures are up 1% and Eurostoxx 50 futures are 0.4% higher.

Main Economic Events (All Times CET)

12:00pm: US NFIB Small Business Index
2:30pm: US PPI Inflation

To learn more about Ballinger Group, please visit our website or our LinkedIn page.