January 17, 2025

“The focus for markets now is squarely on Trump’s inauguration on Monday, where we will get some concrete policy choices in his day one acts. There is a lot of two-way risk here, as some strong statements on tariffs could lift the dollar higher, while a more benign set of events could lead to a sell-off or even an anti-climax.”

Tim Hallinan – Trading Director

USD

The dollar once again held firm despite there being several reasons to move lower yesterday, and Monday’s inauguration might have something to do with it. Retail sales and unemployment claims skewed to the weaker side of the forecasts, and the Fed’s Waller suggested that three or four rate cuts might be possible this year. The market has added 15bps in easing bets this year over the week so far, but the high event risk going into Trump’s first day as President has had the dollar trading with a premium this year. While Bessent’s Senate hearing had little direct impact on the dollar, there were some interesting points made about his support for tariffs, a few warnings on the ‘economic calamity’ that would come with allowing the 2017 tax cuts to expire, a willingness to ramp up Russian oil sanctions, and some reassuring words on keeping the Fed independent. Most appear to hope that, as in his previous administration, more orthodox figures like Bessent will act as a counterweight to Trump’s more extreme calls.

While traders wait for the inauguration, housing starts and industrial production data are expected to be relatively strong this afternoon. GDP data out of China came in at 5.4% for 2024 this morning, exceeding the ruling party’s 5% target, although neither the yuan nor Chinese equities seem to be benefitting because a) there is a lot of scepticism surrounding the accuracy of the data, and b) Trump’s tariff crosshairs will be directed first at China next week.

GBP

The pound is struggling again this morning after a 0.3% contraction in retail sales last month compounded the bad news for the UK economy. Sterling is the worst performing G10 currency by a wide margin so far in 2025, having dropped over 2.5%, and it is not clear where it finds the catalyst for a rebound in the near term – except perhaps against the dollar if Trump enters his second term quietly. Governor Bailey is expected to speak this evening and the next major piece of data is on wage growth next Tuesday.

EUR

The US is still in the driving seat for the euro, and we are unlikely to see fireworks today as traders brace for Monday. The ECB released its minutes from the December meeting yesterday, where policymakers had heavily discussed a 50bp rate cut and admitted that the already soft growth forecasts were probably too optimistic, given that they had not yet incorporated the adverse impacts on trade that are likely to come from US policy this year. ECB speakers have stuck to a dovish tone throughout the week and markets are back to fully pricing four rate cuts for 2025. Today, we get a final estimate for December CPI, and several more speeches from he likes of Nagel and Centeno.

Markets

Risk appetite has been fragile in the US as Monday’s inauguration looms, with stocks in a holding pattern before Trump’s day one actions as President. European stocks have made some strong gains this week, however, with the Eurostoxx 50 and the DAX both up nearly 2%.

Main Economic Events (All Times CET)

3:00am: Chinese GDP
8:00am: UK Retail Sales
2:30pm: US Industrial Production

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