Morning Report
January 27, 2025
“There is a lot for markets to absorb this week: the lingering threat of tariffs, rate decisions from the ECB and the Federal Reserve, and a wide range of macro data on both sides of the Atlantic. This morning, it is Trump’s threats to Colombia that are giving the dollar some upward momentum.”
Tim Hallinan – Trading Director
USD
Trump’s first week was also the dollar’s worst since November 2023 as tariff fears cooled, but a narrowly averted US-Colombia trade war served as a reminder yesterday that the story is not quite over yet. Trump pulled the trade lever to threaten 25% tariffs, rising to 50% within a week, as punishment to the Colombian government, which refused to accept two military planes carrying deportees on Sunday. After some short-lived threats to retaliate, Bogota soon agreed to Washington’s demands and the threats were rescinded. COP trading has not kicked off yet, so the dollar’s gains this morning are concentrated on chief tariff-proxy, MXN (1.0%), and the risk-sensitive G10 – NOK, SEK, AUD, and NZD have all contracted by more than 0.4%.
With the 1st Feb closing in – Trump’s floated start date for Mexico and Canada tariffs – the trade story and Trump’s remarks will remain in focus this week, alongside a Federal Reserve rate decision on Wednesday, where policymakers are set to begin an extended pause. On the data side, there s Q4 GDP on Thursday and a core PCE inflation print on Friday.
GBP
A beat on the January PMIs and Trump’s benign comments on China tariffs briefly lifted sterling to the 1.25 level on Friday. Output growth improved and the composite PMI figure rose to 50.9, but details pointing to a ‘stagflationary environment’ painted a more complicated picture for the Bank of England. The survey implied job cuts at a pace not seen since the financial crisis (excluding the pandemic), which businesses linked to rising cost pressures, the NI tax hike, and the post-budget nosedive in economic sentiment. That report came soon after the GfK consumer confidence figure dropped to its lowest in over a year. The pound is down on the US tariff story this morning, and a relatively quiet week means that the US and eurozone headlines are likely to drive sterling pairs this week, ahead of a Bank of England decision next Thursday.
EUR
The euro spent some time above 1.05 on Friday in its best week since 2023, as Trump’s altogether soft tone on tariffs led traders to price out some trade risk premium. It is a data-heavy week for the eurozone and most of it is packed into Thursday, when we get consumer confidence, Q4 GDP, the unemployment rate, and an ECB decision. The market has marginally priced out some easing since Friday’s PMIs hinted towards some increasing cost pressures and at least a temporary end to the economic contraction, but the consensus is still relatively anchored to the four-cut view for 2025. With the Fed now expected to cut twice rather than once, the dollar’s 2-year yield advantage has contracted around 20bps so far this month. A cut on Thursday is priced at 98%, and so naturally the focus will be on Lagarde’s comments at the press conference and the pace of further moves.
Markets
The big story this morning centres on Chinese AI startup DeepSeek, who have announced an LLM that is said to match the capabilities of ChatGPT but at far cheaper costs. Futures in the tech-heavy Nasdaq were down significantly in Asian trading as traders began to question the huge sums being spent by the big US tech firms. Tech will remain a focus throughout the week, with Apple, Tesla, Microsoft and Meta all reporting Q4 earnings.
Main Economic Events (All Times CET)
10:00am: German ifo Business Climate
4:00pm: US New Home Sales
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