January 29, 2025

“Three central bank decisions – from Sweden, Canada, and the US – means that the market’s focus can finally return to monetary policy after several weeks of following Trump. The Fed is widely expected to hold rates steady, but the market is looking for an interesting press conference.”

Tim Hallinan – Trading Director

USD

The dollar is consolidating yesterday’s gains as markets switch their focus from trade policy to monetary policy ahead of the January Federal Reserve decision this evening. After 100bps in easing in the final three meetings of 2024, there is a solid consensus that today will be the beginning of a multi-month pause, as a result of a) a lack of further progress on inflation, b) some stabilisation in the cooling of the labour market, and c) the potential inflationary implications of Trump’s tariff and tax cut policies. Powell’s communication in the press conference is the market mover here – expect him to be quizzed on the timing of further cuts, Fed independence in a Trump presidency, and tariffs. The market is pricing in two rate cuts this year, so any indication of a high bar for further easing could boost the dollar, while a dovish surprise could send EUR/USD back closer to 1.05. It is worth watching out for any response from Trump too – remember that he wants the Fed to start bringing rates lower and is no fan of Powell.

To the north, the Bank of Canda is widely expected (94%) to deliver another 25bps rate cut this afternoon before holding steady in March. The BoC has come far already – today’s cut will take its rate down to 3% – and policymakers have indicated that a slower approach is necessary now that they are inching closer to the terminal rate. Expect lots of questions on Trump’s tariff threats and how much further rates have to go.

GBP

A speech from the Chancellor is the highlight for the pound today, which continues to claw back its losses against the euro from during the gilt sell-off earlier in the month. Reeves is set to strike a more upbeat tone as she announces the latest measures that the government hopes will kickstart growth in the UK, including plans for an Oxford-Cambridge ‘growth corridor’ that creates ‘Europe’s Silicon Valley’, the construction of nine water reservoirs, and an overhaul to the planning system. Anything that helps to undo the slump in confidence since last summer could be positive for the pound. BoE Governor Bailey also speaks this afternoon on the Financial Stability Report in front of a Treasury Committee, though it is unclear how much we will learn about monetary policy.

EUR

Until tomorrow, it is still all about the US for the euro. The FT report about Bessent’s plans for monthly tariff increases drove the bulk of the losses yesterday, alongside Trump’s affirmation that tariffs would rise much higher than 2.5%. That the yield differential moved in favour of the euro suggests that this was purely a risk-related move rather than any impact on central bank pricing. The eurozone is in the limelight tomorrow, when we get GDP, consumer confidence, and unemployment data, followed by a likely ECB rate cut in the afternoon.

In Sweden, the Riksbank cut its rate by 25bps this morning, to 2.25%, and suggested that it may be the final cut of the cycle. The market isn’t convinced, however, and sees a good chance of at least one more before mid-2025 given the prolonged undershoot of the 2% inflation target and only a tentative recovery in the economic data.

Markets

The equity market rebounded yesterday after the DeepSeek sell-off from Monday. The Nasdaq recovered just over half of its losses, rising by 1.6% by the close.

Main Economic Events (All Times CET)

1:30am: Australian CPI
9:30am: Riksbank Rate Decision
3:45pm: Bank of Canada Rate Decision
8:00pm: Federal Reserve Rate Decision

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