January 30, 2025

“After cuts from the Riksbank and the Bank of Canada, and a hawkish hold from the Federal Reserve yesterday, the ECB is set to follow up with its first rate cut of 2025. Q4 GDP growth data today is also set to reinforce the macroeconomic divergence between the US and the eurozone that is keeping the dollar so strong.”

Tim Hallinan – Trading Director

USD

The Federal Reserve’s hawkish rate hold did little to unsettle the market’s expectations for rate cuts this year. The omission of the line saying that inflation has made further progress prompted a short-lived bounce in the dollar, but Powell’s relatively upbeat press conference left FX broadly unchanged overall. The language change was clarified to be a simple ‘clean-up’, rather than a relevant signal, and while he emphasised that the strength of the economy and the jobs market mean they do not need to be in a hurry to cut further, he did seem pleased about the recent inflation data, particularly with regards to the steady decline in OER (Owner’s Equivalent Rent – the imputed measure of housing costs for owners). The market remains firm on its bets for two further cuts later in the year.

The main event for the US today is a Q4 GDP print, where the market is expecting a solid 2.5% annualised pace of growth. That should reinforce the US exceptionalism narrative that has driven the dollar rapidly higher since Q4. The Q4 core PCE inflation figure is often as important as the growth figure itself, and this time it is expected to tick up from 2.2% to 2.5%.

CAD

The Fed barely made mention about the tariff story, but it was almost the sole focus of the BoC press conference. Forward guidance was ditched and there were some humble admissions that accompanied the latest 25bps rate cut, with the forecasts subject to ‘more-than-usual’ uncertainty due to the ‘rapidly evolving policy landscape’. According to Gov Macklem, ‘there is a lot we don’t know’ and ‘even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts’. In short, the overhanging threat of 25% tariffs means that they simply do not know where rates are headed this year. The only clear conclusion was that a trade war means higher inflation and lower growth – a combination that monetary policy cannot resolve simultaneously. The downside risks for CAD remain strong, and interestingly only 1% of the 7% rally in USD/CAD was pinned down to rate decisions in the report, with the rest attributed to a tariff risk premium. It is hard to agree with that conclusion, but it nonetheless highlights their level of concern.

GBP

Sterling had another good day on the crosses yesterday, as confidence in the economy and the gilt market continue to recover. As expected, Reeves championed stability, reform, and investment and backed a third runway at Heathrow, an Oxford-Cambridge ‘Silicon Valley’, and fundamental reforms to welfare and the planning system. For markets, the upbeat tone is a welcome change from the persistent gloom that came from ministers last year about the fiscal inheritance and the measures they had chosen to ameliorate it. With no other obvious reason for the speech, it is likely that flipping the narrative was a central goal. The gilt market’s concern is not over by any means, however, and the Resolution Foundation has said that Reeves meeting her budget rules is ‘on a knife edge’ thanks to the rising interest bill. The only data today is on mortgage approvals and lending this morning, so the focus will be on US growth and the ECB decision.

EUR

A fifth ECB rate cut this afternoon is the highlight of a busy day for the eurozone calendar. So far, French GDP disappointed with a -0.1% drop in the fourth quarter, and we have German data followed by the eurozone-wide figures this morning. Full year growth is expected at 1.0%, driven largely by strong showings in what used to be the growth ‘periphery’ in the south – Spain, Italy, Portugal, and Greece. It is the two largest economies – France and Germany – that are dragging on activity, as both face structural and cyclical headwinds, and political turmoil. Of course, weakened growth prospects are the main reason why the market is fully pricing in a 25bps rate cut from the ECB today, and then a further three before the end of 2025. With the consensus expectation that rates terminate at 2%, the main focus today may be on how low rates do eventually go, and whether policymakers see any need to take them below neutral.

Markets

The tech sector dragged on the US equity market yesterday, undoing some of the post-DeepSeek recovery from Tuesday. Nvidia fell over 4% and Frankfurt-traded Microsoft shares are down 4.5% this morning after a downbeat cloud forecast, though Meta is up after beating expectations. European stocks made broad gains yesterday, meanwhile.

Main Economic Events (All Times CET)

10:30am: UK Mortgage Approvals
11:00am: Eurozone Q4 GDP, Consumer Confidence, Unemployment
2:15pm: ECB Rate Decision
2:30pm: US Q4 GDP, Jobless Claims

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