Morning Report
January 31, 2025
“The clock is ticking and tomorrow might see the first of Trump’s long-promised trade tariffs. He repeated his threats yesterday, driving a broad rise in the US dollar, and the market is on edge to see whether he will follow through on his promise.”
Sam Cornford – Head of Trading
USD
Trump hit the headlines again last night with a fresh promise to slap 25% tariffs on Mexico and Canada by tomorrow. The broad dollar rallied as the market began to take the tariff threat more seriously – the surges in USD/CAD and USD/MXN reflects the large amount of scepticism built into pricing. There is scope for the dollar to rise further today if he follows through, because a healthy amount of that scepticism is still embedded into the dollar ahead of the impending deadline. With one more day to achieve some concessions on fentanyl and migrant flows, or for Trump to change his mind, the enactment (or not) of these tariffs is a key test for how serious the new administration is about using protectionism as the default option for achieving its foreign policy goals.
Turning to the data, growth underperformed expectations in Q4, but with a healthy 2.3% print and consumption growth at a huge 4.2%, we have few concerns about the strength of the US economy. The focus today is on the Fed-favoured core PCE inflation, which the consensus expects to tick up to 0.2%. A surprise may move the dial somewhat on Fed rate expectations, but it is the tariff story in charge for FX today.
GBP
Sterling is at the mercy of Trump and German inflation today. Trump and Fed headlines have thrown GBP/USD around, but GBP/EUR has held on to a steady upward momentum throughout this week. Housing data suggested a sharp deceleration in price growth to 4.1% in January, although not for a lack of activity after mortgage lending rose in December by the most in over two years, as homebuyers try to squeeze transactions through before the stamp duty thresholds normalise in April. Beyond that, there is little in the UK to divert traders’ attention away from trade risk until next week’s Bank of England decision.
EUR
While the ECB decision itself yesterday was wholly unsurprising, there were some interesting leaks in the hours after. Rates were cut by 25bps and the policy statement was largely a copy of the one released in December, with all the old favourites featuring in the rhetoric: ‘data-dependent’, ‘meeting-by-meeting’, and no clear forward-looking guidance. Lagarde stuck to her previous stance in the press conference, too, expressing confidence in further services disinflation and cooling wage growth. Some interesting clues came from some Reuters and Bloomberg sources stories, saying that policymakers are set to cut again in March but drop the reference to rates being ‘restrictive’ and start debating where the end point might be. A staff paper is expected on current estimates of the neutral rate on 7th February, although it is not clear yet whether the ECB may have to go even lower to prop up the economy, which stagnated in Q4. Today, French CPI held steady at 1.8%, leaving the euro a touch softer, and German inflation figures come early this afternoon.
Markets
Equities gained broadly across Europe and the US yesterday, while gold hit a fresh all-time high for the first time since October.
Main Economic Events (All Times CET)
2:00pm: German CPI
2:30pm: Canada GDP
2:30pm: US Core PCE
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