Global FX Market Summary:  Fed And ECB, US Dollar Dynamics, Trade Policy Uncertainty 17 January 2025

The Fed focuses on inflation control with slower easing, while the ECB prioritizes eurozone growth, maintaining rate cuts amid uncertainties.

Monetary Policy Divergence Between the Fed and ECB

The Federal Reserve (Fed) and European Central Bank (ECB) are currently adopting contrasting approaches to monetary policy, creating a significant divergence that is shaping market dynamics. The Fed has shifted to a slower pace of easing, with its primary focus on controlling inflation. In December, the Fed reduced interest rates to a range of 4.25%–4.50%, signaling cautiousness moving forward due to persistent inflationary risks and a gradual softening of the labor market.

In contrast, the ECB remains committed to supporting growth in the eurozone economy, particularly in Germany. Despite a slight uptick in inflation, the ECB continues its rate-cutting strategy, prioritizing economic stability. ECB Vice President Luis de Guindos has emphasized the need for caution, pointing to ongoing geopolitical tensions, global trade uncertainties, and fiscal policy challenges as significant factors influencing their decisions.

US Dollar Dynamics and Investor Sentiment

The performance of the US Dollar (USD), as reflected in the US Dollar Index (DXY), showcases a complex picture of investor sentiment influenced by fluctuating economic data and Federal Reserve signals. Recently, weaker-than-expected US Retail Sales and Initial Jobless Claims data, combined with dovish remarks from Federal Reserve officials, have contributed to softening the Greenback.

However, this trend is not uniform. Stronger economic indicators, such as robust housing starts and better-than-expected economic data from China, have intermittently boosted demand for the USD. This highlights the market’s sensitivity to evolving economic metrics and the delicate balance investors must strike in interpreting these developments.

Trade Policy Uncertainty Under the Incoming US Administration

The proposed trade policies of President-elect Donald Trump have introduced a layer of uncertainty with potential far-reaching implications for global markets. The reintroduction of tariffs, a key component of Trump’s trade strategy, could lead to increased inflation in the United States. This, in turn, might compel the Federal Reserve to adopt a more aggressive monetary policy stance, potentially strengthening the USD. Such a development could exert additional downward pressure on the EUR/USD exchange rate.

Beyond its direct impact on currency markets, the uncertainty surrounding these trade policies is influencing broader market sentiment. Investors are approaching the transition to the new administration with caution, reflected in shifts in risk appetite across various asset classes. The lead-up to the inauguration has been characterized by restrained behavior as markets seek clarity on the direction of fiscal and trade policies.

Top economic events for next week:

• January 20, 2025 00:00:00 – Presidential Inauguration (HIGH, USD): The inauguration of a new or re-elected president is a major political event with significant implications for US policy, both domestically and internationally. This can have a substantial impact on market sentiment and the US dollar.
• January 21, 2025 07:00:00 – Claimant Count Change (HIGH, GBP): This UK data point measures the change in the number of people claiming unemployment-related benefits. A significant increase suggests a weakening labor market, which can negatively impact the British pound.
• January 21, 2025 07:00:00 – Employment Change (3M) (HIGH, GBP): This figure shows the change in employment over the past three months in the UK. Strong employment growth is generally positive for the economy and the currency.
• January 21, 2025 07:00:00 – ILO Unemployment Rate (3M) (HIGH, GBP): The International Labour Organization’s unemployment rate provides a standardized measure of unemployment in the UK. A rising unemployment rate is a key indicator of economic weakness.
• January 21, 2025 13:30:00 – BoC Consumer Price Index Core (YoY) (HIGH, CAD): This measures the year-over-year change in core consumer prices in Canada, excluding volatile items like food and energy. It’s a key indicator of underlying inflation and influences the Bank of Canada’s monetary policy decisions.
• January 21, 2025 13:30:00 – Consumer Price Index (YoY) (HIGH, CAD): The overall Consumer Price Index measures the year-over-year change in the price of a basket of goods and services. High inflation can lead to interest rate hikes, impacting the Canadian dollar.
• January 21, 2025 21:45:00 – Consumer Price Index (QoQ) (HIGH, NZD) and Consumer Price Index (YoY) (HIGH, NZD): These figures measure inflation in New Zealand. Like in Canada, rising inflation can prompt the central bank to raise interest rates, affecting the New Zealand dollar.
• January 22, 2025 15:15:00 – ECB’s President Lagarde speech (HIGH, EUR): Speeches by the European Central Bank President are closely watched for insights into the central bank’s current thinking on monetary policy and the economy. Her words can significantly move the euro.
• January 24, 2025 03:00:00 – BoJ Interest Rate Decision (HIGH, JPY), BoJ Monetary Policy Statement (HIGH, JPY), and BoJ Press Conference (HIGH, JPY): The Bank of Japan’s interest rate decision, accompanying statement, and press conference are major events for the Japanese yen. Changes in monetary policy or forward guidance can cause substantial currency volatility.
• January 24, 2025 08:30-09:30 – HCOB/S&P Global/CIPS Composite/Manufacturing/Services PMI’s (HIGH, EUR and GBP): These Purchasing Managers’ Index (PMI) releases provide a snapshot of business activity in the Eurozone and the UK. They are leading indicators of economic health. Readings above 50 suggest expansion, while readings below 50 indicate contraction. Because they come out in quick succession and cover all major sectors they have a high impact on the EUR and GBP.

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