• The two-day FOMC meeting ends today with a widely expected hold; Chair Powell’s post meeting press conference will be key; BOC is expected to cut rates 25 bp to 3.0%; Brazil is expected to hike rates 100 bp to 13.25%; Chile delivered a hawkish hold
  
• The two-day ECB meeting began today; eurozone money growth slowed; Riksbank cut rates 25 bp to 2.25%, as expected
  
• The minutes of the December BOJ meeting were released; Australia Q4 CPI data ran cool; RBNZ Chief Economist Conway stuck to bank’s dovish guidance

The dollar is firm ahead of the FOMC decision. DXY is trading higher for the second straight day near 108.094 as markets brace for a hawkish hold (see below). USD/JPY is trading lower near 155.45 as markets shrug off December BOJ minutes (see below). Sterling is trading lower near $1.2420 and the euro is trading lower near $1.04. AUD is the worst performing major after soft Q4 CPI data (see below), while SEK shrugged off the Riksbank’s 25 bp rate cut. More and more tariff noise is likely in the coming days and weeks but we continue to look through that and focus on the underlying fundamental backdrop, which remains unchanged. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar. Today’s G-10 central bank decisions should underscore the monetary policy divergences that favor the dollar.

AMERICAS

The two-day FOMC meeting ends today with a widely expected hold. We see some risks that the Fed’s decision is not unanimous after Governor Waller went full dove ahead of the media blackout. However, we believe he is in the clear minority, with most other officials preferring to keep policy on hold until the economic outlook becomes clearer. There are no updated Summary of Economic Projections, as the next one will be published in March.

Chair Powell’s post meeting press conference will be key. We expect Powell to emphasize again that the FOMC can be “more cautious as we consider further adjustments to our policy rate.” Of note, the next cut is now fully priced in for June and a second hike in December is now nearly priced in. Both are slightly more dovish than previous pricing but it will all come down to the data.

Growth remains robust. The Atlanta Fed's GDPNow model is now tracking Q4 growth at 3.2% SAAR vs. 3.0% previously and will be updated again today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 2.6% SAAR and Q1 growth at 3.0% SAAR and will be updated Friday. In between, we get the first official read for Q4 GDP tomorrow. Consensus sees growth of 2.7% SAAR vs. 3.1% in Q3, driven in large part by strong personal consumption of 3.2% SAAR expected vs. 3.7% in Q3. Bottom line: above-trend growth and elevated inflation will keep the Fed on hold for now.

Conference Board consumer confidence unexpectedly weakened. Headline dropped to 104.1 in January vs. 105.7 expected and a revised 109.5 (was 104.7) in December. Still, the index remains within the same narrow range that’s held throughout the past two years. The details were soft. The present situation index fell to a 4-month low of 134.3 vs. a revised 144.0 (was 140.2) in December, while the expectations index fell to a 4-month low of 83.9 vs. a revised 86.5 (was 81.1) in December. Of note, the labor index (jobs plentiful minus jobs hard to get) declined to a 4-month low of 16.2 vs. 22.2 in December.

Bank of Canada is expected to cut rates 25 bp to 3.0%. The bank is expected to cut rates 25 bp to 3.0% following two consecutive 50 bp cuts. Inflation is stabilizing around 2% and business sentiment remains subdued but has improved. Governor Macklem effectively ruled out additional jumbo cuts, pointing out that officials will consider further rate cuts but likely at a slower pace. Updated macro forecasts will be released and could provide some clues to the bank’s rate path. Markets are now pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 2.5%. USD/CAD has scope to overshoot to fresh cyclical highs due to FED/BOC policy divergence, risk of all-out trade war between Canada and the U.S., and the Trump administration’s focus on lowering energy prices.

Brazil COPOM is expected to hike rates 100 bp to 13.25%. At the last COPOM meeting December 11, the central bank unexpectedly hiked rates 100 bp to 12.25% and promised more jumbo cuts ahead. Most were looking for a 75 bp move then. The bank stated that “In light of a more adverse scenario for inflation convergence, the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected.” The swaps market is pricing in 400 bp of total tightening over the next 12 months.

Chile central bank delivered a hawkish hold. Rates were kept steady at 5.0% and the bank warned that “Inflation risks have increased, which reinforces the need for caution.” The statement noted that “the Board will evaluate the future movements of the monetary policy rate by considering the evolution of the macroeconomic scenario and its implications for the convergence of inflation.” This contrasts with the December statement, which highlighted the possibility of rate cuts “in the coming quarters.” The swaps market is not pricing in any further easing for this cycle.

EUROPE/MIDDLE EAST/AFRICA

The two-day European Central Bank meeting began today. It is widely expected to cut rates 25 bp. We expect the ECB to stick to its data-dependent guidance by reiterating it “is not pre-committing to a particular rate path.” President Lagarde’s post-meeting conference may offer more near-term policy guidance. Watch out to see if Lagarde re-emphasizes the need for a “very cautious” easing cycle and/or acknowledge if there were once again some discussions around a proposal for a 50 bp cut. There are no new macroeconomic projections due at this meeting as the next updates will be published in March.

Eurozone money growth slowed. Broad money (M3) growth unexpectedly decreased to 3.5% y/y in December vs. 3.9% expected and a two-year high of 3.8% in November. Overall, monetary dynamics are improving but remain very weak by historical standards. Still, the data do not move the dial on ECB rate expectations as market continue to price in 100 bp of total easing over the next 12 months.

Riksbank cut rates 25 bp to 2.25%, as expected. The bank said that cut was justified “given that the risk of inflation becoming too high is limited, at the same time as economic activity is weak.” According to the post-meeting statement “The Executive Board assesses that the forecast for the policy rate made in December essentially holds, but is prepared to act if the outlook for inflation and economic activity changes.” Recall that in December, the Riksbank projected the policy rate to bottom at 2.25%. In contrast, markets continue to price in one more 25 bp cut that would take the policy rate to 2.0% over the next 12 months. We concur, as the benign inflation backdrop suggests it’s too soon for the Riksbank to pause easing. Bottom line: Fed/Riksbank policy divergence favors a higher USD/SEK.

ASIA

The minutes of the December Bank of Japan meeting were released. The minutes are outdated following last week’s 25 bp hike to 0.50%. In December, the BOJ left the policy rate unchanged at 0.25% and the minutes showed the board discussed how high it should raise the policy rate in the future. One member cautioned the BOJ “would need to slow the pace of policy interest rate hikes” once the policy interest rate approached the neutral interest rate. BOJ staff estimates the nominal neutral rate to be in a range of 1.0-2.5%. The account of the January meeting will be released next Monday. Markets continue to price in the policy rate to peak near 1.0% over the next two years. This seems about right as the BOJ expects inflation to stabilize around its 2% target in 2026. Bottom line: the BOJ shallow policy normalization cycle is an ongoing headwind for JPY.

Australia Q4 CPI data ran cool. Q4 headline came in a tick lower than expected at 2.4% y/y vs. 2.8% in Q3 and was the lowest since Q1 2021, while trimmed mean came in a tick lower than expected at 3.2% y/y vs. a revised 3.6% (was 3.5%) in Q3 and was the lowest since Q4 2021. Of note, December headline picked up two ticks as expected to 2.5% y/y, while trimmed mean fell half a percentage point to 2.7% y/y. We believe the soft CPI data locks in a rate cut at the next meeting February 18. Indeed, markets are now fully pricing in a cut vs. 75% odds last week.

RBNZ Chief Economist Conway stuck to bank’s dovish guidance. Conway noted that “easing domestic pricing intentions and the recent drop in inflation expectations help open the way for some further easing” and added that he anticipates “interest rates to ultimately settle around neutral.” The RBNZ estimates the long-term nominal neutral interest rate to lie between 2.5-3.5%. In line with RBNZ guidance, markets continue to price in another 50 bp cut to 3.75% in February and the policy rate to bottom near 3.0% over the next 12 months. The RBNZ/Fed policy divergence remains drag for NZD.