- Fed Chair Jay Powell will stress again that the Fed is in no hurry to resume easing and perhaps offer insights on the impact of tariffs on Fed policy.
- EU pledges “firm and proportionate” countermeasures to the US decision to impose tariffs on European steel and aluminum. EUR shrugs off tit-for-tat tariffs.
- BOE Catherine Mann unpacked the reasoning behind her surprise dovish policy stance change.
USD is trading in a narrow range against most major currencies. US equity futures are modestly lower after yesterday’s upbeat session. US Treasury yields ticked-up slightly across the curve. President Donald Trump confirmed that a 25% tariff on all steel and aluminum imports to the US will go into effect on March 12. President Trump said Australia may be exempt from those tariffs which offered AUD some support. CAD faces further downside pressure because Canada is by far the top supplier of steel and aluminum to the US (see table below). President Trump also reiterated he would unveil new reciprocal tariffs over the next two days on a wide range of countries that tax US imports.
In the meantime, European Commission President Ursula von der Leyen released a statement saying, “I deeply regret the US decision to impose tariffs on European steel and aluminum exports…Unjustified tariffs on the EU will not go unanswered — they will trigger firm and proportionate countermeasures.”
An intensification of protectionist policies is a downside risk to global growth, but the US will likely fare better than all other major economies. We sympathize with Professor Michael Pettis view that in an economy, like the US, suffering from excess consumption, low savings, and a declining manufacturing share of GDP, tariffs would redirect a portion of demand toward increasing the total amount of goods and services produced at home. That would lead US GDP to rise, resulting in higher employment, higher wages, and less debt.
US
The spotlight today is on Fed Chair Jay Powell testimony before the Senate Banking Committee (10:00am New York). Powell will stress again that the Fed is in no hurry to resume easing. Indeed, the New York Fed survey of consumer expectations contributed to evidence that progress on inflation may be stalling well above 2%. Inflation expectations were unchanged at 3.0% at both the one- and three-year-ahead horizons in January. But median five-year-ahead inflation expectations rose by 0.3pts to 3.0%.
Bottom line: the slower US disinflationary process and solid economic activity suggest the Fed easing cycle will be shallower than is currently priced-in which is USD bullish. Fed funds futures currently imply 75% odds the Fed delivers 50bps of cuts in 2025 and the FOMC projects 50bps of rate cuts this year.
Ahead of Powell’s testimony, Cleveland Fed President Beth Hammack (2026 FOMC voter) speaks on the economic outlook (8:50am New York). Later, New York Fed President John Williams gives keynote remarks (3:30pm New York) and Fed Governor Michelle Bowman speaks on bank regulation (no Q&A) (3:30pm New York).
The US January NFIB small business optimism index undershot expectations but is still indicative of an encouraging growth outlook. The index fell from a six-year high at 105.1 in December to 102.8 in January (consensus: 104.7).
UK
GBP is a little lower versus USD and EUR. Former Bank of England (BOE) hawk Dr. Catherine Mann unpacked the reasoning behind her abrupt policy stance change last week. According to Mann a weakening jobs market, slowing consumer demand and a return to normal in the CPI microdata “allowed me to look through the inflation hump, and vote to cut by 50 basis points.”
Dr. Mann added that a 50bps rather than a 25bps cut was necessary to materially ease financial conditions. Still, Dr. Mann stressed that monetary policy “would need to remain restrictive for some time […] and Bank Rate would likely stay high given structural persistence and macroeconomic volatility.” The comments are consistent with Dr. Mann’s activist monetary policy approach. This approach argues for easing monetary policy fast and forcefully once inflation persistence has been purged.
In contrast, the majority of BOE MPC members, including Governor Andrew Bailey, favor “a gradual and careful approach” to further rate cuts. Bailey delivers a speech today titled “Are we underestimating changes in financial markets” (7:15am New York). Overall, the UK’s stagflation backdrop can further weigh on GBP. The BOE slashed Q1 2025 real GDP forecast to 0.1% q/q vs. 0.4% previously while Q1 2025 CPI inflation projection was raised to 2.8% y/y vs. 2.4% previously.
AUSTRALIA
AUD/USD is consolidating near the top-end of its year-to-date 0.6100-0.6330 range. Australia’s Westpac–Melbourne Institute Consumer Sentiment Index was essentially unchanged at 92.2 in February. While the headline print remains below the long-term average of 100.5, the forward-looking sub-indexes edged higher. Regardless, softer inflation pressures in Q4 support the case for the RBA to start easing at the next February 18 meeting, with markets pricing-in a 90% probability. Bottom line: RBA/Fed policy trend and sluggish Chinese economic activity point to additional AUD/USD downside.
NORWAY
Norway’s unfavorable macro backdrop complicates the Norges Bank’s policy decision and is a drag for NOK. Norway mainland real GDP unexpectedly fell -0.4% q/q in Q4 (consensus: 0.3%) vs. 0.5% in Q3. The data validates the Norges Bank guidance to cut the policy rate in March. However, faster inflation in January argues for a cautious easing cycle. Markets price-in 94% odds of a 25bps cut to 4.25% at the next March 27 meeting and a total of 64bps of easing in the next 12 months.
