The dollar came under broad-based pressure against the majors last week. SEK, EUR, and GBP outperformed while JPY, CAD, and NOK underperformed. At the heart of the dollar weakness was a combination of delayed tariffs and weak retail sales data. However, the knee-jerk selling ignored the elevated inflation data that suggest the Fed will not be cutting rates anytime soon. We continue to look through the noise and see the dollar rally resuming on the strong underlying fundamental story. That said, the dollar may not see any relief until Friday, when global February PMI readings should underscore the divergence theme.

AMERICAS

Weak January retail sales data threw the markets for a loop on Friday. Given the solid job growth seen that month, most (including us) were expecting consumption to also remain solid. While talk of stagflation will surely pick up, we prefer not to hit the panic button after just one bad data point. Most other indicators suggest the economy continues to grow robustly and so we will simply remain on alert for further signs of weakness in the economy.

Tariffs have been delayed. Reports suggest the Trump administration will announce so-called reciprocal tariffs around April 1 after a period of study. Countries running large trade surpluses with the U.S. will be targeted, with other reports suggesting the U.S. will focus on tax and regulatory regimes in its trading partners rather than just existing tariffs when calculating reciprocal tariffs. Trump also said over the weekend that new tariffs on autos would come around April 2. Some optimists believe that the delays will allow for some deals to be struck but we do not fall in that camp. Tariffs are coming.

The soft data and delayed tariffs have taken a toll on the dollar. DXY is trading at the lowest since December 12 and is on track to test that month’s low near 105.420. This is a direct result of lower UST yields and increased Fed easing expectations. The next cut is priced in for September after being pushed out to October after the CPI data, while the swaps market sees around 50% odds of a second cut in H2 after pricing in no further cuts after the CPI data. The 10-year yield sank from a high of 4.66% last Tuesday to end the week near 4.48%.

FOMC minutes will be published Wednesday. At the January 28-29 meeting, the Fed delivered the widely expected hold. The statement read hawkish, as it removed the reference to inflation making progress towards the 2% target. Instead, the Fed noted that inflation “remains somewhat elevated.” It also noted that unemployment has stabilized and the labor market remains “solid.” There were no dissents for the first time since the September 17-18 meeting. Powell later downplayed the change in the language but subsequent Fed official comments suggest the change reflected added caution on the part of the Fed. Indeed, the January CPI data underscore that progress towards 2% has indeed been interrupted.

It's clear from Chair Powell’s testimony last week that the Fed is in no hurry to cut rates. This was driven home by the elevated CPI and PPI readings for January. As a result, Fed officials speaking this week are likely to be as cautious as Powell. Harker, Bowman, and Waller speak Monday. Daly and Barr speak Tuesday. Jefferson speaks Wednesday. Goolsbee, Musalem, Barr, and Kugler speak Thursday. Jefferson speaks Friday.

Data highlight will be S&P Global preliminary February PMIs Friday. Manufacturing is expected to remain steady at 51.2, while services is expected at 53.0 vs. 52.9 in January. If so, the composite PMI should rise a tick from 52.7 in January.

Growth remains robust. The Atlanta Fed GDPNow model's estimate for Q1 growth is 2.3% SAAR and will be updated Wednesday after the data. Elsewhere, the NY Fed Nowcast model’s estimate for Q1 is 3.0% SAAR and will be updated Friday, while its initial forecast for Q2 growth will come in early March.

Regional Fed surveys for February will start rolling out. Empire manufacturing kicks things off Tuesday and is expected at -2.0 vs. -12.6 in January. New York Fed services will be reported Wednesday. Philly Fed manufacturing will be reported Thursday and is expected at 20.0 vs. 44.3 in January.

Weekly jobless claims will be of interest. That’s because initial claims will be for the BLS survey week containing the 12th of the month and are expected at 215k vs. 213k previously. Continuing claims are reported with a one-week lag and are expected at 1.879 mln vs. 1.850 mln previously. There is no Bloomberg consensus yet for February NFP but its whisper number stands at 138k vs. 143k reported for January.

On a side note, we are having less and less confidence about the state of the labor market going forward. Why? 1) Government layoffs and early retirement efforts under Musk. Will these workers find other jobs or drop out of the labor force? 2) Migrant deportations. Many of them work and anecdotal evidence suggests that the threat of deportation is keeping some undocumented workers at home. While starting off small, these policies may eventually have significant unintended consequences on the labor force, consumption, and agricultural production. It's early days but this is something to keep an eye on in terms of worrisome exogenous shocks to the economy (along with tariffs).

December TIC data will be reported Tuesday. Simply put, the U.S. is likely to remain a magnet for foreign investment inflows.

Canada highlight will be January CPI data Tuesday. Headline is expected at 1.9% y/y vs. 1.8% in December, core median is expected to remain steady at 2.4% y/y, and core trim is expected at 2.6% y/y vs. 2.5% in December. The GST/HST holiday (from December 14, 2024 to February 15, 2025) will pull down inflation in January, particularly in categories such as food services and semi-durable goods. The Bank of Canada projects headline and core CPI inflation to average 2.1% and 2.5% over Q1, respectively. The BOC has room to ease further, though at a more gradual pace because inflation has been around 2% since August. The market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom at 2.50%. Bottom line: Fed/BOC policy divergence supports the uptrend in USD/CAD. Governor Macklem speaks Friday.

December retail sales will be reported Friday. Statistics Canada’s advanced retail indicator suggests sales increased 1.6% m/m in December after printing flat in November. Sales ex-auto are expected at 1.8% m/m vs. -0.7% in November.

EUROPE/MIDDLE EAST/AFRICA

Eurozone highlight will be preliminary February PMIs Friday. Manufacturing is expected at 47.0 vs. 46.6 in January, services is expected at 51.6 vs. 51.3 in January, and the composite index is expected at 50.5 vs. 50.2 in January. The country breakdown is expected to remain consistent with sluggish economic activity in Germany and France. The German composite PMI is expected at 51.0 vs. 50.5 in January while France’s composite PMI is projected at 48.2 vs. 47.6 in January. Italy and Spain will be reported with the final PMI readings in early March.

European Central Bank easing expectations remain unchanged. The swaps market is pricing another 75 bp of ECB cuts in the next 12 months which would see the policy rate bottom at 2.00%. Unlike the Fed, we believe the ECB has scope to overdeliver on these rate cut expectations, which can pull EUR/USD lower. Over the weekend, GC member Panetta said “Monetary policy continues to exert downward pressure on economic activity and on inflation, an effect that is less and less necessary with near-target inflation and persistently weak domestic demand. A less decisive easing of monetary policy could lead to excessively low inflation in the medium term.” We concur. Nagel speaks Monday. Holzmann and Cipollone speak Tuesday. Makhlouf and Nagel speak Thursday. Lane speaks Friday.

Germany ZEW survey for February will be reported Tuesday. Expectations are expected at 20.0 vs. 10.3 in January, while current assessment is expected at -89.4 vs. -90.4 in January. Germany remains the weak link in the eurozone.

U.K. highlight will be January CPI data Wednesday. Headline is expected at 2.8% y/y vs. 2.5% in December, core is expected at 3.7% y/y vs. 3.2% in December, and CPIH is expected at 3.7% y/y vs. 3.5% in December. If so, headline would be the highest since March 2024 and further above the 2% target. Of note, services inflation is expected at 5.2% y/y vs. 4.4% in December. For reference, the BOE projects headline CPI at 2.8% y/y and services CPI at 5.2% y/y in January. The swaps market is pricing in 50 bp of easing over the next 12 months, with some odds of another 25 bp beyond that. However, the BOE’s job is complicated by the near-term stagflation backdrop, which is a drag on GBP. Governor Bailey speaks Tuesday.

Labor market data will be reported Tuesday. The unemployment rate is expected at 4.5% vs. 4.4% for the three months ending in December, while average weekly earnings ex-bonuses are expected at 5.9% y/y vs. 5.6% previously. If so, earnings would accelerate for the third straight month to the highest since April 2024. However, the DMP survey suggests slower wage growth of 3.9% y/y over the year ahead. In Q4, the Bank of England projects private sector regular pay of 5.2% y/y and an unemployment rate of 4.5%. Overall, the labor market has softened in recent months. Payroll employment fell -0.1% over Q4 and the KPMG and REC UK Report on Jobs survey showed a further steep drop in permanent placements in January. Moreover, the vacancies-to-unemployment ratio is now below the 0.6 level that BOE researchers consider to be consistent with a balanced labor market. That is why the acceleration in wages is so concerning.

U.K. reports January retail sales Friday. Headline sales are expected at 0.6% m/m vs. -0.3% in December, while sales ex-auto fuel are expected at 1.0% m/m vs. -0.6% in December. However, risks are skewed to the downside. The headline GfK consumer confidence index plunged in January to its lowest level since December 2023 and household savings rates remain high, reflecting in part heightened unemployment concerns.

U.K. preliminary February PMIs will also be reported Friday. Manufacturing is expected at 48.5 vs. 48.3 in January, services is expected to remain steady at 50.8, and the composite index is expected at 50.3 vs. 50.6 in January. If so, the composite would be the lowest since October 2023 and would be dangerously close to the key 50 boom/bust level.

ASIA

Japan highlight will be January national CPI data Friday. Headline is expected at 4.0% y/y vs. 3.6% in December, core (ex-fresh food) is expected at 3.1% y/y vs. 3.0% in December, and core ex-energy is expected at 2.5% y/y vs. 2.4% in December. If so, headline would be the highest since January 2023 and core would be the highest since August 2023 and further above the 2% target.

The market has adjusted its Bank of Japan expectations. The next hike is still priced in for September but the swaps market now sees nearly 40% odds of another hike that would see the policy rate peak near 1.25% vs. 1.0% previously. Board member Takata speaks Wednesday.

Preliminary February PMIs will also be reported Friday. The 51.1 reading for the composite PMI was the highest since September 2024 but we believe this improvement will be hard to sustain given downside risks to regional growth and activity.

Q4 GDP data Monday will be of interest. Growth is expected at 0.3% q/q vs. 0.3% in Q3. Private consumption is expected at -0.3% q/q vs. 0.7% in Q3, while business spending is expected at 0.9% q/q vs. -0.1% in Q3. Inventories are expected to shave -0.2 ppt from growth after adding 0.2 ppt in Q3, while net exports are expected to add 0.4 ppt to growth after subtracting -0.2 ppt in Q3.

Reserve Bank of Australia meets Tuesday and is expected to cut rates 25 bp to 4.10%. RBA cash rate futures see nearly 90% odds of a cut while a handful of analysts polled by Bloomberg see steady rates. Softer inflation pressures support the case for the RBA to start easing this week. The policy-relevant trimmed mean CPI inflation undershot the RBA projection (3.4% in Q4) and eased to a three-year low of 3.2% y/y vs. 3.6% in Q3. The RBA will publish a fresh batch of economic forecasts in its February Statement on Monetary Policy. Looking ahead, the swaps market is pricing in 75 bp of easing over the next 12 months that would see the policy rate bottom near 3.60%.

Australis reports Q4 wage price index Tuesday. Wage growth is expected at 3.2% y/y vs. 3.5% in Q3. Wages growth has passed its peak and projected to slow further as the labor market eases. Indeed, most contacts in the RBA liaison expect wages growth to continue to moderate gradually over the year ahead.

Australia reports January jobs data Thursday. Consensus sees 20k jobs added vs. 56.3k in December, while the unemployment rate is seen at 4.1% vs. 4.0% in December on an unchanged participation rate of 67.1%. Survey and liaison measures of employment intentions point to subdued employment growth in the near term.

Preliminary January PMIs will be reported Friday. The 51.1 reading for the composite PMI was the highest since August 2024 but we believe this improvement will be hard to sustain given our pessimistic outlook for China.

Reserve Bank of New Zealand meets Wednesday and is expected to cut rates 50 bp to 3.75%. After cutting rates 50 bp in November, the RBNZ penciled in another 50 bp rate cut this month but warned it does not plan to cut rates below neutral (around 3%) throughout 2027. The swaps market agrees and sees the policy bottoming near 3.25% over the next 12 months. The RBNZ will publish its Monetary Policy Statement that includes updates to the OCR projection. However, we don’t expect material changes to the updated rate path as inflation is converging towards the 2% target mid-point and tracking the RBNZ forecasts.