• Fed rate cut bets look stretched, leaving room for a near-term USD-positive repricing. SCOTUS tariff ruling in spotlight.
• CPI watch: Canada, Japan, UK. Jobs in focus: UK, Australia.
• RBNZ poised to deliver a hawkish hold. BI dovish hold. BSP one and done.
Heads up: there will be no daily strategy report this week as I’m still on the road. Regular publication will resume next week.
USD traded on the back foot last week pressured by: (i) a post-Japan election JPY rally, (ii) NOK strength after faster Norway inflation virtually ruled out additional Norges Bank cuts; and (iii) a better balance between US jobs and inflation lifting bets of deeper Fed funds rate cuts. Fed funds futures are nearly pricing in 50% probability of a third 25bps rate cut by year-end.
In our view, Fed funds rate cut bets look stretched, leaving room for a near-term USD-positive repricing. Leading indicators point to a resilient US growth outlook, a big fiscal thrust is expected over Q1 reflecting a boost from the One Big Beautiful Bill Act (OBBBA), the unemployment rate is tracking below the FOMC’s 4.4% 2026 projection, and underlying PCE inflation is stalling above the Fed’s 2% target.
Minutes, PCE and GDP on Deck
FOMC Minutes of the January 27-28 meeting (Wednesday). The minutes should underscore that the Fed is in no rush to resume easing. Look for additional color on why the FOMC dialed back concerns over downside risks to employment. Recall, at that meeting the FOMC voted 10-2 to keep the target range for the Fed funds rate unchanged at 3.50-3.75%. Fed Governors Stephen Miran and Christopher Waller voted for a 25bps cut.
US December Personal Consumption Expenditure (PCE) (Friday). Headline PCE is expected at 2.8% y/y for a second straight month while core PCE is seen at 2.9% y/y vs. 2.8% in November. Watch core services less housing PCE for a cleaner read on underlying inflation. That measure of domestically driven inflation has been sticky between 3.2% and 3.4% since March 2025 and argues for a patient Fed easing cycle.
US Q4 advanced GDP (Friday). Growth is expected at of 3.0% SAAR vs. 4.4% in Q3 underpinned by personal consumption, inventories, net exports, and non-residential fixed investment. The Atlanta Fed GDPNow model estimates Q4 growth at 3.7% SAAR, and the New York Fed GDP nowcast model estimates Q4 growth at 2.7% SAAR.
Pay attention to real final sales to private domestic purchasers, the sum of consumer spending and gross private fixed investment. That measure of underlying domestic private-sector demand has been resilient at 2.9% SAAR the last two quarters and the S&P Global composite PMI (February print due Friday) points to ongoing solid growth ahead.
The December Treasury International Capital (TIC) data (Wednesday) and trade balance report (Thursday) are also noteworthy. In November, the TIC data showed that in the twelve months to November, foreign investors accumulated a record $1569bn of long-term US securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds), challenging the “Sell America” narrative.
Nevertheless, we expect foreign appetite for US long-term securities to dwindle over time. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities. That’s pure balance of payments mechanics and is a structural drag on USD.
SCOTUS Update
The US Supreme Court (SCOTUS) decision on President Donald Trump's use of emergency tariff powers could come Friday, or next week (February 24 or 25). Online betting markets give 27% chance the court will uphold the tariffs.
A ruling against Trump's emergency tariff powers could see USD come under downside pressure while the Treasury yield curve would steepen further on heightened fiscal concerns. The Congressional Budget Office (CBO) estimates that over the next ten years, budget deficits will average 6.1% of GDP (by comparison, deficits have averaged 3.8% of GDP over the past 50 years) while the revenue from customs duties averages 1% of GDP.
A ruling in favor of Trump's emergency tariff powers would likely be USD supportive at the margin because it would re-empower tariffs as a credible, unilateral economic weapon.
A muddled ruling, where the court grants limited emergency tariff and require only limited repayment, is another scenario. This would raise policy uncertainty. But the broader market impact should be contained because the administration can pursue at least five other, albeit more cumbersome, alternative legal avenues that will keep most of the tariffs in place.
UK Labor and CPI to Steer BOE
GBP underperformed last week as disappointing UK Q4 real GDP growth reinforced the case for additional Bank of England (BOE) rate cuts. The swaps curve implies 74% odds of a 25bps rate cut to 3.50% at the next March 19 BOE meeting and a total of nearly 50bps of easing in the next twelve months. Slower UK wage growth and inflation this week can cement a BOE rate cut next month and further weigh on GBP.
UK December labor market overview (Tuesday). In line with the BOE’s forecast, the unemployment rate is expected to remain unchanged at 5.1% for a third straight month in December, and private sector regular pay is projected to ease to 3.4% y/y (lowest since November 2020) vs. 3.7% in November.
UK January CPI (Wednesday). Headline CPI is expected to fall to 3.0% y/y vs. 3.4% in December due to lower utility prices. Core CPI is also expected to decline to 3.0% y/y vs. 3.2% in December, while services CPI is seen at 4.3% y/y (lowest since March 2022) vs. 4.5% in December. For reference, the BOE forecasts both headline and core CPI at 2.9% y/y, and services CPI at 4.1% y/y in January.
The UK January retail sales and February PMI reports (both on Friday) will offer a timely update on economic activity. Real GDP growth underwhelmed in Q4 at 0.1% q/q. That was a touch below the consensus and the BOE’s forecast for 0.2%. However, the composite PMI is consistent with a solid pick-up in economic activity over Q1.
Inflation Pulse: Canada & Japan
Canada January CPI (Tuesday). Inflation is projected to ease in January, reinforcing the case that the Bank of Canada (BOC) is in good position to keep the policy rate on hold at 2.25% for some time. We expect USD/CAD to remain within a 1.3500-1.3800 range in the near-term.
Headline inflation is seen at 2.4% y/y for a second consecutive month while core inflation (average of trim and median CPI) is expected at 2.55% y/y vs. 2.6% in December. For reference, the BOC projects headline and core inflation to average 2.0% y/y and 2.5% y/y over Q1, respectively.
Japan January CPI (Thursday). Inflation is projected to slow sharply in January which can briefly undermine JPY. Headline CPI is expected at 1.6% y/y vs. 2.1% in December due to subsidies for utilities and a tax cut. Core ex. fresh food is expected at 2.0% y/y vs. 2.4% in December, and core ex. fresh food & energy CPI is expected at 2.7% y/y vs. 2.9% in December.
Nonetheless, the Bank of Japan (BOJ) has room to normalize rates closer to the mid-point of its neutral policy range estimate (between 1.00% and 2.50%) given that the output gap is project to widen moderately within positive territory. Indeed, leading indicators are indicative of an encouraging growth outlook. Japan’s February PMI is due Thursday. In January, the composite PMI rose to 53.1, the highest since May 2023.
Australia Jobs in Focus
At the February 3 policy meeting, the RBA voted unanimously to raise the cash rate target by 25bps to 3.85%, the first increase since 2023. Moreover, the RBA signaled that more hikes are in the pipeline highlighting that “private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight.” RBA cash rate futures imply 34bps of hikes to between 4.10%-4.35% in next twelve months.
As such, Australia’s January labor force report (Wednesday) will set the RBA rate hike tone. The economy is projected to add 20k jobs vs. +65.2k in December and the unemployment rate is seen at 4.2% vs. 4.1% in December, a touch under the RBA’s 4.3% 2026 projection. Stronger jobs growth would lift bets on 50bps of hikes over the next twelve months in favor of a firmer AUD, while softer data would pare those odds and drag AUD a little lower.
RBNZ: Hawkish Hold?
The RBNZ is widely expected to leave the Official Cash Rate (OCR) unchanged at 2.25% (today). The focus instead will be on the RBNZ’s updated OCR forecast. In November, the RBNZ projected the OCR to remain around 2.25% throughout 2026 followed by nearly 50bps of rate hikes in 2027. The RBNZ is expected to bring forward its OCR hike projections because New Zealand inflation is running hot and the job market is improving. The swaps curve implies 50bps of hikes in the next twelve months which is NZD supportive.
BI Dovish Hold
Bank Indonesia (BI) is expected to keep the policy rate unchanged at 4.75% for a fifth consecutive meeting (Thursday). BI will likely reiterate that it still sees room for further interest rate reductions but is currently more focused on maintaining the stability of the rupiah. IDR has underperformed regional peers so far this year amid downgrade threats from MSCI and Moody's Ratings.
Importantly, Indonesia is not in a 1998-style crisis. The current account is in balance, foreign exchange reserves are ample (equivalent to 6.4 months of imports, double the international adequacy standard), inflation is within target of 2.5±1%, and real GDP growth is resilient (5.39% y/y in Q4 2025, the fastest since Q3 2022).
Nevertheless, the perception of governance risk is rising. That makes the country more vulnerable to external shocks with IDR poised to remain under downside pressure until transparency and policy credibility are reaffirmed.
BSP: One More for the Road
Philippine central bank (BSP) is expected to cut rates 25bps to 4.25% (Thursday). At its last December meeting, BSP cut rates 25bps to 4.50% and noted that “the Monetary Board sees the monetary policy easing cycle nearing its end.” BSP has cut rates 200bps since its easing cycle began in mid-2024 and the swaps market price in 70% odds of one final 25bps cut to 4.25% in the next twelve months. Still, positive real rates support the uptrend in PHP.
