US
USD recovered some of this week’s losses mostly versus JPY and EUR. Cyclical-sensitive currencies are outperforming, led by AUD. Global equity markets are up, bond markets are steady, and gold is firm near record highs. US-EU trade tension and investor concerns over the Fed’s independence were dialed back a notch.
President Donald Trump said he will not be imposing the tariffs on some European nations that were scheduled to go into effect on February 1 after reaching a “framework of a future deal with respect to Greenland.” Meanwhile, the US Supreme Court hearing related to President Trump’s efforts to fire Fed Governor Lisa Cook signaled reluctance to side with the administration. A final court ruling is expected by July.
Encouraging US economic data is in the pipeline today and will likely underpin USD in the short-term:
Updated Q3 GDP estimate (1:30pm London, 8:30am New York). The initial print showed real GDP grew at an annualized rate of 4.3% in Q3 vs. 3.8% in Q2, driven by consumer spending and net exports. Going forward, the Atlanta Fed GDPNow model, which will be updated later today, estimates Q4 annualized growth at 5.4%.
Weekly jobless claims (1:30pm London, 8:30am New York). Initial jobless claims for the week ending January 17 are seen at 209k vs. 198k the previous week. Claims have only fallen below 200k a few times in recent years. Bottom line: there is no layoff spiral underway.
November Personal Consumption Expenditure (PCE) (3:00pm London, 10:00am New York). Headline and core PCE deflators are both expected to remain at 2.8% y/y vs. 2.8%, respectively. Real personal spending is projected to rise 0.3% m/m, slightly below its long-term monthly average pace of 0.5%.
Nonetheless, we still see scope for the Fed to further unwind policy restrictiveness this year. First, upside risks to prices are fading. The January Fed Beige Book noted that “firms expect some moderation in price growth.” Second, downside risks to employment remain high. Excluding the non-cyclical health care and social assistance sector, private nonfarm payrolls fell -1.5k in December and are down on average -19.4k in the three months to December.
Fed funds futures price little chance of a cut at the next three FOMC meetings (January 28, March 18, and April 29). A 25bps cut is 80% priced in for the June 17 meeting, while markets imply a total of nearly 50bps of easing by year-end. In contrast, most other major central banks are done easing. As such, relative monetary policy trend means the dollar index (DXY) is unlikely to sustain a break above the upper end of its trading range in place since June.
NORWAY
USD/NOK extended this week’s decline under 10.0000. As was widely expected, the Norges Bank left the policy rate unchanged at 4.00% for a third straight meeting and reaffirmed its cautious easing bias. The Norges Bank reiterated that “the policy rate will be reduced further in the course of the year” while stressing that “a restrictive monetary policy is still needed” because inflation is still too high.
Indeed, annual underlying inflation has been sticky around 3% since Q3 2024. The Norges Bank pencils in one full 25bps rate cut to 3.75% by Q4, matching market pricing. Risk is Norges bank is done easing which is NOK supportive.
AUSTRALIA
AUD is outperforming, while AUD/USD broke above psychological resistance at 0.6800. Australia’s December jobs report was strong. The economy added more jobs than expected 65.2k (consensus: 27k) vs. -28.7k in November. Full-time employment surged 54.8k, partly reversing November’s loss, while part-time employment increased 10.4k after rising 36.6k in November.
The unemployment rate unexpectedly dropped 0.2pts to 4.1% (consensus: 4.3%), which is well below the RBA’s year-end projection of 4.4%. In parallel, the tick up in the participation rate (0.1pts to 66.7%) and the rise in hours worked (0.4% m/m) point to a modest tightening in labor market conditions.
Bets for a 25bps RBA rate hike to 3.85% at the upcoming February 3 meeting more than doubled to 60%. If next week’s December CPI data shows trimmed mean inflation above the RBA’s 3.2% y/y projection, that could seal the deal for a February rate increase and turbocharge AUD.
EM WATCH
As was widely expected, Bank Negara Malaysia (BNM) left the overnight policy rate at 2.75% for a third consecutive meeting and maintained its neutral bias. BNM reiterated it “considers the monetary policy stance to be appropriate and supportive of the economy amid price stability.”
Turkey central bank (CBRT) is expected to slash rates 150bps to 36.50% (11:00am London, 6:00am New York). Core CPI inflation slowed to a four-year low at 31.08% y/y in December vs. 31.65% in November, leaving room for a less restrictive monetary policy stance. Over the next twelve months, the swaps market is pricing in 775bps of easing.
