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Today’s US monthly jobs report will be important to the USD. The strong US labour market is why markets think the Fed believes the neutral rate is near. Interest rate futures see the Fed delaying rate cuts to June and October, a factor that kept the USD strong. Nonfarm payrolls are anticipated to slow to 175k in January after the better-than-expected increase to 256k in December. However, we cannot rule out surprises. ADP Employment increased to 183k in January, more than the 150k consensus, while December was revised to 176k from 122k. The ISM Services employment index rose to 52.3 from 51.3 while the 4-week moving average initial jobless claims eased to 217k from 223k. Pay attention to the University of Michigan’s consumer survey, which showed that one-year inflation expectations have increased to 3.3% in January from 2.8% in December. Next week, US CPI and core inflation are expected to remain sticky at 0.3% MoM in January.
Fed Chair Jerome Powell will present his semi-annual congressional testimonies on monetary policy next week. Powell should reinforce the Fed’s cautious approach to lowering rates this year, telling US lawmakers that more clarity will be needed on Trump’s policies on tariffs, tax cuts, and immigration before the next move. With the Fed cautious and Trump delaying tariffs on Canada and Mexico by a month, markets have been looking at shorting yen crosses again. TheBank of Japan has flagged more hikes this year, while other central banks lowered rates to cushion their economies from potential US tariffs that heighten global trade tensions. For example, AUD/JPY is eyeing last August’s low of 93.7 after breaking below its two-month support at 96. The futures market is pricing a 96% chance of the Reserve Bank of Australia joining the global easing cycle on February 18.
There were essential takeaways from US Treasury Secretary Scott Bessent’s interview on Bloomberg TV. First, Bessent would refrain from criticizing Powell, trusting him to make the right decisions on monetary policy. He was more concerned about the US Treasury 10Y yield, which influences the mortgage market, than the Fed Funds Rate. Second, Bessent expected the strong USD policy to be completely intact under Trump but did not want other countries to manipulate their currencies for unfair trade advantages. Third, Bessent warned that China would end up “eating quite a bit of tariffs”, adding that China was the most unbalanced economy in the history of the world.
GBP/USD failed to trade above 1.25 again this year, in line with our expectations. The Bank of England’s decision to lower the bank rate by 25 bps to 4.50% was dovish. Two Monetary Policy Committee members – Catherine Mann (the hawk) and Swati Dhingra (the dove) – wanted a larger 50 bps cut. Apart from the bank rate matching the upper bound of the Fed Funds Rate, the BOE also adopted a “careful” approach to rates, mirroring the Fed’s “cautious” stance. The BOE looked past its own expectation for CPI inflation to rise from 2.5% YoY in December to 3.7% in 1H25, driven temporarily by higher energy prices and increases in some regulated prices. The MPC reckoned weak demand and a negative output gap would eventually return inflation to the 2% target. Bank staff expected the UK economy to contract by 0.1% QoQ saar in 4Q24, in contrast to the 0.3% growth projected in the November report. The subsequent recovery in 1Q25 is now seen weaker at 0.4% instead of 1.4% amid a higher unemployment rate of 4.5% vs. 4.1% previously. The forecasts did not factor in US tariffs, which the BOE considered a threat to the UK’s growth by encouraging businesses to delay investments and consumers to increase savings. The stagflation outlook should keep the market alert to fiscal slippage risks in Chancellor Rachel Reeve’s budget. The Office for Budget Responsibility (OBR) will likely downgrade its 2% growth forecast for 2025 in the March Spring Budget Statement. We maintain our forecast for GBP/USD to fall to 1.20 by mid-2025.
Quote of the Day
“The people of this country want an industrial policy that is for America and Americans.”
US President William McKinley
February 7 in history
The Maastricht Treaty was signed in 1992, leading to the creation of the European Union.
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