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Central banks are a sideshow when on tariff watch.
John J. Hardy
Chief Macro Strategist
Résumé: JPY is firm as US yields stay sideways after FOMC non-event. ECB also unlikely to change the plot as the whole world waits for the shape of Trump tariffs.
The FOMC meeting has come and gone with hardly a ripple in US yields and the US dollar, which fits very well with the backdrop: we aren’t waiting for Fed decisions or guidance, rather, we are waiting for economic outcomes and incoming policy moves that will drive those outcomes, namely from the Trump administration. Trump is the first mover, or primus motor for now and will remain so until we have the firm outlines of his administration’s tariff schedule and the pace at which it will or won’t ratchet higher as well as the follow-on response from the rest of the world. Once we have the tariff schedule, we’ll know where the market is priced. Some commodities markets showing rising premiums for copper in New York versus prices in London do show that the pricing of tariffs is real and already crystallizing in specific markets. Whether that is the same case for currency and broader risk sentiment . Some possible nervousness here over the weekend, by the way, given that Trump mentioned February 1 in association with earlier comments on tariffs against Canada and Mexico and even the EU.
While Trump’s next moves will dominate market attention, I can’t help but believe we may continue to see some fallout in key market sectors from the DeepSeek news this week, the market’s brave attempt to brush this off notwithstanding. The first key companies to report this week like Microsoft and Meta sounded more than positive (Microsoft CEO: It’s “all good news” as Zuckerberg defended Meta’s spending on hardware infrastructure and Microsoft has capacity constraints on its cloud service and is offering DeepSeek to customers on its Azure service already. We’ll only know perhaps in the next quarter if the introduction to DeepSeek is eating into demand for high-end chip hardware and related cloud services. (This is not an equity column, but the issue is important for risk sentiment as US tech stocks including Nvidia so dominate global markets.)
Otherwise, looking ahead we have the December PCE inflation data tomorrow – a minor distraction unless it produces major surprises in either direction. More important US data next week with the usual ISMs followed by the jobs report on Friday, but again, only huge directional surprises can generate attention. More interesting, perhaps, as a subplot is the Bank of England next Thursday, where the Bank may end up waxing more dovish than the market is pricing on UK growth risks. Watching EURGBP for the broad read on sterling relative strength after the big move to 0.8450 retreated today close to the final real support zone of 0.8325-50.
ECB meeting today and the Eurozone’s plight
The ECB will cut 25 basis points today and express a lot of uncertainty about the outlook while probably guiding for another cut in March (though saying it never “pre-commits” followed by more uncertainty. This is the common refrain around the world in this new era of fiscal dominance and the US’ first-mover status as noted above. Some minor focus in the crosses (EURJPY for example) possible on incoming flash January inflation from Germany tomorrow and Eurozone on Monday.
Chart: EURUSD
EURUSD firmly rejected the attempt into the 1.0500+ area, setting up solid resistance with the three-candle evening star formation, but not yet fully posting a rejection of this rally wave unless it can work down through the 1.0350-1.0325 zone. Some tariff news will be needed for the pair to challenge the lows and set sights on parity in coming weeks, otherwise we may drift around in the range.
German Q4 GDP estimate today rolled in at -0.2% QoQ if 0.0% on a work-day-adjusted basis, both 0.1% south of expectations., Europe is attempting to respond to its dire long-term growth outlook, in which it risks the US throwing up tariff barriers that threaten a key export destination for EU products, it suffers high energy costs from cutting off Russian gas and reliance on high-cost renewable source, and finds itself competing with cheap, but increasingly high-quality state-supported Chinese exports in traditional core EU industries like automobiles. Yesterday, European Commission president Ursula von der Leyen was out yesterday presenting a 26-page Competitive Compass, a raft of ideas based on Mario Draghi’s report on how to bring back EU competitiveness. This new report will table measures over the next five years on everything from “action plans” on biotech, space, quantum computing, and advanced materials technology to affordable energy and decarbonization. This, all while relieving the regulatory burden on companies, of course. It is all very top-down, as Rabobank thought leader on the new geopolitical backdrop, Michael Every points out in a post on LinkedIn: “What one sees is an expensive, unfunded, hyper-ambitious, acronym-tastic, top-down, PowerPoint EU industrial policy that will require radical reforms and constant monitoring and policy…while somehow cutting paperwork and increasing dynamism; and which currently has almost no buy-in from EU national governments.” On the EU’s energy cost emergency, interesting to see the FT Article today: “EU debates return to Russian gas as part of Ukraine peace deal.”
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.
The gathering JPY strength on retreating US yields is the most interesting current development, though it will likely require US 10-year yields to punch down through 4.50% to continue to lead. Elsewhere, AUD weaker on the soft CPI earlier this week, but hard to hang a hat on that move without a sense of where the Chinese currency is headed once we know the shape of Trump tariffs.
Table: FX Board Trend Scoreboard for individual pairs.
A lot of dark blue in the ATR readings, suggesting a very quiet market, though much of this is in Antipodean crosses, where the uncertainty around CNY direction is anchoring things. In key US crosses, including EURUSD, USDJPY and GBPUSD, the ATR readings are in the "Warm" category. Note EURGBP is tilting into a negative trend if it doesn't put in a strong rally bar here.