Intro
The yen was (as usual) a highly volatile currency in the past week despite no significant related news. It may be reacting to the Bank of Japan’s historic rate hike a few weeks prior. USD was also part of relatively big moves, dropping against the likes of CHF and CAD.
Our sentiment biases remain unchanged from last week. However, we should pay particular attention to the Australian dollar, the New Zealand dollar, and the British pound.
Market Overview
Here is a brief sentiment report for all major currencies.
US Dollar (DXY): Bearish
The USD is fundamentally bearish due to the Fed’s recent hate hold and lower Nonfarm Payrolls a few weeks prior (although the employment rate improved slightly). Still, the Consumer Price Index (CPI) report came out better than expected last week.
This suggests that the Fed may raise or keep the interest rate unchanged, thus delaying cuts.
Key news to watch: Initial Jobless Claims on Thursday.
Euro (EUR): Bearish
The European Central Bank (ECB) cut the interest rate last month and removed the ‘sufficiently restrictive’ language. So we should expect more cuts in 2025. Economic forecasts are downgraded, suggesting slowing momentum (another negative for the euro).
The threat of a fresh trade tariff with Trump is hugely influential and may cause the euro to be sold off on tariff fears.
British Pound (GBP): Bearish
Recently, the Bank of England (BoE) delivered an unsurprising 0.25% rate cut, reinforcing the bearish bias surrounding the British pound.
Economic growth is among the UK’s key focus areas. Fortunately, the Gross Domestic Product (GDP) print for Q4 came out better than expected. This will likely provide short-term bullish support for the currency and delay the need for the BoE to cut rates.
Key news to watch: unemployment rate on Tuesday; inflation rate YoY on Wednesday.
Japanese Yen (JPY): Bullish
The fundamentals are largely bullish for the yen. Previously, Governor Ueda said they couldn’t keep interest rates too low for too long in December (as this would accelerate inflation). Well, the BoJ recently delivered a 25-basis-point hike to 0.5%, the highest level since October 2008!
In the long term, we should also keep an eye on US Treasury yields – rising yields = lower JPY, while lower yields = higher JPY.
Key news to watch: inflation rate YoY on Friday.
Australian dollar (AUD): Neutral
‘Unchanged’ should be the Reserve Bank of Australia’s (RBA) middle name. It’s the ninth time in a row they have kept the interest rate the same at 4.35%. However, this may change with an 89% chance of a rate cut on Tuesday.
Growth remains weak, with GDP at 0.8% y/y, while the labour market shows gradual easing and wage stagnation. The RBA has also emphasised that policy will remain restrictive until inflation moves toward its target.
Always keep in mind that the Australian dollar is procyclical, with particular exposure to China’s geopolitics. Trump’s new presidency means the prospect of trade tariffs with China has increased (potentially causing headwinds for AUD).
Key news to watch: interest rate decision on Tuesday; unemployment rate on Thursday.
New Zealand dollar (NZD): Bearish
The Reserve Bank of New Zealand (RBNZ) recently cut its interest rate by 50 bps to 4.25%. They also signalled further reductions while remaining confident that inflation will remain in the target zone.
In the last RBNZ meeting, Governor Orr indicated that a 50 bps cut (a 75% chance, according to short-term interest rate markets) is possible on Wednesday. Given potential trade tariff issues between China and the United States, we can rule out a rate hike.
Key news to watch: interest rate decision on Wednesday.
Canadian dollar (CAD): Bearish
The Bank of Canada’s language and the country’s economy of late align with a bearish sentiment. Despite having inflation under control, economic challenges persist, as shown by weak sentiment in the BoC’s recent Business Outlook Survey.
The markets had previously priced an 80% chance of a rate cut last week. However, the central bank surprised everyone with a hold.
Key news to watch: inflation rate on Tuesday.
Swiss Franc (CHF): Bearish
The Swiss National Bank (SNB) cut the rate by another 25 bps last month. Given the modest economic growth, the central bank is prepared to intervene in the forex market to maintain a stable Swiss franc.
Always look at geopolitical tensions (like the current Russia/Ukraine crisis) that can affect the currency’s value.
In the long run, the bearish sentiment remains. The new SNB chairman is more keen to cut rates than the last chairman, with the SNB aiming for neutral rates between 0 and 0.5% (currently at 0.5%).
