Intro
It’s pretty much a cliché to mention the yen’s volatility. Still, it’s always worth stating since the yen always ends up being the best or worst performer (in this case, the latter).
We can also anticipate three major interest rate decisions, the most notable of which is the Federal Funds Rate.
Let us briefly cover this week’s sentiment biases for each major forex currency!
Market Overview
Here is a brief sentiment report for all major currencies.
US Dollar (DXY): Bearish
The recent Non-Farm Payrolls and unemployment rate releases came out better than expected, giving USD a lift.
We should expect considerable volatility for the upcoming interest rate decision and Fed press conference (events which are 30 minutes apart). The prediction is for a rate hold as the US navigates tariff-based uncertainty. So, the bias remains bearish.
Key news to watch: interest rate decision on Wednesday.
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.
Key news to watch: unemployment rate and interest rate decision on Tuesday.
British Pound (GBP): Bearish
As expected, the Bank of England (BoE) recently held the interest rate at 4.75%. Year-on-year inflation is still higher than desired (rising from 2.3% to 2.6%), which could lift GBP despite the overall bearish bias.
The BoE has also indicated they need to be restrictive and a “gradual approach” to policy easing.
Japanese Yen (JPY): Bullish
Despite some volatility on the charts, the fundamentals are bullish for the yen. Tokyo’s CPI rose above forecasts last month. Also, Japan’s base salaries have increased above expectations.
However, the Bank of Japan (BoJ) did not hike the interest rate on Dec 19 as was predicted. Still, Governor Ueda has said they can’t keep interest rates too low for too long last month (as it would accelerate inflation).
In the long term, we should also keep an eye on US Treasury yields – rising yields = lower JPY, while lower yields = higher JPY.
Australian dollar (AUD): Neutral
‘Unchanged’ should be the Reserve Bank of Australia (RBA)’s middle name. It’s the ninth time in a row they have kept the interest rate the same at 4.35%.
Growth remains weak, with GDP at 0.8% y/y, while the labour market shows gradual easing and wages slowing. The RBA has also emphasised that policy will remain restrictive until inflation moves toward its target.
Always keep in mind the Australian dollar is procyclical, with particular exposure to China’s geopolitics. Trump’s recent win in the US election means the prospect of trade tariffs with China has increased (potentially causing headwinds for AUD).
Key news to watch: YoY inflation rate on Wednesday.
New Zealand dollar (NZD): Bearish
The Reserve Bank of New Zealand (RBNZ) cut its interest by 50 bps to 4.25% as expected recently. It also signalled further reductions while having confidence that inflation will remain in the target zone.
Governor Orr indicated in the last RBNZ meeting that a 50 bps cut in February 2025 is possible. So, we can rule out a rate hike, more so with potential trade tariff issues between China and the United States.
Canadian dollar (CAD): Bearish
The Bank of Canada’s language and the country’s economy of late aligns with a bearish sentiment. Despite having inflation contained, economic challenges persist, as shown by weak sentiment in the BoC’s Business Outlook Survey.
The BoC faces a critical decision on whether to implement another 50-basis-point rate cut or a 25-basis-point cut, with markets pricing in an 80% chance of the smaller cut. A larger cut would likely surprise markets, presenting potential opportunities (especially for USD/CAD traders).
Key news to watch: Interest rate decision on Wednesday.
Swiss Franc (CHF): Bearish
The Swiss National Bank (SNB) delivered another 25 bps rate cut a few weeks back. Economic growth is modest. With this in mind, 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 0-0.5% (currently at 0.5%).
