Forex markets are currently experiencing a period of relative stability, following the immediate aftermath of President Donald Trump’s inauguration and his initial series of executive orders. As the initial shockwaves from these actions continue to fade, traders are adjusting their expectations. Trump’s proposed tariffs have emerged as a point of contention, yet the delay in their implementation indicates a more measured and strategic approach linked to imminent negotiations. This tempered outlook has fostered cautious optimism in the markets; traders speculate that any potential disruptions may not be as pronounced as previously feared, particularly if favorable agreements can be brokered with key trade partners, such as the European Union.
Despite this overall cautious optimism, the Canadian Dollar (CAD) finds itself facing significant challenges. It is poised to become one of the most immediate victims of Trump’s tariff policies, which are expected to be activated by February 1. The struggles of the Loonie’s recovery have been exacerbated by disappointing Consumer Price Index (CPI) data released for December, which highlighted a slowdown in inflation due to unexpected declines in food and restaurant prices. While energy prices showed an uptick owing to base effects, other sectors reflected softening pressures that contributed to the overall inflation deceleration. With inflation hovering close to the Bank of Canada’s (BoC) target of 2%, it is anticipated that the central bank will maintain a course of easing monetary policy, albeit with caution and at a more measured pace.
As the week unfolds, the performance of currencies showcases a diverse landscape. The US Dollar has emerged as the weakest performer thus far, alongside the CAD and the Japanese Yen. Contrastingly, the New Zealand Dollar (NZD) has taken the lead among gainers, followed by the Euro and the British Pound. The Swiss Franc and Australian Dollar are treading a more neutral path, finding themselves in the middle tiers of performance.
Technical Analysis of AUD/CAD
The AUD/CAD currency pair has demonstrated a notable rebound this week, largely attributed to the prevailing weakness of the Loonie. The pair is currently testing resistance around 0.9016, coinciding with the 55-day Exponential Moving Average (EMA). A sustained breakout above this level would suggest that the 0.8851 support has held robustly, thus allowing the corrective rally that commenced from the year’s low of 0.8562 to remain intact. Positive momentum could pave the way for further movement toward retesting the previous high of 0.9375.
The technical indicators reveal an interesting interplay as traders remain cautious of potential fluctuations. If the resistance is exceeded, the market might anticipate a continuation of the upward trend, while failure to maintain above this level could suggest a reversal in the short term.
Market Overview: European and Asian Performance
As of the latest market data, European indexes are showing mixed signals. The FTSE 100 index in the UK rests slightly higher, up by 0.09%, while the German DAX has dipped by 0.09%. The French CAC has recorded a modest gain of 0.18%. On the bond market side, the UK’s 10-year government yield has decreased by 0.053 to 4.610, and Germany’s 10-year yield has also fallen marginally by 0.011 to 2.518.
Shifting the focus to Asia, we note that the Nikkei has increased by 0.32%, while the Hong Kong Hang Seng Index has improved significantly by 0.91%. Conversely, the Shanghai Composite Index experienced a slight decline of 0.05%, and the Singapore Straits Times Index fell by 0.33%. Observations of the Japanese 10-year JGB yield show a decrease of 0.0073, now sitting at 1.190, indicative of the cautious environment in the bond markets.
Inflationary Trends in Canada
Recent data has shown that Canada’s annual inflation rate experienced a slight decrease, falling to 1.8% year-over-year in December, a drop from 1.9% in November and below market expectations of 1.9%. This moderation in inflation was primarily influenced by declines in food prices and costs associated with alcohol. Notably, the price of food purchased from restaurants has dropped by 1.6% annually, marking a historical first for this index.
Examining the specifics further, gasoline prices noted a year-over-year increase of 3.5% in December, recovering from the previous month’s -0.5%. This rise can be linked to base-year effects, as the oil market faced notable pressures previously. On a monthly scale, however, gasoline prices saw a minor decline of -0.6%.
Analyzing the core measures of the CPI, median CPI weakened from 2.6% to 2.4%, against expectations of stability at 2.5%. The trimmed CPI showed a slowdown from 2.6% to 2.5%, aligning with forecasts, while CPI common remained unchanged at 2.0%, exceeding expectations of 1.9%. The data paints a complex picture of the Canadian economic landscape, suggesting that while inflation remains below target, the underlying components reflect mixed pressures.
Economic Sentiment in Germany and the Eurozone
Turning our attention to Germany, the latest ZEW Economic Sentiment index has shown a stark decline, plummeting from 15.7 to 10.3 in January, falling short of the expected figure of 15.1. However, the Current Situation Index demonstrated slight progress, rising from -93.1 to -90.4, marginally surpassing forecasts. This shift in sentiment has been attributed to ongoing economic challenges that Germany faces, particularly in light of consecutive years of recession.
In contrast, the Eurozone as a collective appears to present a more hopeful outlook. The Eurozone ZEW Economic Sentiment index rose from 17.0 to 18.0, exceeding expectations of 16.9, with a similar rise in the Current Situation index that gained 1.2 points to -53.8. Achim Wambach, President of ZEW, noted that the decline in German sentiment stems from persistent economic headwinds, notably subdued private household spending and weakened construction demand. He warned that sustained patterns could further isolate Germany from recovery compared to other Eurozone countries, particularly given the political uncertainties regarding coalition-building amid changing US economic policies.
Unemployment Trends in the UK
In the UK, recent labor market data revealed that payroll employment dipped by 47,000 in December, representing a 0.2% month-on-month decline. Despite this downturn, median monthly pay did experience an increase, rising by 5.6% year-over-year, although this is down from 6.4% in November and 7.9% in October. The claimant count saw a modest increase of 0.7k, falling short of the expected 10.3k.
Looking at the broader labor context, the unemployment rate for the three months leading up to November ticked up to 4.4%, just above the anticipated 4.3%. Meanwhile, average earnings excluding bonuses rose by 5.6% year-on-year, showing an improvement from the prior 5.2%, yet average earnings, including bonuses, held steady at 5.6%, which matched market expectations.
New Zealand’s Service Sector Performance
In New Zealand, the BNZ Performance of Services Index (PSI) has declined from 49.1 to 47.9 in December, marking the 10th consecutive month of contraction. The result is notably below the historical average of 53.1. This downturn reflects widespread weakness across various sectors within the economy, as evidenced by sales and activity metrics falling from 48.3 to 46.2, alongside a sharp drop in supplier deliveries from 52.5 to 47.7.
In a detailed assessment, the key data points include stagnation in new orders, remaining almost unchanged at 49.5—barely shy of the expansion threshold—while employment showed slight recovery from 46.7 to 47.4. However, the overall sentiment among respondents has turned increasingly negative, with 57.5% expressing pessimism, an increase from 53.6% the previous month, primarily due to cost-of-living pressures and general economic uncertainties.
BNZ’s Senior Economist Doug Steel pointed out that New Zealand is the only trading partner currently experiencing such a contraction compared to its neighbors, underscoring a significant divergence within the region.
GBP/USD Mid-Day Outlook
In terms of intraday movements, the GBP/USD currency pair displays a neutral bias as it consolidates in the wake of fluctuations around the 1.2278 pivot point. The outlook remains bearish unless a robust resistance level around 1.2486 is breached. A sustained decline below 1.2099 would likely resume the downward trajectory that began from the recent highs, exacerbating bearish pressure.
From a broader macroeconomic perspective, the cycle of growth from the historically low 1.0351 level is assumed to have concluded at the recent high of 1.3433, prompting expectations of further declines as long as resistances hold firm. A deeper descent to approximately 1.1528, representing a 61.8% retracement, might unfold as traders await clearer signals indicating the direction of future monetary policies.
Economic Indicators Summary
GMT | CCY | EVENTS | ACT | F/C | PP | REV |
---|---|---|---|---|---|---|
21:30 | NZD | Business NZ PSI Dec | 47.9 | |||
07:00 | GBP | Claimant Count Change Dec | 0.7K | 10.3K | 0.3K | -25.1K |
07:00 | GBP | ILO Unemployment Rate (3M) Nov | 4.40% | 4.30% | 4.30% | |
07:00 | GBP | Average Earnings Excluding Bonus 3M/Y Nov | 5.60% | 5.50% | 5.20% | |
07:00 | GBP | Average Earnings Including Bonus 3M/Y Nov | 5.60% | 5.60% | 5.20% | |
10:00 | EUR | Germany ZEW Economic Sentiment Jan | 10.3 | 15.1 | 15.7 | |
10:00 | EUR | Germany ZEW Current Situation Jan | -90.4 | -93 | -93.1 | |
10:00 | EUR | Eurozone ZEW Economic Sentiment Jan | 18 | 16.9 | 17 | |
13:30 | CAD | CPI M/M Dec | -0.40% | -0.40% | 0.00% | |
13:30 | CAD | CPI Y/Y Dec | 1.80% | 1.90% | 1.90% | |
13:30 | CAD | CPI Median Y/Y Dec | 2.40% | 2.50% | 2.60% | |
13:30 | CAD | CPI Trimmed Y/Y Dec | 2.50% | 2.50% | 2.70% | 2.60% |
13:30 | CAD | CPI Common Y/Y Dec | 2.00% | 1.90% | 2.00% |
Summary
In summary, the global forex markets are navigating through nuanced economic landscapes shaped by recent political developments and economic data releases. The Canadian Dollar remains under pressure as it faces imminent tariff vulnerabilities, while inflation dynamics play a pivotal role in shaping monetary policy responses. Perspectives from the Eurozone reveal a divergence in sentiment, with Germany grappling with structural economic challenges, while the overall Eurozone presents a more buoyant outlook. In the UK, labor market metrics reflect a complex interplay of stability and concern. Lastly, New Zealand’s ongoing contraction raises red flags about persistent economic weaknesses. As traders process these developments, they remain on guard, adjusting their strategies to align with evolving market conditions.
FAQs
Q1: How will Trump’s tariff policy affect the Canadian Dollar?
President Trump’s tariff policies are expected to impact the Canadian economy significantly, leading to a depreciation of the Canadian Dollar as trade relationships become strained.
Q2: What is the current inflation rate in Canada?
As of December, Canada’s inflation rate is reported at 1.8%, slightly lower than anticipated, driven primarily by falling food prices.
Q3: What are the implications of the ZEW Economic Sentiment index in Germany?
A declining ZEW Economic Sentiment index indicates worsening perceptions about the economic outlook, which could potentially influence monetary policy and investor sentiment in the region.
Q4: What does the contraction in New Zealand’s services sector signify?
The ongoing contraction in New Zealand’s services sector points to broader economic challenges, suggesting possible headwinds ahead, particularly concerning consumer confidence and spending.
Q5: How does the GBP/USD outlook appear currently?
The GBP/USD pair remains under pressure, with bearish trends indicating a potential return to lower support levels unless broader economic conditions improve and resistance levels break.
References
- Bank of Canada. (2023). Monetary Policy Report.
- ZEW Institute. (2023). Economic Sentiment Index Report.
- Statistics Canada. (2023). Consumer Price Index.
- UK Office for National Statistics. (2023). Labor Market Overview.
- BNZ. (2023). Performance of Services Index Report.
- Forex Market Analysis. (2023). Daily Currency Performance.