The EUR had its best week in over a year as markets trimmed European Central Bank (ECB) rate cut expectations following better-than-expected economic activity in January, and Donald Trump's tariff risks easing.
Markets are interpreting the upwards trajectory of the EURUSD pair as a rebalancing of the severe drop we saw over the last four months.
GBP had a strong day, with PMI numbers exceeding expectations. Markets used the drop in US PMIs as a cue to continue to weaken USD.
*Daily move - against G10 rates at 7:30am, 27.01.25
** Indicative rates - interbank rates at 7:30am, 27.01.25
The USD is on the rise this morning, following President Trump's weekend announcement of a potential 25% tariff on Colombian imports to the US. However, he has since rescinded the threat after Colombia agreed to take back undocumented migrants. Trump's actions illustrate how much of a wild card he can be and, whilst the USD seems to be in a correction trajectory, should he decide to put his foot down on incoming trade tariffs. we could see renewed USD strength.
The Federal Reserve (Fed) and ECB rate decisions will be on the radar for markets this week ,with the latter holding the potential for a hawkish surprise. Lagarde et al are widely expected to cut rates by 25bp, which is fully priced in. However, if the Bank highlights any inflationary risk or points to a change in economic sentiment in the bloc, we will likely see markets trim this year's rate cut expectations, and, thus, a stronger EUR.
On Wednesday, the Fed will likely push back against Trump's recent calls for rate cuts, as they balance the robust economic performance with the potential inflationary impacts of his fiscal strategies. No rate cuts are expected in this week's meeting.
Q4 GDP numbers from the US are due on Thursday with markets expecting growth to marginally slow down to 2.6% from 3.1%. Then on Friday, core PCE numbers are expected to show a rise in inflation from 0.1% in November to 0.2% in December.
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