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Dollar rally on pause ahead of Trump inauguration

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20 January 2025

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

Financial markets breathed easier after better than expected inflation data out of the US last week.

T
reasury yields dropped sharply across the curve, risk assets rallied, and the dollar fell against all its G10 peers, including the pound and the Canadian dollar, both of which are mired in domestic troubles. Most emerging market currencies rebounded as well off the back of the inflation news. The moves were, however, mostly quite shallow, as financial markets await details on the Trump administration’s tariffs, with investors unwilling to push too hard on any trend until there is more visibility on that front.

The Martin Luther King holiday means a relatively light economic and policy calendar in the US on Monday, so all eyes will be on Trump’s inauguration at 5pm GMT today. This looks set to accelerate the newsflow around all aspects of economic policy, particularly his tariff plans, which are likely to drive moves in financial markets in the near future. Trump has already planned a ‘blizzard’ of executive orders on his first day back in the White House, so investors will be awaiting his upcoming communications with baited breath.

GBP

Sterling continues to struggle in the aftermath of the sharp 2025 sell off in gilts, which essentially amount to a vote of no confidence in Labour’s fiscal policies and the prospect of a widening deficit. The sell-off in sterling was compounded last week, after UK inflation also came in lower than expected in December. To make matters worse, we saw another miss in the latest monthly GDP report, with Britain’s economy barely growing in November, following consecutive periods of contraction in the two preceding months.

The generally weaker tone of the latest economic releases has revived the prospect of Bank of England interest rate cuts, which is not helping the pound either. Indeed, markets now see a strong chance of another rate reduction at the next MPC meeting in February, with a 25 basis point cut currently more than 80% priced in by swaps. We’ll see a raft of labour data out of the UK on Tuesday. This will be followed by the key PMI numbers for January on Friday, which may confirm the increasingly bleak near-term outlook for the UK economy.

EUR

The lack of timely data out of the Eurozone makes it particularly difficult to gauge the strength of the common bloc economy. For instance, we have seen some tentative signs of stabilisation in the downbeat industrial sector, although the latest data we have is from November. Last week’s HICP data matched the initial estimate, confirming that the main inflation rate edged up to a five month high in December. Yet, communications from the ECB have remained dovish, notably from member de guindos last week, and markets still see at least two more cuts at the next two meetings as a near certainty.

This lack of economic news makes the release of the January PMI surveys on Friday particularly important for the euro and the prospects for ECB cuts in the near-term. A number above the key level of 50 in the composite index would signal that the economy is expanding again, and could provide some badly needed relief for the euro – this appears a very long way from guaranteed, however.

USD

Last week’s inflation report brought some very welcome relief for the Federal Reserve. Our favourite indicator, the annualised three-month average in the core index, fell noticeably, from 3.7% to 3.3%, while the underlying measure printed below 0.3% on the month for the first time in five months. Markets are now pricing in almost two 25 basis point cuts from the Fed in 2025 and a terminal rate of about 4%.

The 10-year Treasury rate fell back for the first time this year, bringing a pause to the dollar rally for now, and boosting risk assets worldwide. In this holiday-shortened week, we will focus almost exclusively on news and hints emanating from Trump’s economic team, primarily on his plans for tariffs. Any details on his fiscal policy, and the administration’s attitude towards the Federal Reserve, could also prove to be market moving.

 

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