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Fed stands pat, enters a new wait-and-see phase
Updated Updated Wed, 2025 January 29 09:40
* FOMC holds rates steady, takes less confident view on inflation
* Meta, Microsoft and Tesla shares mixed after Q4 earnings
* Bank of Canada cuts rates for a sixth consecutive time, braces for tariffs
* ECB to lower rates by 25bps as fears of weak growth, tariffs mount
FX: USD posted a very modest gain after shoppy price action through the Fed’s statement and Powell’s press conference. As expected, rates were kept unchanged but there was a mildly hawkish tweak to the statement. The reference to inflation making progress was removed implying policy may pause for longer. Powell then stressed the central bank was in no hurry to adjust policy. The dollar also saw some selling after US Commerce Secretary Lutnick said Canada and Mexico could avoid tariffs this Saturday if they clamp down on border security.
EUR looked like it could be rolling over, after its brief upside breakout of the long-term bear channel. All eyes are on the ECB meeting today where another 25bps rate cut is fully baked in. A major pivot level remains the October 2023 low at 1.0448. See below for more on the ECB rate decision.
GBP held relatively steady as it continued to trade around a minor Fib level (23.6%) of the September to January drop at 1.2414. There was little market reaction to UK Finance Minister Reeves’ speech where she endeavoured to shift the narrative back to the growth agenda. The next big test for markets, regarding the government, will be at the end of March with the Spring Statement.
USD/JPY printed another inside day as the 10-year Treasury yield again settled unchanged. That has a high correlation to the major. Minutes from the BoJ meeting revealed a cautious stance on policy changes. The next major level below is at 153.40 – that is the Fib retracement (61.8%) marker of the summer drop. The 200-day SMA is 152.81.
AUD dropped for a third day and looks to be moving down back towards the recent long-term low below 0.62. Softer-than-expected CPI saw markets nail on a February RBA rate cut. The policy-relevant trimmed mean figure printed one-tenth below estimates at 0.5%, and three-tenths below the prior. USD/CAD moved higher up to 1.4470 before paring gains as the loonie found buyers on the potentially softer tariff story. The quarter point BoC rate cut was expected, but Governor Macklem sounded more cautious about more policy easing going forward.
US stocks: The benchmark S&P 500 closed in the red, down 0.47% at 6,039. The tech-dominated Nasdaq settled lower, down 0.24% at 21,411. The Dow Jones finished down 0.31% at 44,713. Nvidia dropped 4.03% on news Trump is considering additional curbs on the sale of their chips to China. That was the biggest decline on the Dow and Nasdaq. Results from Meta, Microsoft and Tesla were mixed with the stocks all lower after hours, though Tesla pushed higher soon after their release. The EV-maker missed estimates of Q4 profit margin. Microsoft’s flagship cloud computing business saw a slowdown in growth with constraints on data centre supply a key issue.
Asian stocks: Futures are mixed. Stocks traded higher after the Wall Street rebound post-DeepSeek losses on Monday. It is the Chinese New Year holiday all week. The ASX 200 moved north on tech and utilities outperformance. Rate cut bets now nail on a first RBA rate cut of the cycle next month. The Nikkei 225 also moved higher, but gains were capped.
Gold trade in a narrow range, consolidating in the upper part of this week’s range. Friday’s top is at $2763 and with the record high at $2790.
Day Ahead – ECB Meeting, US GDP data
The ECB is virtually fully priced in to cut the deposit rate by 25bps to 2.75%. Inflation has ticked up recently, but this was forecast by policymakers. There was a welcome move higher in the latest PMI data, with the composite printing above 50 denoting expansion. But growth is the concern, and stagnant in Europe’s “growth engine”, Germany, which is also hamstrung by political upheaval. On top of this comes Trump’s tariff threats (of which Germany is especially vulnerable), that likely means a dovish, but meeting-by-meeting stance will be preached by President Lagarde. Questions around the neutral rate will be asked, which is currently estimated by most economists to sit around 2%. But if growth deteriorates further or tariffs really do kick in, then there might be more rates cuts taking the terminal rates below 2%.
We also get US GDP data released later today. The economy is predicted to remain just below 3%, boosted by a strong end to the year for consumer spending. That would be the third straight quarter of growth above estimates for the potential rate of growth. It means the US economy continues to push further into excess aggregate demand and capacity constraints as indicated by the output gap. The implications for inflation and policy risks are important, and that’s without more fiscal stimulus.
Chart of the Day – EUR/USD still depressed
The world’s most traded currency pair just printed the third leg of an “evening star” candlestick pattern on the daily chart. This is a bearish reversal signal as the first candle sees recent upward momentum, controlled by bulls, begin to lose steam. The star is a period of balance between buyers and sellers within a narrow range. Then momentum shifts and the bear gain control.
Prices are trading around the key pivot point for us, the long-term low at 1.0448. A false breakout, perhaps on increased dovishness by Lagarde, would be confirmed and the major will likely resume its downtrend. Otherwise, prices need to get above that recent high at 1.0532 and preferably up to 1.06 to confirm a breakout of the long-term bear trend.
