Forex Week Ahead, 10 Feb 2025, Will US CPI and Trump’s Tariff Trigger Market Turmoil?
This week’s Forex market is poised to react to a confluence of factors, including ongoing trade dynamics, crucial economic data releases (particularly US CPI), and geopolitical uncertainties. While markets have shown a degree of resilience in the face of mild tariffs, underlying risks remain elevated. This analysis provides a detailed breakdown of these influences, offering insights into potential currency movements and highlighting key trading opportunities. We examine the performance of major currencies, assess the impact of upcoming economic events, and provide actionable trade recommendations to help you navigate the week ahead.
Key Insights
- Tariff Threats: Watch for potential market-moving headlines from the Trump administration regarding tariffs on China, Mexico, and Canada.
- US Economic Data: US CPI and PPI figures will be critical in shaping expectations for Federal Reserve policy.
- Central Bank Actions: Monitor any shifts in expectations for rate cuts by the Federal Reserve and the Bank of England.
- Safe-Haven Demand: Geopolitical risks may continue to support safe-haven currencies like the Swiss franc.
- UK Economic Data: UK GDP and inflation data will be key for the pound.
Market Drivers
The Forex market enters the week of February 9, 2025, with a mix of optimism and caution. While markets have shown resilience in the face of mild tariffs, underlying risks remain elevated. The global economic outlook is still uncertain, with varying growth rates across different regions. This divergence is reflected in the performance of individual currencies, as central banks respond to their respective economic conditions.
The primary driver for the week will undoubtedly be the US CPI data. Inflation figures have been a key focus for the Federal Reserve, and any significant deviation from expectations could trigger a sharp reaction in the dollar. Beyond the CPI, traders will also be closely monitoring political developments, particularly those related to former President Trump. Any unexpected news or developments could inject volatility into the market, affecting risk sentiment and currency valuations.
Furthermore, global trade tensions and geopolitical risks will continue to play a role. While the initial market reaction to mild tariffs was positive, the potential for escalation remains a concern. Traders should also be aware of any unexpected events or announcements that could disrupt market stability.
Currencies Analysis
USD (U.S. Dollar)
The dollar’s strength is closely tied to U.S. economic data and Federal Reserve policy. Strong CPI and PPI figures could support the dollar by reducing expectations for rate cuts. Conversely, weaker economic data could lead to dollar losses. The Greenback has gained around 4% since the November election, mirroring its post-2016 election performance. However, it remains about 6% below its 20-year highs reached in 2022. A clear trade escalation and signs of globally rebounding inflation would be needed for the dollar to climb to its previous highs.
EUR (Euro)
The Eurozone is sensitive to US-China trade tensions. The euro remains weak on a longer-term basis, trading lower compared to both 12 months and five months ago. The broader economic environment, shaped by US policy and European inflation, will likely determine the euro’s performance in the near term. Easing by the ECB depends on US tariffs and European inflation. Stronger-than-expected Eurozone inflation suggests markets may have overestimated potential rate cuts. The delay in US tariffs on Mexico and Canada provided some relief, allowing euro buyers to re-enter the market.
GBP (British Pound Sterling)
Sterling’s low beta to tariff risks makes it a potential outperformer versus risk-sensitive G10 currencies while tariff risk premia are driving the market. Trade war scares are generally bad for GBP/USD due to risk sentiment, but positive for other sterling crosses. The UK’s weak domestic growth backdrop and fiscal concerns are limiting the pound’s recovery hopes. The Bank of England’s dovish rate cut triggered a sharp move in GBP/USD, but comments from Governor Bailey tempered the move. UK Inflation and GDP data could provide impetus for further gains. Any change in rhetoric from Trump regarding import levies on the UK could hurt sterling.
JPY (Japanese Yen)
The Yen has returned ~3% gains YTD. The Swiss franc is turning into the favored traditional safe haven of choice, beating the JPY of late as Trump’s tariff risks continue to unnerve investors globally. Comments from BoJ member Tamura about closing gaps between market and central bank views, along with his relaxed stance on rates, have helped ease some of the recent selling pressure. The pair is stabilizing around key technical support levels.
AUD (Australian Dollar)
The Australian dollar shows promising technical signals despite mixed domestic business confidence data and is near recent YTD highs. The AUD/USD shows a bullish pattern. Negative business confidence reflects ongoing cost pressures, while improved forward-looking indicators like capital expenditure plans and annual outlook provide some fundamental support.
CAD (Canadian Dollar)
The USDCAD experienced its most volatile week since the COVID-19 pandemic. Fear gripped the Loonie early in the week as Trump confirmed tariffs on Canadian imports. Hopes for an early deal and potential USMCA/CUSMA renegotiation are keeping the USDCAD below a certain level. Trade policy uncertainty is keeping the USDCAD below the 1.45 level.
CHF (Swiss Franc)
The Swiss franc is turning into the favored traditional haven of choice. The uncertain tariff, economic and geopolitical contexts, and associated market jitters make defensive FX views more compelling at this stage, which is supportive of the franc. Dovish SNB policy dynamics remain CHF bearish.
CNY (Chinese Yuan)
USD/CNH faces technical resistance. While trade tensions resurface with China’s WTO complaint against US tariffs, the yuan’s immediate direction appears more technically driven.
NZD (New Zealand Dollar)
Inflation expectations might sway rate-cut bets. Another 25-bps cut is highly likely, whether policymakers maintain an easing bias or turn more neutral will depend on what the next two CPI reports will point to.
Upcoming Economic Calendar
The US CPI release is the highlight of the week. Economists are forecasting an increase in the headline CPI and an increase in the core CPI (excluding food and energy). Any significant deviation from these forecasts could trigger a sharp reaction in the Forex market. Traders should be prepared for increased volatility around the time of the release. A higher-than-expected CPI reading would likely lead to a stronger USD, while a lower-than-expected reading would likely lead to a weaker USD. The market’s reaction will also depend on the underlying details of the report, such as the components driving the inflation increase or decrease.
US CPI and PPI Data (Wednesday, Thursday): These inflation readings will be closely watched. Strong figures could reinforce concerns about sticky inflation, potentially affecting Fed rate-cut expectations and supporting the dollar.
US Retail Sales (Friday): Flat or negative retail sales could signal consumer weakness and reinforce concerns about slowing demand
US Industrial Production (Friday): An expected improvement in industrial production could indicate sustained momentum in the manufacturing sector
UK GDP (Thursday): The first estimate of Q4 growth will be released, along with monthly readings on services, industrial, and manufacturing output
UK Inflation Data: The UK’s inflation data could provide the impetus for a move in GBP/USD
China CPI and PPI: China will publish its CPI and PPI data for January
Swiss CPI: Switzerland’s CPI data is due
📅 Ziwox Terminal, Economic calendar
Pairs of the Week
EUR/USD: This pair will be heavily influenced by the US CPI data and the ECB’s monetary policy stance. A strong US CPI could lead to a decline in the EUR/USD, while a more hawkish ECB could provide support for the pair.
× Fundamental Analysis: The Eurozone’s economic recovery is still fragile, while the US economy has shown more resilience. This divergence could favor the US dollar in the near term. However, any signs of improvement in the Eurozone or a more dovish Fed could shift the balance.
USD/JPY: This pair will be sensitive to risk sentiment and the BOJ’s monetary policy. Increased uncertainty could lead to a decline in the USD/JPY, as investors seek safe-haven assets.
× Fundamental Analysis: The BOJ’s ultra-loose monetary policy continues to weigh on the Yen. However, the Yen’s safe-haven status could provide support in times of market stress.
GBP/USD: This pair will be influenced by a combination of economic data and political developments in the UK.
× Fundamental Analysis: Brexit-related uncertainties continue to weigh on the British Pound. However, the UK economy has shown some resilience, which could provide support for the currency.
AUD/USD: This pair will be sensitive to global growth and commodity prices, particularly those of iron ore and coal.
× Fundamental Analysis: Developments in China, a major trading partner, will also influence the AUD. A slowdown in the Chinese economy could weigh on the AUD.
Suggested Trade:
EURUSD
Given the fragile Eurozone economy and the potential for a strong US CPI reading, a short EUR/USD position may be warranted. The Eurozone economy is facing several challenges, including high inflation, rising interest rates, and the ongoing war in Ukraine. These factors could weigh on the euro and lead to a weaker EUR/USD. A strong US CPI reading could further bolster the US dollar and exacerbate the downward pressure on the EUR/USD pair.
GBPUSD
Sterling’s Low Beta to Tariff Risks: The GBP appears to be an outperformer versus risk-sensitive G10 currencies when tariff risk premia are driving the market. UK Economic Data: Upcoming UK inflation and GDP data could provide impetus for a move in GBP/USD. Stronger-than-expected data could aid the pound’s rebound. Technical Levels: GBP/USD is testing the 1.25 level, where the 50-day moving average resides, which acts as a strong barrier to the upside. A hold above 1.2466 could provide a platform for further gains towards 1.26.
Conclusion
The Forex market is poised for an eventful week, with the US CPI data and political developments surrounding Trump taking center stage. Traders should closely monitor these events and be prepared for potential volatility. While the suggested trade offers a potential opportunity, it’s crucial to conduct thorough research and manage risk effectively. Remember that the Forex market is inherently unpredictable, and no analysis can guarantee profits. Stay informed, stay disciplined, and trade responsibly.
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