Key Insights

  • 🇺🇸 Federal Reserve likely to pause rate cuts amid inflation concerns.
  • 🇨🇦 Bank of Canada expected to signal an end to aggressive rate cuts.
  • 🇪🇺 European Central Bank to continue gradual easing with potential rate cut.
  • 🇯🇵 Japanese yen may react to inflation data and BoJ policy.
  • 🇦🇺 Australian dollar under pressure from weak CPI data.

Market Overview

​As we head into the latest week of Jan 2025, the Forex market is poised for significant movements driven by key central bank meetings and economic data releases.​ The Federal Reserve is expected to maintain its current policy stance, pausing any further rate cuts as inflation remains a concern. This decision comes amid uncertainty surrounding former President Trump’s potential tariff policies, which could influence inflation and economic growth.

The Bank of Canada is anticipated to announce a 25 basis point rate cut, reflecting recent dovish trends in inflation and growth data. However, there are indications that the BoC may be nearing the end of its cutting cycle, which could stabilize the Canadian dollar in the medium term.

The European Central Bank is also expected to cut rates by 25 basis points, continuing its gradual approach to easing. Market participants will be closely watching President Lagarde’s comments for insights into future policy directions, especially in light of ongoing trade tensions.

In Asia, the Japanese yen remains steady following the BoJ‘s recent rate hike, but its recovery is limited by the policy gap with the Fed. Key inflation data from Tokyo will be crucial in determining the yen’s trajectory.

The Australian dollar faces pressure from weak inflation data, which could prompt the RBA to consider rate cuts. Additionally, China’s manufacturing PMIs will be closely monitored for signs of economic recovery, impacting risk sentiment and the Aussie dollar.

Currencies Analysis

🇺🇸 US Dollar (USD)

The US dollar is poised for volatility as the Federal Reserve‘s policy decision approaches. With inflation remaining stubbornly high, a dovish tone from the Fed could weigh on the dollar. However, stronger-than-expected GDP or PCE inflation readings could counterbalance any downside risks. Traders should watch for signals from Chair Powell regarding the Fed‘s readiness to adjust policy in response to Trump’s trade rhetoric.

🇨🇦 Canadian Dollar (CAD)

The Canadian dollar faces pressure from political uncertainty and potential tariff threats from the US. The Bank of Canada‘s anticipated rate cut could further impact the loonie, especially if wage growth and GDP data released later in the week disappoint. Traders should be prepared for increased volatility in CAD as the BoC‘s tone may indicate an end to aggressive cuts.

🇪🇺 Euro (EUR)

The euro is likely to remain under pressure as the European Central Bank continues its gradual easing. The upcoming GDP data for Q4 will be crucial in assessing the Eurozone’s growth trajectory. Any new trade restrictions from the US could exacerbate the euro’s weakness. Traders should focus on Lagarde’s remarks for hints about future policy moves.

🇯🇵 Japanese Yen (JPY)

The yen’s recent stability is attributed to the Bank of Japan‘s rate hike, but its recovery is limited by the ongoing policy divergence with the Fed. Key data releases, including Tokyo CPI and industrial output, will be critical in shaping expectations for further BoJ action. A strong inflation reading could bolster the yen, but sustained gains may require more aggressive moves from the BoJ.

🇦🇺 Australian Dollar (AUD)

The Australian dollar may face headwinds as weak CPI data could fuel expectations of an imminent rate cut by the Reserve Bank of Australia. Traders should monitor the upcoming CPI release closely, as it could significantly impact the AUD‘s trajectory. Additionally, China’s manufacturing PMIs will provide insights into the broader economic recovery, influencing risk sentiment.

Upcoming Economic Calendar

The upcoming week is packed with high-impact economic events that traders should closely monitor. Key releases include the US GDP on Thursday, which is expected to show a slowdown to 2.6% q/q from 3.1%, and the PCE Inflation data on Friday, with core PCE forecasted to remain at 2.8% y/y. In Canada, wage growth and GDP data will be released, while the Eurozone will see preliminary Q4 GDP estimates. In Japan, Tokyo’s CPI and industrial output data will be crucial for gauging inflationary pressures. These events are vital for traders as they provide insights into economic health and potential central bank actions.

📅 Ziwox Terminal, Economic calendar

Conclusion

The upcoming week in the Forex market is set to be pivotal, with central bank decisions and key economic data releases shaping the landscape. Traders should remain vigilant, as the outcomes of these events could lead to significant market movements. Understanding the implications of these developments will be crucial for making informed trading decisions.