The FED kept rates unchanged as highly anticipated on Wednesday evening basing it on how the economy has been performing up until now, with FED Chair Jerome Powell stating ‘we do not need to be in a hurry’. This suggests that the data following Trump taking office, along with policies from the Trump administration on immigration, tariffs and taxes will be closely watched to see how disruptive they could be to the economy.
They will continue to watch closely and remain cautious only making changes as an when required to not get ahead of themselves, with inflation and job data remaining in line with their targets.
Over in Europe, the ECB cut their interest rates by the 25 basis points yesterday as markets had already priced in, this also signaled there could be yet another cut as close as March. This decision continues to put them well ahead of the UK and US, cutting further and faster supporting how the Euro has continued to underperform in the market, however they are ‘on track’ with the 2% inflationary target.
Lagarde acknowledged that the Eurozone has continued to struggle and that with Trumps proposed tariff threats could be detrimental to the 20 plus counties it would effect, further putting pressure on the Eurozone’s growth.
This is the fifth rate cut since June with markets anticipating another two to three this year, data dependent.
Across the Pond, Trump reminded markets that the deadline for the first proposed tariffs on Mexico and Canada of 25% were due to commence February 1st, meaning extended volatility for CAD and MXN. Trump has also proposed a 10% tariff on Chinese imports at a later date, but is yet to specify. The President also reiterated the threats that any BRICS Nations who opt to try and replace the US Dollar would face 100% tariffs.
Analysts have suggested that the Canadian Dollar could weaken between 5 and 10% if these 25% tariffs are imposed properly, which would then see multi year highs for the likes of GBPCAD and EURCAD pairs, along with a significant adjustment to the USDCAD pair.
-Oakleigh Exchange Partners-