Euro Zone Inflation Rises but March Rate cut Still Likely

Economic

Central Bank

Summary:

Consumer price inflation accelerated to 2.5% in January from 2.4% in December, just above expectations for 2.4%.

Euro zone inflation accelerated last month but remained on an anticipated course that could let the European Central Bank cut interest rates further, even if a surging dollar, a looming trade war and higher gas prices raise uncertainty.

The ECB lowered borrowing costs for the fourth straight time last week and hinted at even more policy easing since inflation could be back at its 2% goal by late summer, economic growth is anaemic and a trade war was a distinct possibility.

Consumer price inflation accelerated to 2.5% in January from 2.4% in December, just above expectations for 2.4%.

But underlying inflation, a valuable indicator of the durability of price growth, held steady at 2.7% and services inflation eased. That was a modest relief to the ECB which has long argued that domestic price pressures are too high, even if all conditions are in place for some easing in those pressures given more muted wage growth.

For now, even the dollar's relentless rise may not have a big enough impact to shift expectations on borrowing costs.

The ECB earlier estimated that for every 1% euro depreciation, inflation rises by 0.04% in one year. However, on a trade weighted basis, the euro has fallen only by about 2% since the U.S. election last November, pointing to a small overall impact.

While quicker inflation is not welcome, the figures are in line with the narrative outlined by ECB President Christine Lagarde, who last week said that price growth could oscillate around these levels for the coming months before a slowdown towards the 2% target in the subsequent period.

Indeed, Lithuanian policymaker Gediminas Simkus said he expected a rate cut in March and even that is unlikely to be the last move. Slovakia's central bank chief Peter Kazimir, meanwhile has already appeared to shift his focus to the April meeting, arguing that for now, the ECB was not yet done.

That echoes both on- and off-the-record commentary from a host of policymakers suggesting that for now, another rate cut in March was the baseline.

The debate on a possible pause in policy easing may only heat up from April by when the deposit rate could be at 2.5%, the upper end of the estimate range for the 'neutral' level, a rate that neither restricts, not stimulates growth.

Economists were mixed on the fresh inflation print but were not ready to revise their rate outlook.

Nordea said that inflation could already be close to 2% next month but ING warned that upside risks surrounding inflation have far from abated.

"With inflationary risks still prevalent and uncertainty increasing, the question is how low the ECB can push rates to give the economy more breathing room," ING's Bert Colijn said.

The biggest risk to such an outlook is whether U.S. President Donald Trump levies fresh tariffs on the European Union and how the bloc responds.

Tariffs slow economic growth since they reduce demand for European goods overseas, weighing on exports, a key driver of growth for decades. But retaliatory measures could push up domestic inflation by making goods imported from the U.S. more expensive.

Source: Reuters

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Glendon

Economic

Forex

EUR/USD nosedives over 1% to near 1.0240 at the start of the week. The major currency pair plummets as United States (US) President Donald Trump reiterates threats to impose tariffs on the European Union (EU). Over the weekend, Donald Trump slapped 25% tariffs on Canada and Mexico and 10% on China. Trump also warned that he will also raise levies on the trading bloc, but he didn’t provide much information.

"It will definitely happen with the European Union. I can tell you that because they've really taken advantage of us," Trump said. He also accused the old continent of not buying enough US cars and farm products. Trump added that the EU take “almost nothing and we take everything from them”.

The imposition of tariffs on the Eurozone will accelerate its troubles. The shared currency bloc is already facing risks of a slowdown. Preliminary Eurozone Gross Domestic Product (GDP) data for the fourth quarter of 2024 showed that the economy was flat after expanding 0.4% in the third quarter. The shrinking German economy remained the weak link to the Eurozone's flat GDP growth. Flash German GDP data showed that the economy contracted by 0.2% year-over-year in the last quarter of 2024.

Signs of further weakness in the Eurozone economy could force the European Central Bank (ECB) to continue reducing interest rates. The ECB reduced its Deposit Facility rate by 25 basis points (bps) to 2.75% on Thursday and guided that the monetary policy path is clear, which is expansionary. Traders have fully priced in three interest rate cuts and see them coming by the summer as ECB officials are confident that inflation will sustainably return to the desired rate of 2% this year.

On Monday, a flash Harmonized Index of Consumer Prices (HICP) report for January showed that price pressures deflated on a month-on-month basis. The core HICP – which excludes volatile food and energy prices – deflated by 1% after growing 0.5% in December. In the same period, the headline HICP also deflated by 0.4%. On year, the headline HICP rose steadily by 2.7%, faster than estimates of 2.6%. The core HICP rose expectedly by 2.5%, faster than expectations of 2.4%.

Daily digest market movers: EUR/USD slides vertically as USD gains on global trade war

EUR/USD faces an intense sell-off due to the strength of the US Dollar (USD). The safe-haven demand for the US Dollar has increased significantly as US President Trump has started a trade war. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, surges above 109.50.

The US Dollar’s movement is mainly influenced by Trump’s comments on global trade. However, investors will also focus on a slew of US economic data, such as ISM Manufacturing and Services Purchasing Managers Index (PMI), ADP Employment Change and the Nonfarm Payrolls (NFP) for January, and JOLTS Job Openings for December, which will release this week.

Investors will pay close attention to labor market-related data to know its current status. On Wednesday, the Fed kept interest rates at their current levels and guided that the central bank will stay in the waiting mode until it sees “real progress in inflation or some weakness in the labor market”.

In Monday’s session, investors will focus on the US Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) and the revised S&P Global Manufacturing PMI data for January.

Technical Analysis: EUR/USD sees more downside below 1.0170

EUR/USD dives vertically to near 1.0200. Last week, the major currency pair started declining after a short-lived recovery move to 1.0533, which market participants capitalized for adding shorts. The pair has fallen below the 20- and 50-day Exponential Moving Averages (EMAs) around 1.0378 and 1.0440, respectively, suggesting a bearish trend.

The 14-day Relative Strength Index (RSI) slides below 40.00, suggesting a strong bearish momentum.

Looking down, the January 13 low of 1.0177 and the round-level support of 1.0100 will act as major support zones for the pair. Conversely, the psychological resistance of 1.0500 will be the key barrier for the Euro bulls.

Source: FXSTREET

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Manuel

Economic

Political

Canada’s energy patch may have temporarily dodged disaster in the trade war with the US, with President Donald Trump’s orders taxing crude at a lower rate and possibly letting producers avoid levies altogether on some shipments.

The 10% tariff on US imports of Canadian energy is less than half the 25% rate the industry had braced for, a move White House officials said was meant to limit increases in gasoline and heating oil prices. The wording of the order also leads some analysts to believe Canadian producers won’t be taxed on shipments that simply pass through the US, allowing them to export significant volumes off the Gulf Coast without penalty.

“At 10%, pricing offsets are more manageable, and likely will not require a significant overhaul to physical flows,” RBC analysts including Helima Croft said in a note.

A US Midwestern coking refinery could still achieve the same level of profitability it had before the tariffs if refined product pricing rises by 4%-6% while Canadian heavy crude’s discount to US benchmark oil widen to $14-$16 per barrel, RBC also said.

Still, the tariffs threaten to disrupt a North American energy market that has been highly integrated for decades. Canada sends nearly all its roughly 4 million barrels a day of oil exports to the US, making it America’s largest foreign source of crude.

American refiners benefit from the steady flows of relatively cheap, heavy Canadian crude that can be turned into fuel more profitably than the light oil produced domestically. The US Midwest, home to 23% of the country’s refining capacity, is particularly reliant on Canadian supplies shipped via pipeline and has limited ways to access alternatives.

The hit to light crude grades from Canada’s top oil-producing province of Alberta may also be substantial because they compete with abundant US supplies of similar oil. Nearly half of Alberta’s oil is either light, conventional crude or oil sands bitumen that has been upgraded into light synthetic oil. The discount for light Canadian grades may widen by $7 a barrel, said Susan Bell, a Rystad Energy analyst. The discount on synthetic crude is currently at $3.50 a barrel.

However, Trump’s executive order says the duties “shall apply with respect to goods entered for consumption,” potentially exempting Canadian oil that crosses the US and is exported off the Gulf or that transits the US en route to refiners in Ontario and Quebec.

The “working assumption” is that crude destined for the Gulf won’t be subject to tariffs, Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners in Toronto, said in an email. “But that may require legal interpretation.”

About 300,000 barrels a day of oil could be sent to the Gulf for re-export, Dan Tsubouchi, chief market strategist at SAF Group, said in a note.

Canada has another partial shield against the tariffs: the newly expanded Trans Mountain pipeline running from Alberta to a marine terminal near Vancouver. The expanded line, which started operation in May, is underused because of its expensive tolls.

About 180,000 barrels of oil a day could be diverted from the US for shipment off the West Coast to non-US markets, Bell said. The drop in exports to the US means that West Texas Intermediate crude could strengthen by about a $1 a barrel versus international benchmark Brent, she said.

Canada is responding to the US levies with 25% counter-tariffs on C$155 billion ($107 billion) of American-made products. Prime Minister Justin Trudeau didn’t specifically rule out measures such as taxing or restricting energy exports to the US, but said no one industry or region should bear an undue burden of Canada’s response.

Since Trudeau isn’t signaling any export tax on crude, total flows out of Canada probably won’t change, Nuttall said.

Still, the tariffs could slow economic growth, reducing oil demand and making it less likely that OPEC+ will increase supplies to the world market as it had planned, backfiring on Trump’s push to have the cartel boost output to lower prices, Nuttall said.

Source: Bloomberg

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Warren Takunda

Economic

The Canadian dollar sank to its weakest since 2003 against the Dollar and is near 2024 lows against the British Pound following confirmation the U.S. would proceed with a 25% import tariff on Canadian goods.

Canadian Prime Minister Justin Trudeau reciprocated with a tariff on C$155BN worth of U.S. imports, thereby kicking off a trade war in North America.

Trump said he would hold separate calls on Monday morning with Trudeau, as well as with the Mexican leadership. The levies are set to take effect on Tuesday, barring a last-minute deal.

The hope of a last-minute deal will limit CAD weakness on Monday. Any breakthrough would see CAD rally back in a relatively determined fashion.

However, the chances of Trump pulling back look slim. "I don’t expect anything very dramatic," Trump said of the planned calls. "We put tariffs on. They owe us a lot of money, and I’m sure they’re going to pay."

Trump surprised markets in the wake of his November election win by citing Canada as an early target for tariffs.

Many thought Canada would be covered by the NAFTA 2.0 agreement that Trump himself created during his first presidency. However, he made it clear that tariffs would be tied to issues concerning immigration and drugs, as well as trade imbalances.

"Mexico sends tons of fentanyl into our country. Canada has seen a massive increase in fentanyl trafficking across its border. There are three ways of stopping this. The first is ask nicely, which we’ve done. It’s gone nowhere," says Vice President JD Vance.

"Now we’re on to the consequences phase," he adds.

Pound to Canadian Dollar: Last-ditch Tariff Talks_1

Above: GBPCAD at daily intervals showing the technical ceiling CAD buyers are facing.

Developments GBPCAD rises up towards a technical ceiling at 1.8150, which has invited selling interest in the past and thwarted the achievement of stronger levels for CAD buyers.

Certainly, any softening of the U.S.-Canada trade faceoff would reinforce this level and prompt another pullback to 1.7850 and then lower.

On the upside, a break of 1.8150 would open the door to another retest of the 2024 high at 1.82. To reach above here we would need clear confirmation that the U.S. is sticking with its hawkish trade stance.

Source: Poundsterlinglive

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Glendon

Economic

Forex

Saturday's announcement that Washington would go into full tariff mode against Mexico and Canada starting tomorrow has come as a surprise to FX markets. As recently as Friday afternoon, reports were circulating that tariffs would come into effect on 1 March – seemingly providing a month for Canada and Mexico to negotiate away the tariff threat. Instead, it looks like the 'maximum pressure' negotiating position of this new Trump administration is to tariff first, perhaps in an effort to get the best deal as quickly as possible, ING’s FX analysts Chris Turner notes.

DXY to stay bid near this year's high

“The trouble for investors, however, is that the off-ramp to these tariffs remains unclear. There have been remarks from President Donald Trump to the effect that there's 'nothing they can do' to avoid these tariffs. This points to a more substantial, permanent shift to a high tariff-low tax US economy and perhaps is consistent with the major report being asked of the US Commerce Department as to why the US runs large, perennial trade deficits. This report is due in April and could lead to universal tariffs.”

“The FX market reaction has unsurprisingly been a defensive rally in the dollar. The DXY gapped higher by a percent. The currencies most heavily hit were understandably the commodity currencies - those currencies that benefit from global growth. In fact, the New Zealand and Australian dollars have been hit harder than the Canadian dollar. Outperforming are the defensive Japanese yen and Swiss franc. This is also driven by the 2% fall in S&P futures - under pressure on the prospect that US supply chains will break and corporate profitability will be hit.”

“Unless Donald Trump surprises with a very last-minute de-escalation in tariffs (unlikely) expect DXY to stay bid near this year's high. Friday's benchmark revisions will probably be the best chance of DXY filling the overnight gap left down to 108.56.”

Source: FXSTREET

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Adam

Economic

Retail Sector Faces Prolonged Downturn Despite Industrial Growth

South Korea’s retail sector experienced its steepest decline in over two decades, with 2024 retail sales dropping by 2.2% compared to the previous year. This marks the third consecutive annual decline, underscoring weak domestic demand despite continued strength in industrial production and capital investment. The data, released by the Korean Statistics Agency (SK) on February 3, reveals that the country’s consumer economy is struggling to recover, weighed down by inflationary pressures and declining consumer purchasing power.

The 2.2% contraction in retail sales represents the largest annual drop since 2003, following smaller declines of 0.3% in 2022 and 1.4% in 2023. Officials at SK noted that this three-year downward trend is the longest period of declining retail sales since the agency began tracking such data, signaling sustained weakness in household spending. The biggest declines were observed in durable and non-durable goods, particularly food-related products, as high inflation continued to squeeze consumer budgets.

Despite the slump in retail sales, South Korea’s industrial output expanded by 1.7% in 2024, marking the third consecutive year of growth. The semiconductor sector played a crucial role in this expansion, with rising global demand for memory chips and advanced semiconductor components driving a surge in production and export activity. Investment in industrial infrastructure also rebounded, increasing 4.1% year-over-year, reversing a 5.5% contraction in 2023. This uptick reflects stronger demand for semiconductor-related machinery, supporting the country’s position as a key player in the global technology supply chain.

Weak Consumer Spending Contrasts with Industrial Resilience

The stark contrast between declining retail consumption and expanding industrial production highlights a growing economic divergence in South Korea. While businesses tied to technology and manufacturing continue to thrive, households are cutting back on discretionary spending, reflecting cautious consumer sentiment amid economic uncertainties.

Rising inflation has played a major role in the retail downturn, eroding purchasing power and forcing consumers to limit spending on non-essential goods. The cost of living crisis has particularly impacted lower and middle-income households, dampening demand for household goods, apparel, and even food items. This weakness in consumer spending raises concerns about South Korea’s economic recovery, as domestic demand remains a critical pillar of overall growth.

Analysts suggest that the prolonged decline in retail sales could force policymakers to consider economic stimulus measures aimed at supporting consumer confidence and easing inflationary pressures. However, with industrial output holding firm, South Korea’s economic trajectory remains complex, with growth heavily reliant on external demand for high-tech exports rather than domestic consumption.

Looking ahead, South Korea’s economy may need to balance its reliance on industrial expansion with stronger domestic spending incentives, ensuring that economic growth is broad-based and not solely driven by external trade factors. The persistence of weak retail sales, if left unchecked, could pose long-term risks to economic stability, potentially limiting South Korea’s overall growth prospects in 2025 and beyond.

Source: The Korea Times

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Warren Takunda

Economic

The Bank of England is preparing to announce a cut in UK interest rates on Thursday, with central banks around the world facing increased scrutiny as Donald Trump ramps up his attacks on the US Federal Reserve.

Trump wants lower borrowing costs to boost the economy, even though the US has maintained the highest rate of growth in the G7 richest nations for several years and has every prospect of topping the G7 poll in 2025.

Three days after his inauguration, the president said: “I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making the decision.”

Jerome Powell, the chair of the Federal Reserve, resisted an attack by president Trump last week as US rates were held steady.

Trump’s comments appeared to prompt European Central Bank boss Christine Lagarde to warn against political interference in monetary policy or risk inflation racing up again and causing panic in financial markets.

Against this backdrop, the Bank’s governor, Andrew Bailey, will present its decision on UK rates this week, with a cut from 4.75% to 4.5% widely expected. After two cuts last year, financial markets are expecting three reductions during 2025, to leave the base rate at 4% by the end of the year.

Bailey is no stranger to political pressure himself. Former prime minister Liz Truss threatened to review the central bank’s remit in response to successive interest rate rises as inflation headed above 10%.

Truss has subsequently said that she would have sacked Bailey, but his eight-year contract, and the “deep state”, made that impossible.

This time, the governor is feeling the heat from a different direction, though not unconnected to the latest drama in Washington.

Bailey and his colleagues on the monetary policy committee (MPC) are considering whether a slowdown in economic growth is going to persist – and whether they may be to blame.

At the moment, the chancellor, Rachel Reeves, is taking all the flak for the slowdown as she fights to get business onside with her growth plan after a difficult first few months in office. But attention could switch to the central bank should interest rates in the UK, which are the highest in the G7 – made up of France, Germany, Italy, Japan, the US, UK and Canada – be kept on hold at 4.75%.

There are Labour MPs who want to criticise Bailey but are reluctant to go public, fearing a rebuke from Rachel Reeves

Most forecasts have shown the economy staggering this year – much as it did in 2024. Official figures released next month are expected to confirm that growth was virtually flat in the second half of last year.

The UK should still outpace much of continental Europe in 2025, but as victories go, this could be considered of little value. To most Britons it will rank as another year of stagnation.

Bank officials have worried for some time that persistently high wages in the private sector will push inflation up again. More recently, the weakness of the pound against the dollar has caused a headache.

Sterling has fallen after financial markets considered how much the new president’s policies would push up inflation and prevent the Fed from making further reductions in rates. The reaction was one of panic after Trump’s return to the White House was cast as inflationary and previous forecasts of rate reductions in the US were reversed.

The dollar strengthened and the pound fell on the prospect of higher interest rates than expected in the US. A lower pound makes imports more expensive, pushing up inflation.

Some forecasters disagree with the consensus. The International Monetary Fund said in its most recent health check of the UK economy that wage growth was slowing quickly and other inflationary pressures would weaken this year, allowing the MPC to push through four rate cuts to 3.75%.

What most economists agree is that interest rates are punishing the economy and are too high. Killing off the remnants of inflation, as some MPC members want to do, comes at too high a price. UK inflation was 2.5% in December, easing from 2.6% in November but above the Bank’s 2% target.

There are Labour MPs who want to criticise Bailey, but are reluctant to go public, fearing a rebuke from Reeves, who has promised to respect Bailey’s independence.

This leaves Bailey and the MPC to reflect on the damage they will do, not to the Labour government, but the economic outlook, if they follow Powell’s hard line.

The Fed has a strong economy to manage and keep in check. Meanwhile, the Bank is overseeing a weak UK economy in need of a stimulus.

Source: TheGuardian

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Euro Zone Inflation Rises but March Rate cut Still Likely

Source: Reuters

EUR/USD Slumps by Over 1% as US President Trump Reiterates Tariff Threats on Eurozone

Daily digest market movers: EUR/USD slides vertically as USD gains on global trade war

Technical Analysis: EUR/USD sees more downside below 1.0170

Source: FXSTREET

Canadian Oil Takes Solace in Lower-Than-Feared 10% Tariff

Source: Bloomberg

Pound to Canadian Dollar: Last-ditch Tariff Talks

Above: GBPCAD at daily intervals showing the technical ceiling CAD buyers are facing.

Source: Poundsterlinglive

USD: Trump Delivers New Tariffs

DXY to stay bid near this year's high

Source: FXSTREET

South Korea’s Retail Sales See Sharpest Decline in 21 Years Amid Economic Pressure

Weak Consumer Spending Contrasts with Industrial Resilience

Source: The Korea Times

Pressure Rises on Bank of England and the Fed as the Interest Rate Debate Gets Political

Source: TheGuardian

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