UK Budget Deficit Soars More Than Forecast on Debt Costs

Economic

Forex

Summary:

(Jan 22): Debt costs pushed up UK government borrowing more than forecast last month, highlighting the fiscal challenges facing

(Jan 22): Debt costs pushed up UK government borrowing more than forecast last month, highlighting the fiscal challenges facing Chancellor of the Exchequer Rachel Reeves.

The budget deficit totaled £17.8 billion (US$21.9 billion or RM97.7 billion) in December, more than double the £7.7 billion recorded a year earlier, the Office for National Statistics said Wednesday.

It left the shortfall in the first nine months of the fiscal year at £129.9 billion — £4 billion higher than forecast by the Office for Budget Responsibility at the time of budget on Oct 30.

The increase in December was driven by the cost of servicing inflation-linked bonds, which account for around a quarter of the total government debt stock. Overall debt costs were at £8.3 billion, £3.8 billion more than a year earlier. There were also increases in welfare payments and public-sector pay.

Stubborn inflation, a surge in gilt yields since the budget and a deteriorating growth outlook have left Reeves in danger of breaking her own fiscal rules, which require day-to-day spending to be covered by tax revenue by the 2029-30 fiscal year.

At the budget Reeves was deemed to have just £9.9 billion of headroom but that has likely been wiped out by the rise in government borrowing costs earlier this month.

Reeves has pledged not to raise taxes again after launching a £40 billion raid in October. She is said to favor spending cuts instead, opening Labour to criticism that it is returning to the austerity. With departmental spending plans beyond 2026 already tight, Reeves may also struggle to convince investors that she can deliver further cuts.

Source: Theedgemarkets

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Owen Li

Economic

President Trump’s comments about potential tariffs on Canada and Mexico by February 1st caused increased market volatility and risk aversion.

The US Dollar Index (DXY) experienced significant price swings due to uncertainty and shifting information.

Tariffs are seen as potentially inflationary, which could reduce expectations of future rate cuts and support a stronger USD.

The DXY broke below a key ascending trendline, suggesting potential further downside.

President Trump’s first day didn’t include clear plans for tariffs, and officials said any new taxes would be applied slowly, which was good news for currencies affected by trade. The Euro and British Pound benefitted as it appeared the Trump team had no plans for tariffs on the EU or the UK. This could of course change in the coming days.

This morning however we got some clarity on the Trump administration’s plans. President Trump told reporters his team was thinking about tariffs on Canada and Mexico by February 1 which increased concerns that his policies may not be implemented gradually after all.

This saw risk sentiment increase with the likes of Gold rising as well as markets ponder the potential impact of wider trade wars.

Currency Strength Chart: Strongest USD, JPY, CHF, EUR, GBP, NZD, AUD, CAD – Weakest

Will the USD Appreciate Under President Trump?

The impact of potential tariffs can not be understated as evidenced by the sharp swings we saw yesterday. Yesterday’s Wall Street Journal report about the potential for incremental tariffs and no specifics led to US Dollar weakness, while the Mexican Peso and the Canadian Dollar were the major beneficiaries.

This trend was reversed today with another bout of volatility as President Trump floated February 1 for potential tariffs against Mexico and Canada. Some analysts suggest that the lack of clarity could be worrying as it could mean that President Trump’s economic team is working on something big. If this is the case, volatility may be just getting started.

USD Index (DXY): Dollar Recovers as Tariffs Take Center Stage_2

Tariffs also bode well for a stronger USD, at least in the interim. Markets see tariffs as potentially leading to heightened inflation and thus less rate cuts. However, given that President Trump signed an order looking at the cost of living issue, these fears could be arrested in the coming months. The question is whether that will be too late?

In Trump’s first term, the US dollar had a tough time. Now though, it looks like the dollar might enjoy a better run this time around. The only thing I know for sure, is that the next few days will be very unpredictable.

It’s a relatively quiet week on the data front from the US with tariff developments and US policy likely to take center stage and drive market movements. On Friday we have the US S&P Manufacturing and Services PMI data which could add some additional volatility. USD Index (DXY): Dollar Recovers as Tariffs Take Center Stage_3

USD Index (DXY): Dollar Recovers as Tariffs Take Center Stage_3

Technical Analysis

US Dollar Index (DXY)

The US Dollar index has had an interesting ride as expected to start the week. The inauguration of President Donald Trump certainly stirred volatility yesterday with some whipsaw price action experienced by the US Dollar.

A jump to the downside when markets were closed in the US session saw the DXY on the daily timeframe break below a key ascending trendline hinting at further downside ahead.

US Dollar Index (DXY) Daily Chart, January 21, 2025

Dropping down to a H4 timeframe and price is currently testing the ascending trendline which is also where the 100-day MA rests, making this a key confluence area.

price has showed an initial rejection here, showing signs that a further pullback may materialize. If this does not happen then a retest to close yesterdays gap at 1.09300 may become s areal possibility.

Immediate support rests at 108.00 with a break lower finding the 200-day MA at 107.90 before the 107.00 handle comes back into focus.

If the price continues its recovery, the USD Index could find resistance at 108.82 before the 109.30 and 110.00 handle become areas of focus.

US Dollar Index (DXY) Four-Hour (H4) Chart, January 21, 2025

Support

108.64

108.00

107.60

Resistance

109.00

109.52

110.00

Source：action forex

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ING

Economic

Price action in US Treasuries remains biased in a positive direction, and we maintain a tactical long positioning

There are lots of forces that can ultimately force the 10yr yield up to 5% in the weeks and months ahead, but for now the bias is in the other direction, for a few reasons. First, we've just had a material prior move higher in yields, and typically they are followed by a test back lower again. Second, mutual fund data flows show a re-setting of duration longs for the first couple of weeks of 2025, reversing the significant preference for duration shorts into the turn of the year. Third, despite the strong speech laced with executive action(s) from President Trump post Monday's inauguration, the market continues to await precise policy prescriptions with respect to fiscal policy, tariffs and tax policy. Fiscal and tax policies require congressional approval, and indeed a legislative process, which takes time.

The time for discounting unclear outcomes is behind us; the market now moves into reacting to actual policy prescriptions. And arguably to more influence from actual data releases (and this week is quietish for those).

The uncertainty about the ECB terminal rate is a source of volatility

A European Central Bank rate cut next week is easy to call, bringing the policy rate down by 25bp to 2.75%, keeping it in slightly restrictive territory. But going forward the ECB’s job is going to be more difficult, as the key question is where is the landing zone? With inflation numbers still too hot to call victory on that front, but growth numbers clearly weakening, the balancing act will be a source of rates volatility. As seen in the chart below, the pricing of the ECB’s landing zone has been strongly tied with rates further out the curve. With plenty of ECB speakers on the agenda, markets will be listening for what to expect.

The uncertainty around the ECB’s terminal rate means that US influences, including Trump’s next policy moves, will remain a driving force on the short end of the EUR curve. For now markets seem to anchor the 2Y swap rate to a landing zone of 2%, which should hold well as long as US rates continue to see little room for Fed cuts. Should US markets start pricing in more Fed cuts (which we think will happen), then that 2% handle will come under pressure. Markets may very well start toying with the idea of a terminal rate closer to 1.5% again.

The 10Y swap rate is strongly linked to the ECB terminal rate pricing

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Statistics Canada

Data Interpretation

On January 21, Statistics Canada released the December CPI annual report:

In December, the Consumer Price Index (CPI) rose 1.8% year-on-year, down from 1.9% in November. CPI excluding food rose 2.1% year-on-year.

The data shows that Canada's annual average inflation rate decreased from 3.9% in 2023 to 2.4% last year. While this marks the lowest level since 2020, it remains above the pre-pandemic annual average, indicating a slow but steady pace of returning to historical inflation levels. Excluding the pandemic peak years of 2021 to 2023, the average CPI for 2024 is the highest since 2011.

Breakdown of Data:

The federal government's GST holiday contributed to price declines across several categories, with the most notable drop in restaurant food and beverage prices, which fell by 1.6%.

Despite this, housing prices rose by 4.5% in December, slightly lower than the 4.6% increase in the previous month.

Due to base-year effects, gasoline prices increased by 3.5%.

While goods prices showed significant deceleration, service prices continued to rise. Since December 2021, rental prices have increased by 22.1%. Food purchased from restaurants and alcoholic beverages from stores contributed the most to the slowdown.

This inflation data largely met expectations, with core inflation easing, providing room for the central bank to cut interest rates. Overall, Canada experienced strong employment and robust economic growth last year, with moderate core inflation. However, potential trade tariffs could disrupt progress. Despite the notable data fluctuations, underlying inflation is near 2%, and the Bank of Canada may cut interest rates by 25 basis points next week.

Canada's December CPI

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ING

Commodity

Energy – Freeport outage sees TTF surge

The oil market’s attention is slowly turning away from US sanctions against Russia towards President Trump’s potential trade policy, which saw Brent settle below US$80/bbl yesterday. The president has reiterated his threats to impose a 25% tariff on imports from Canada and Mexico, potentially by 1 February. Overnight, he also threatened 10% tariffs on China in retaliation to fentanyl flows from the country, which has kept some pressure on oil prices in early morning trading in Asia today. Clearly, trade and tariff risks and the potential for retaliation are growing.

The European natural gas market surged higher yesterday with TTF settling more than 4.5% higher on the day and above EUR50/MWh – the highest level since the first trading day of 2025. The catalyst for the move appears to be an outage at the Freeport LNG export terminal in the US, which has been dealing with power issues which coincide with the freezing weather conditions the region is currently experiencing. Freeport, which has a capacity of a little more than 20bcm, said the plant will remain shut until power to the plant stabilises. Europe needs to pull in more LNG this winter with the loss of Russian pipeline flows through Ukraine, along with also stronger demand. EU gas storage has now fallen to 59% and the region will need to try to make sure it stays above the European Commission’s target of 50% full by 1 February.

In addition, Germany is potentially looking at subsidising the refill of gas storage ahead of the 2025/26 winter, a discussion we are likely to see more of across the EU with the TTF forward curve providing little incentive for players to store gas for the next winter with summer 2025 prices trading at a premium to 2025/26 winter prices.

Metals – Complex declines as Trump plans tariffs on Canada and Mexico

Base metals declined yesterday after US President Trump said, on his first day back in power, that he will likely impose tariffs as high as 25% on Mexico and Canada by 1 February. Trump also indicated that he was still considering a universal tariff on all imports to the US, but said he was “not ready for that yet”. This has raised prospects of renewed global trade conflict once again.

Tariffs are the biggest risk to our industrial metals outlook. We believe with President Trump back in the White House, the downside risks have increased for industrial metals.

Agriculture – CONAB lowers coffee output estimates

Brazil’s agriculture agency, CONAB lowered its coffee production estimates for 2024/25 as adverse weather conditions last year and at the end of 2023 resulted in reduced yields. In its recent survey, CONAB estimates total coffee production in Brazil to fall 1.6% year-on-year to 54.2m bags in 2024/25, below the previous estimates of 54.8m bags. The agency said that the Arabica coffee production projections were little changed at 39.6m bags. However, this was still 1.8% above last season’s output. Meanwhile, Robusta coffee production estimates fell from its previous estimate of 15.2m bags to 14.6m bags (-9.6% YoY). However, the market is more focused on how the 2025/26 crop develops with the harvest set to start in April. There have been concerns over the upcoming crop given the dry weather conditions seen over much of 2024.

Recent estimates from the Brazilian Association of Vegetable Oil Industries (ABIOVE) show that soybean production could rise 11.9% YoY to 171.7mt in 2025, up from its previous forecast of 168.7mt. Similarly, soybean export estimates were raised by 1.7mt to 106.1mt, while 2024 export estimates were increased from 98.3mt to 98.8mt. Meanwhile, soybean ending stock estimates were raised to 9.8mt this year, up 2.2% from its earlier forecast. In 2024, ending stocks declined by 22% YoY to 3.6mt.

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Glendon

Economic

Forex

The EUR/JPY cross attracts follow-through buyers for the fourth straight day on Wednesday and looks to build on its recovery from the 159.70-159.65 area, or over a one-month low touched last week. The intraday positive move lifts spot prices to a one-week top, around the 162.35-162.40 area during the Asian session and is sponsored by the emergence of some selling around the Japanese Yen (JPY).

The global risk sentiment remains well supported by the Israel-Hamas ceasefire agreement and hopes that US President Donald Trump might relax curbs on Russia in exchange for a deal to end the Ukraine war. Adding to this, Trump's proposed trade tariffs lacked details, which further boosted investors' appetite for riskier assets. This, in turn, is seen undermining demand for the safe-haven JPY and acting as a tailwind for the EUR/JPY cross.

That said, the growing acceptance that the Bank of Japan (BoJ) will raise interest rates on Friday should limit any meaningful JPY depreciation. Furthermore, a modest US Dollar (USD) strength, along with Trump's threat to impose tariffs on the European Union and bets that the European Central Bank (EC) will lower borrowing costs further, seem to weigh on the shared currency and should cap any further gains for the EUR/JPY cross.

The aforementioned fundamental backdrop and the recent repeated failures near the 200-day Simple Moving Average (SMA) warrant some caution for bullish traders. Hence, it will be prudent to wait for strong follow-through buying before positioning for any further appreciating move. Traders now look to ECB President Christine Lagarde's speech for some impetus, though the focus will remain glued to the crucial BoJ policy meeting.

Source: FXSTREET

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Owen Li

Data Interpretation

On January 22 (local time), Statistics New Zealand released the Q4 annual CPI report:

In Q4 2024, the CPI rose by 0.5% quarteronquarter and 2.2% yearonyear, consistent with the previous quarter and in line with expectations from the Reserve Bank and economists.

The data shows that New Zealand's annual inflation rate has remained within the central bank's 1%-3% target range for two consecutive quarters. After reaching a peak of 7.3% in 2022, inflation has now fallen to 2.2%, its lowest level since Q2 2021. This trend validates the central bank's decision to ease monetary policy in August last year. Although high interest rates led to a period of deep economic recession, inflation has recently shown significant moderation.

Key Data Highlights:

Domestic and international airfares rose by 9.3% and 6.6%, respectively, while holiday accommodation prices increased by 3.4%, making them the main drivers of Q4 inflation, accounting for 6% of the CPI basket.

Insurance premiums, influenced by natural disasters and inflation, increased by 11.2% annually, contributing significantly to the CPI.

Falling import prices were a key factor in reducing the annual inflation rate. In Q4, tradeable inflation was 1.1%, while nontradeable inflation dropped to 4.5%, below market expectations.

Core inflation indicators, excluding food and energy, approached the Reserve Bank's midpoint target of 2%, with core CPI falling from 3.1% to 3%.

Rent increases of 4.2% were the largest contributors to inflation, accounting for 18% of overall inflation, followed by local government rates, which rose by 12.2%. Meanwhile, gasoline prices and fruit and vegetable prices fell by 9.2% and 14.6%, respectively, partially offsetting other price increases.

Although some costs remain "sticky," the overall trend in inflation has slowed significantly, with core inflation nearing the target range.

Source: Statistics New Zealand

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Data

UK Budget Deficit Soars More Than Forecast on Debt Costs

Source: Theedgemarkets

USD Index (DXY): Dollar Recovers as Tariffs Take Center Stage

Technical Analysis

US Dollar Index (DXY)

US Dollar Index (DXY) Daily Chart, January 21, 2025

US Dollar Index (DXY) Four-Hour (H4) Chart, January 21, 2025

Support

Resistance

Source：action forex

Rates Spark: Still Tactically long

Price action in US Treasuries remains biased in a positive direction, and we maintain a tactical long positioning

The uncertainty about the ECB terminal rate is a source of volatility

The 10Y swap rate is strongly linked to the ECB terminal rate pricing

Canada's December Inflation Falls Back to Target Range, Economic Recovery Steady

Breakdown of Data:

The Commodities Feed: Tariff Threat Weighs on the Complex

Energy – Freeport outage sees TTF surge

Metals – Complex declines as Trump plans tariffs on Canada and Mexico

Agriculture – CONAB lowers coffee output estimates

EUR/JPY Climbs to One-Week Top, Closer to Mid-162.00s Amid Weaker JPY

Source: FXSTREET

New Zealand Inflation Rate Remains at 2.2%, Inflation Slows Down

On January 22 (local time), Statistics New Zealand released the Q4 annual CPI report:

Key Data Highlights:

Source: Statistics New Zealand

Risk Disclosure