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Yesterday’s Fed policy meeting was a non-event. The US central bank kept rates steady at 4.25-4.5% and suggested they would remain there for some time. A hawkist twist in the statement that left out the part saying inflation has made progress was dismissed by chair Powell as being part of a “cleaning-up exercise”. He nonetheless noted the Fed wants to see “serial [CPI] readings” that suggested things were headed in the right way. Add “We need to let those [Trump’s] policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be” and you sense the central bank just installed a long pause that could last through June. US markets reacted accordingly. The small spike shortly after the updated statement was released, evaporated quickly, leading to marginal net daily changes varying between +1.9 (2-yr) to -0.6 bps (30-yr). Bunds slightly underperformed (+2.4 bps in the 30-yr). The dollar held a minor upper hand against most global peers. Sterling appreciated towards EUR/GBP 0.837 as UK Chancellor Reeves sought to convince investors of her growth-reviving plans in her first high-profile appearance yesterday since delivering the October budget. The Japanese yen outperformed yesterday and does so again this morning. USD/JPY eases to 154.5.

US Q4 GDP figures today should comfort the Fed in taking a long breather and keep both US yields and the dollar at least steady. Economic activity is seen to have expanded at a solid 2.6% q/q annualized pace following Q3’s 3.1%. Private consumption remains the key engine. Q4 PCE price deflators may have picked up to 2.5%. Euro area GDP growth contrasts with a meagre 0.1% q/q. France’s numbers released this morning suggest, if any, minor downside risks. From a market point of view, though, a lot of pessimism has been priced in already. Attention is likely to shift to the ECB meeting pretty quickly. Another 25 bps rate cut to 2.75% is all but certain. But the path forward is getting less and less predictable with the central bank nearing (the upper bound of) the neutral rate. President Lagarde will face but will probably walk around any related questions. Last week’s PMI’s in any case offered light at the end of the tunnel for the economy while flagging rising price pressures. We assume one more cut in March to 2.5% before the debate opens up and paves the way for a pause in the cycle. Since this is the market’s base case too, risks for the euro (and yields) are for Lagarde to keep the door ajar for cuts in April and June as well.

News & Views

The Brazilian central bank (BCB) raised its policy rate as flagged by new governor Galipolo by 100 bps to 13.25% and sticks to its commitment to implement another 100 bps rate hike at the next, March 19, policy meeting which will take the key Selic rate above its previous peak level of 13.75% (Aug 2022 – July 2023). Beyond the next meeting, the BCB reinforces that the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target and will depend on inflation dynamics, on the output gap, and on the balance of risks. Domestic economic activity and the labour market remain strong while inflation remains above the 3% target and is rising again. A significant increase in inflation expectations adds to upside inflation risks together with resilient services inflation and a persistently more depreciated currency both because of internal (fiscal) policy and the external environment (Fed: higher for longer). Inflation forecasts show headline inflation declining from 5.2% Y/Y to 4% Y/Y by Q3 2026 (current policy horizon), assuming a 15% peak policy rate through year-end.

The Bank of Canada (BoC) reduced its policy rate by 25 bps to 3% yesterday. The central bank acknowledged that the cumulative reduction in the policy rate since last June is substantial (200 bps). Lower interest rates are boosting household spending and the economy is expected to strengthen gradually (from 1.4% in 2024 to 1.8% in 2025 & 2026) and inflation to stay close to the 2% target. Risks around the outlook are reasonably balanced. Dovish twists include the labelling of the labour market as being “soft” and the warning that if broad-based and significant tariffs were imposed by the US, the resilience of Canada’s economy would be tested. Canadian money markets are split on the outcome of the next, March 12, policy meeting. All else equal we’re inclined to think of a pause awaiting new updates at the April meeting. The BoC yesterday also announced its plan to end quantitative tightening. The Bank will restart asset purchases (regular term repo programme followed by treasury bill purchases) in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy. The Canadian dollar remains weak at USD/CAD 1.4430 (1.45-1.47 resistance).

In focus today

At the ECB meeting today at 14:15 CET, another 25bp cut bringing the policy rate to 2.75% is unanimously expected among analysts and markets. Markets anticipate 100bp in rate cuts this year. While we expect the ECB to cut further, we see the risk of a repeat hawkish market reaction in December if Lagarde does not commit to the end point of this cutting cycle.

Multiple euro area prints are on the agenda today including the first estimate of euro area GDP for Q4 2024, which we expect to show continued weak growth at 0.1% q/q. Previously released data indicated that Spain remained the primary growth driver with GDP rising 0.8% q/q. Ahead of the euro area, we receive Q4 GDP figures from France and Germany, where we anticipate a slightly negative growth rate. Additionally, the euro area unemployment rate for December will be released. With survey indicators suggesting a softening of the labour market in recent months, not yet visible in the hard data, it will be interesting to see the print. Focus will also be on Spanish inflation for January.

In the US, we expect Q4 Flash GDP growth to land at 2.4% q/q AR, indicating a modest slowdown from the 3.1% pace in Q3. Solid private consumption continues to be the most important driver of growth, although we do pencil in some moderation towards 2025.

In Sweden, we will receive additional data to assess where we stand with regards to the widely expected consumption-driven recovery. At 08.00 CET, retail sales data for December will be out, followed by NIER's confidence indicators at 09:00 CET. The NIER survey will highlight consumer confidence, which has been rising since late 2022 but dipped in December. Corporate sector sentiment and pricing plans will also be examined.

Economic and market news

What happened yesterday

In the US, the Fed kept rates unchanged at 4.25-4.50% as expected. Powell delivered a balanced message avoiding speculation on future trade and fiscal policy effects. He noted the committee's general lack of urgency to adjust policy, but he did not rule out a cut in March. We make no changes to our call for the next cut in March and for quarterly reductions thereafter until the policy rate target reaches 3.00-3.25%. See more in Fed review: As balanced as it gets, 29 January.

In Sweden, the Riksbank cut the policy rate as expected by 25bp to 2.25%, motivated in the press release as "the risk of inflation becoming too high is limited, at the same time as economic activity is weak". In combination with the wording that the Riksbank "is prepared to act if the outlook for inflation and economic activity changes", our interpretation is that the Riksbank keeps the door open to further cuts, and we maintain our view that the Riksbank will cut once more to 2.00% in May. Especially as our inflation forecast is lower than the Riksbank's. See more in Flash Comment: Riksbank January 2025, 29 January. The Swedish GDP indicator for Q4 showed an increase of 0.2% q/q s.a. close to consensus and our expectations of 0.3% q/q. Important to note, that this print belongs in the unofficial, experimental set of SCB data, which has understated actual GDP growth, so it should be taken with a pinch of salt.

In the euro area, the European Commission presented the "Competitiveness Compass", which outlines policy priorities for the next five years aimed at enhancing the European economy's competitiveness. This will be achieved through reforms that promote investment by increasing innovation, risk capital, and reduced regulation. Concrete reforms, based on the Draghi report's recommendations, will be introduced over the next two years. If implemented, these reforms could enhance European and Danish productivity. However, their long-term impact remains uncertain due to the need for approvals and growing scepticism in the European Parliament about increased EU centralisation and integration.

In Spain, the strong GDP growth continued into Q4 rising 0.8% q/q (cons: 0.6%, prior: 0.8%). The Spanish economy has been a clear bright spot of the euro area with GDP rising 3.2% y/y in 2024. This growth has been boosted by strong service activity, relatively lower energy prices, and a large rise in employment.

In Canada, BoC cut policy rate by 25bp bringing it to 3.0% as widely expected. Emphasis was especially on the threat of US tariffs as a major source of uncertainty, though the BoC stressed that its projections do not incorporate these new tariffs threatened by the US.

Equities: Global equities declined yesterday, once again dragged down by the US while Europe was higher. Year to date, European equities are up by 6%, while their US counterparts have increased by only 3%. Yesterday was not influenced by a single factor and the DeepSeek impact faded as anticipated. The combination of monetary policy and earnings dominated the market, with monetary policy aligning closely with expectations, while earnings were strong not only in Europe but also in the US. Most positive earnings news in the US emerged after the close of cash trading, which should positively impact cash trading today. In the US yesterday, the Dow fell by 0.3%, the S&P 500 by 0.5%, the Nasdaq by 0.5%, and the Russell 2000 by 0.3%. Many Asian markets are closed for the Lunar New Year. However, those open for trading are mostly higher. Futures in Europe are mixed this morning, while US futures are higher, led by the Nasdaq.

FI: Yesterday's wait-and-see mode ahead of the FOMC in the evening led to European yields trading in a very tight range. In the afternoon, a surge in natural gas prices due to unplanned supply restrictions sent yields slightly higher though. 10y Bunds ended the day at 2.58%. All three central bank decisions were widely anticipated: Riksbank and the BoC cut by 25bp while the Fed was on hold. That said, BoC also announced its plan to end QT to complete the normalisation of its balance sheet. Starting in early March, BoC will gradually restart its asset purchases to stabilise its balance sheet. At the same time, effective 30 January, the BoC will set the deposit rate at a spread of 5bp below the policy rate. Together with the plan to halt QT, these measures aim to support the functioning of liquidity markets and mitigate upward pressure on the overnight repo rate.

FX: EUR/USD remained largely unchanged following the widely anticipated Fed hold, hovering above 1.04. We continue to see potential for a near-term topside to EUR/USD. CAD remained unfazed as the BoC delivered a widely expected 25bp rate cut, bringing its policy rate to 3.00%. We maintain our near-term bias for a move lower in USD/CAD. Yesterday, the Riksbank cut the policy rate as expected by 25bp to 2.25%. EUR/SEK initially dipped lower, but the cross ended the day close to unchanged. GBP FX has been in for a strong week with Chancellor Reeves speech yesterday not spurring renewed fiscal policy concerns.

Three of the Magnificent 7 companies – and ASML – released their Q4 earnings yesterday and the numbers were ... mixed. First, ASML announced better-than-expected results and more importantly a strong order book confirming a continued strength in AI business for the coming months. The share price gained more than 5.5% in Europe and regained the levels pre the DeepSeek selloff.

The announcements were less outright great from the three others’. Microsoft reported a significant boost in its AI segment, with an annual revenue increase of 175% year-over-year. However, the growth rate in Azure and other cloud services was 31%, slightly below 31.8% expected by analysts. Note that the company faces challenges in meeting the rising AI demand due to data center capacity constraints – the reason why they plan to invest around $80bn in AI this year. But investors were not enchanted by the cocktail of high spending and slowing growth, and sent the stock price more than 4.50% in the afterhours trading.

Meta exceeded both revenue and earnings expectations, but its current quarter forecast disappointed. More importantly, the company doubled down on its planned $60-65bn AI investment this year – defying the DeepSeek-triggered skepticism about AI costs – and Zuckerberg said that 2025 will make Meta’s AI accessible to over a billion users. There you go – you can’t have such ambitions and buy less than Nvidia’s most premium chips. The stock price first fell on disappointing current-quarter forecast then rebounded more than 2% in the afterhours. If Meta pulls off this AI story successfully, they have an incredible potential to grow as they have so much data in their hand! Meta's AI ambitions are as convincing as its metaverse bet was unconvincing.

And oh, Alibaba stepped out of the darkness saying that it’s AI model is the greatest of the world and is performing better than Meta and DeepSeek. A giant like Alibaba should be taken as a bigger threat than DeepSeek as the company can back it up with real-world applications and wide adoption. Enthusiasm from investors remains surprisingly underwhelming. Alibaba is a solid candidate for Chinese AI bets.

Overall, the AI race is intensifying, with strong demand and limitless potential. While competition might drive prices down, the sector is definitely on track for another impressive year of growth.

Last but not least: Tesla missed both earnings and revenue expectations last quarter, but... the company said that it will launch the robotaxi and pilot production of the Optimus as early as this year. Musk said that ‘Teslas will be in the wild with no one in them in Austin in June’. It was a rollercoaster ride in the afterhours trading. The stock price first fell nearly 4%, then rebounded to print a more than 4% jump. I should all admit that Musk is impressive encouraging price rallies with lower-than-expected results. But be careful, his implication in politics is a risk.

Apple is due to report earnings today.

Keeping up with the central banks

Zooming out, the US equity markets were down yesterday, but the futures are up this morning. The Federal Reserve’s (Fed) decision went according to the plan. Fed members decided to maintain the rates where they are but there was some confusion about the inflation outlook. The statement cited that inflation remains ‘somehow elevated’ bit removed a reference regarding the progress toward the 2% goal. The latter immediately got investors’ attention as a significant hawkish shift and sent stock prices lower. But then, Powell said that the language tweak was only to shorten the sentence and wasn’t meant to send a signal. So the Fed removed a big chunk of the most important information to markets from a sentence to shorten the sentence (?!) and investors partially bought into the rectification...

Overall, the fact that ‘inflation remains elevated’ and the fact that it does not necessarily trend toward the 2% target, combined with the healthy US jobs market and robust growth/earnings, topped with Trump’s tariff threats led to an unsurprisingly hawkish Fed announcement. The probability of a no cut in May rose to around 55%. And the first rate cut from the Fed is now expected for June – the earliest. But the data could change that.

Beyond the borders, the Bank of Canada (BoC) cut its rate by 25bp BUT refrained from giving any guidance due to Trump uncertainties. The USDCAD remains under the pressure of Trump risks to the Canadian growth that could need the BoC’s help to navigate the agitated waters, and the European Central Bank (ECB) will certainly announce a 25bp cut today, and repeat that if the data allows, there will be further support. The EURUSD is under pressure and is inclined to extend losses.

Key Highlights

• AUD/USD struggled near 0.6330 and started a fresh decline.
• It traded below a key bullish trend line with support at 0.6240 on the 4-hour chart.
• EUR/USD started a fresh decline from the 1.0520 zone.
• The US GDP could grow 2.8% in Q4 2024 (Preliminary).

AUD/USD Technical Analysis

The Aussie Dollar failed to extend gains above 0.6330 against the US Dollar. AUD/USD started a decline below the 0.6300 and 0.6250 levels.

Looking at the 4-hour chart, the pair traded below a key bullish trend line with support at 0.6240. There was a clear move below the 50% Fib retracement level of the upward move from the 0.6131 swing low to the 0.6330 high.

The pair even traded below the 100 simple moving average (red, 4-hour) and the 200 simple moving average (green, 4-hour). On the downside, immediate support sits near the 0.6200 level.

The next key support sits near the 0.6175 level and the 76.4% Fib retracement level of the upward move from the 0.6131 swing low to the 0.6330 high. Any more losses could send the pair toward the 0.6120 level.

On the upside, the pair seems to be facing hurdles near the 0.6250 level. The next major resistance is near the 0.6285 level. A close above the 0.6285 level could set the tone for another increase. In the stated case, the pair could even clear the 0.6330 resistance.

Looking at EUR/USD, the pair failed to start a fresh decline and started and extended losses below the 1.0420 support.

Upcoming Economic Events:

• US Initial Jobless Claims - Forecast 220K, versus 223K previous.
• US Gross Domestic Product for Q4 2024 (Preliminary) – Forecast 2.8% versus previous 3.1%.

Short Term Elliott Wave View in DAX suggests that rally from 11.19.2024 low is in progress as a 5 waves nesting impulse. Up from 11.19.2024 low, wave 1 ended at 20522.82 and wave 2 dips ended at 19649.87. The Index nested higher in wave 3. Up from wave 2, wave i ended at 20024.79 and wave ii ended at 19833.82. Wave iii higher ended at 20391.17 and wave iv ended at 20255.85. Wave v higher ended at 20480.49 which completed wave (i).

Pullback in wave (ii) ended at 20025.28. Index has resumed higher in wave (iii). Up from wave (ii), wave i ended at 20362.59 and wave ii ended at 20234.26. Wave iii higher ended at 21330.87 and wave iv ended at 21212.25. Wave v higher ended at 21491.51 which completed wave (iii). Pullback in wave (iv) ended at 21081.61. Expect wave (v) to end soon which should complete wave ((i)) in higher degree. Afterwards, wave ((ii)) pullback should correct cycle from 12.20.2024 low before the rally resumes. Near term, as far as pivot at 19648.57 low stays intact, expect dips to find buyers in 3, 7, 11 swing for more upside.

DAX 1-Hour Elliott Wave Chart From 1.29.2025

DAX Elliott Wave Video

https://www.youtube.com/watch?v=Lu7OV4NQdBc

The AUDUSD pair declined on Wednesday, dropping to 0.6220 after the US Federal Reserve's latest decision. As expected, the Fed kept interest rates steady at 4.25%-4.50%, but its statement was cautious, removing previous comments about inflation improving. This signaled that future rate cuts might not come as soon as expected, boosting the US Dollar and putting pressure on the Aussie.

From a technical perspective, the pair remains weak, with indicators showing bearish momentum. If AUDUSD falls below 0.6200, it could reach 0.6170, while resistance is around 0.6230.

GBPAUD – D1 Timeframe

Typically, when a price breaks a trendline, the retest of the same trendline often confirms a change in the market's direction. In the case of the price action on the daily timeframe chart of GBPAUD, the price broke below the trendline support and seems to be heading back towards the same trendline, but now as resistance. A hidden rally-base-drop supply zone aligns perfectly with the area of interest at the intersection of the two resistance trendlines. The sentiment from the daily timeframe is bearish.

GBPAUD – H4 Timeframe

The 4-hour timeframe chart of GBPAUD lends more detail to the original setup on the daily timeframe chart. Here, we are able to see the FVG (Fair Value Gap) more clearly, with the supply zone being much more visible.

Analyst's Expectations:

• Direction: Bearish
• Target: 1.96794
• Invalidation: 2.01398

Summary

• As universally expected, the FOMC decided at its policy meeting today to keep rates unchanged. The decision to maintain the target range for the federal funds rate at 4.25%–4.50% was universally supported by all 12 voting members of the FOMC.
• The post-meeting statement continued to describe the pace of economic activity as "solid." It also upgraded its characterization of the labor market. Previously, the Committee said that "labor market conditions have generally eased." The FOMC now views labor market conditions as "solid."
• The FOMC continues to characterize inflation as "somewhat elevated."
• In sum, there was little in today's statement to suggest the FOMC is contemplating another rate cut in the near future.
• With the pace of real economic activity holding up and with inflation remaining above target, we think the FOMC will keep rates on hold until the second half of 2025.

FOMC Appears To Be in Little Hurry to Cut Further

As universally expected, the Federal Open Market Committee (FOMC) left its target range for the federal funds rate unchanged at 4.25%–4.50% at the conclusion of its meeting today. Unlike in December, when Cleveland Fed President Beth Hammack dissented from the decision to cut rates by 25 bps—she preferred to keep rates on hold at that meeting—today's decision was unanimously supported by all 12 voting members of the Committee.

The post-meeting statement continued to note that "economic activity has continued to expand at a solid pace." It also stated that "the unemployment rate has stabilized at a low level in recent months." In that regard, the unemployment rate trended up from 3.4% in April 2023 to 4.2% in mid-2024. But it has subsequently leveled off at just over 4% (Figure 1). The statement went on to characterize labor market conditions as "solid." This characterization of the labor market represents an upgrade from the December statement, which said that "labor market conditions have generally eased."

Additionally, the December statement noted that "inflation has made progress toward the Committee's 2 percent objective," although it continued to describe inflation as "somewhat elevated." Today's statement simply said that "inflation remains somewhat elevated." In that regard, the year-over-year change in the core PCE deflator, which Federal Reserve officials believe is the best measure of the underlying rate of consumer price inflation, has leveled off noticeably above the FOMC's target of 2% (Figure 2).

In sum, there was little in today's statement to suggest the FOMC is contemplating another rate cut in the near future. The Summary of Economic Projections (SEP), which is the quarterly document that summarizes the macroeconomic forecasts of the individual Committee members, that was released in December showed that the median Committee member thought that an additional 50 bps of rate cuts would be appropriate by the end of the year. If the FOMC views only 50 bps of rate cuts by December as appropriate, then it clearly does not need to be in a hurry to cut rates.

Outlook; FOMC on Hold Until Second Half of 2025

As highlighted in our most recent U.S. Economic Outlook, we look for the FOMC to maintain its current target range for the federal funds rate until the second half of the year (Figure 3). Indeed, Chair Powell noted in his post-meeting press conference that policy "is significantly less restrictive" today than it was before the FOMC started to cut rates, which "means we do not need to be in a hurry" to ease further. As noted above, real economic activity is holding up reasonably well. If, as we expect, real GDP grew at an annualized rate of 2.3% in Q4-2024 on a sequential basis, then the economy would have expanded at a solid rate of 2.5% on a year-over-year basis. (The Bureau of Economic Analysis will release Q4 data on Thursday, January 30.) Additionally, we estimate that nonfarm payrolls rose by a solid 185K in January. (The Bureau of Labor Statistics will release employment data for January on February 7.) With inflation remaining stubbornly above target, we see little reason for the FOMC to cut rates in the near term. But with policy remaining somewhat restrictive, albeit not as restrictive as a few months ago, we are penciling in another 50 bps of easing by the end of 2025 (25 bps in September and another 25 bps in December). Thereafter, we look for the FOMC to maintain its target range at 3.75%–4.00% through the end of 2026.

The FOMC also made no changes today to the pace of balance sheet runoff, commonly referred to as "quantitative tightening" (QT). Specifically, the monthly caps of $25 billion of Treasury securities and $35 billion of mortgage-backed securities (MBS) will remain in place. Since peaking in early 2022 at roughly $9 trillion, the Fed's balance sheet has shrunk by about $2 trillion (Figure 4). As we wrote in our recent "Flashlight" report, we look for balance sheet runoff to continue through May. Starting June, we look for the Fed to maintain a constant size for the balance sheet through at least the end of the year. That said, we believe that the central bank wants to continue to reduce its MBS holdings, which currently total $2.2 trillion. Therefore, we think the Fed will begin to replace MBS paydowns one-for-one with Treasury securities.

The Federal Reserve Open Market Committee (FOMC) maintained the federal funds rate in the 4.25% to 4.50% range and announced it would continue its balance sheet runoff.

The Fed justified its decision to hold rates steady by highlighting that the economy "continued to expand at a solid pace", while inflation still remains "somewhat elevated".

On the future path of policy, the statement shows that the Fed thinks risks are roughly balanced. There was no mention of risks coming from Trump tariffs nor how it would respond should a worst-case scenario unfold.

All of the members of the FOMC voted in favor of the decision.

Key Implications

A policy rate pause was always expected today. The more pressing question relates to how the Fed's outlook has changed following a flurry of President Trump's executive orders and under the threat of tariffs to various countries. The policy statement failed to touch on this. We look to see if Chair Powell can shed more light on this during his presser.

Markets are expecting the Fed to remain on hold through the spring. While the President's policies have had an impact on Fed pricing, the strength of the economy remains the main driver. The Fed benefits from strength in consumer spending and jobs, alongside wage gain stabilization. Inflation has also been more restrained, with the Fed's preferred core PCE index running at 2.5% on a three-month annualized basis. Solid growth and stable inflation mean that the bar for rate cuts is high. Unless we start to see weaker U.S. economic growth, we expect the Fed to remain on the sidelines.

FOMC left interest rates unchanged at 4.25–4.50% in a unanimous decision, as widely expected. However, the accompanying statement provided little clarity on the duration of the pause.

Fed simply reiterated that the timing and extent of future rate cuts will depend on incoming economic data, the evolving outlook, and the balance of risks..

The statement highlighted that the US economy continues to "expand at a solid pace," with the unemployment rate remaining stable at low levels and labor market conditions still "solid." Inflation remains "somewhat elevated."

Additionally, Fed emphasized that it remains "attentive to the risks to both sides of its dual mandate."

Full FOMC statement here.