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Summary

• The Eurozone economy is entering 2025 on an unsteady and uncertain footing. While household fundamentals are still favorable overall, they may become less supportive as 2025 progresses, suggesting the pace of consumer spending could slow. The outlook for the corporate sector remains challenging, and a further decline in investment spending cannot be ruled out.
• In addition to mixed fundamentals, sentiment has slipped through the latter part of 2024. Political uncertainties in France and Germany, and concerns surrounding the threat of U.S. tariffs on imports from Europe, are factors that have weighed on sentiment. Given the mixed fundamental backdrop and softening sentiment, our Eurozone GDP outlook for 2025 is for growth of just 0.9%. However, considering the prevailing uncertainties, we view the risks to even this modest outlook as to the downside.
• Considering the underwhelming Eurozone economic outlook, and even with some lingering inflation pressures, we expect the European Central Bank (ECB) to continue steadily along its monetary easing path through much of 2025. We maintain our outlook for 25 bps ECB rate cuts at the January, March, April and June meetings, with a final 25 bps rate cut in September, for a terminal ECB policy rate of 1.75%. The growing wedge between European Central Bank and Federal Reserve policy interest rates is likely, in our view, to keep the euro on the defensive versus the greenback over the medium term.

Eurozone Outlook Remains Uncertain And Unsteady

The Eurozone economy stagnated in 2023, in response to a spike in energy prices and inflation, and as European Central Bank monetary policy moved into restrictive territory. The region's economy has since experienced a recovery starting from early 2024, although that rebound has been uneven—a trend we think is likely to continue in 2025 given distinctly mixed fundamentals and as sentiment surveys remain downbeat.

Among the brighter pieces of recent economic news, Eurozone Q3 GDP grew 0.4% quarter-over-quarter, lead by a 0.7% gain in consumer spending. There are also indications that consumer activity may have continued expanding during the fourth quarter, with real retail sales for the October-November period up 0.4% compared to their third quarter average. However, while consumer fundamentals remain favorable overall (and certainly more so than for the corporate sector), there are signs they may become less supportive as 2025 progresses.

For the latest available figures (Q3-2024), growth in real employee compensation (3.1% year-over-year) and household disposable income (2.3%) outpaced growth in consumer spending (1.0%). While those favorable income trends would usually be considered supportive for the consumer outlook, the European Central Bank argued in a recent Economic Bulletin article that household savings could remain high, as households aim to rebuild their “real” net wealth that has been eroded by inflation in recent years. That is consistent with the Q3 household saving rate, which fell slightly to 15.3% of disposable income, but remains noticeably above the average of 13% in the year prior to the pandemic. Finally, while employment growth has held up to date, survey data suggest a slowdown in job gains may be ahead. The European Commission's Employment Expectations Indicator fell to 97.3 in December, a level that is historically consistent with job growth well below its current pace of 1.0% year-over-year in Q3-2024. Thus, while household fundamentals are favorable overall, they may become less supportive as 2025 progresses. Overall, we expect consumer spending will continue to advance this year. However, the combination of the potential for slower employment (and thus income) growth and continued consumer caution suggests gains in consumer expenditures may struggle to match the pace seen during the second half of 2024.

In contrast to the household sector, the outlook for the corporate sector remains more challenging. In Q3-2024, fixed investment spending rose 2.0% quarter-over-quarter, however much of that rise reflected a jump in the volatile intellectual property products component. We estimate that our measure of core ex-housing investment (which excludes both residential investment and intellectual property products) fell 1.6% quarter-over-quarter and 2.4% year-over-year. Moreover, we see reasons for investment spending to remain restrained in the quarters ahead. Net entrepreneurial income, a proxy for corporate profits, fell 4.6% year-over-year in Q3, a lack of profitability that may crimp investment spending. With manufacturing capacity utilization also at its lowest level since the pandemic, a further decline in investment spending cannot be ruled out.

Sentiment Slips Amid Rising Risks

In addition to these mixed fundamental factors, sentiment has slipped through the latter part of 2024, suggesting some downside risk to business investment in particular, and consumer spending to a lesser extent. Eurozone sentiment was at its most upbeat earlier in 2024, with the services PMI peaking at 53.3 in April and the manufacturing PMI peaking at 47.3 in May. Since then, however, Eurozone sentiment has followed a softening overall trend. By December the manufacturing PMI fell further into contraction territory at 45.1, while the services PMI was consistent with only modestly positive expansion at 51.6. As result, the composite (or economy-wide) PMI printed at 49.6, a level historically consistent with a stagnating economy.

Political uncertainty has weighed on sentiment to some extent, with French President Macron's centrist ruling coalition losing legislative elections in July, and the new French Prime Minister (and government) subsequently losing a vote of no-confidence in December. German Chancellor Scholz also lost a confidence vote late last year, with an election now scheduled for 23 February. Another factor likely weighing on sentiment is the threat of U.S. tariffs on imports from Europe. While the economic impact may be moderate—with Eurozone merchandise exports to the United States accounting for a little more than 3% of the region's GDP—the uncertainty surrounding tariffs could certainly weigh on investment spending and employment decisions.

Given the mixed fundamental backdrop and softening sentiment, our Eurozone GDP outlook for 2025 is for growth of just 0.9%. However, considering the prevailing uncertainties, we view the risks to even this modest outlook as to the downside.

European Central Bank Easing to Continue At a Steady Pace

Considering the underwhelming Eurozone economic outlook, and even with some lingering inflation pressures, we expect the European Central Bank (ECB) to continue steadily along its monetary easing path through much of 2025. Eurozone headline and core inflation are running moderately above the central bank's 2% inflation target, with January readings of 2.4% year-over-year and 2.7% year-over-year respectively. Services inflation is proving somewhat more stubborn at 4.0%. Still, with ECB policymakers expecting wage growth to slow and services inflation to ease, overall inflation is expected to converge more sustainably toward the 2% target by later in 2025. Moreover, we expect the European Central Bank to lower its policy interest rate largely independent of how fast, or how far, the Federal Reserve eases monetary policy. ECB policymakers have said as much in recent days. Governing Council member Olli Rehn said against “the backdrop of disinflation being on track and the growth outlook having weakened it makes sense to continue rate cuts” adding the ECB “is not the 13th federal district of the Federal Reserve System, we take decisions on the basis of our mandate, which is price stability in the euro area.” Croatia's Boris Vujcic said “we are not dependent on the Fed or any other central bank,” while Chief Economist Philip Lane said the ECB is likely to reduce rates further in order to ensure price stability and growth. Considering the economic environment and central bank signals, we maintain our outlook for 25 bps ECB rate cuts at the January, March, April and June meetings, with a final 25 bps rate cut in September, for a terminal ECB policy rate of 1.75%. Moreover, given a growing wedge between European Central Bank and Federal Reserve policy interest rates, we expect the euro to remain on the defensive versus the greenback over the medium term. As of now, we target a long-term EUR/USD exchange rate of $0.9700.

• Gold prices are currently in flux thanks to the US Dollar, global trade uncertainties, and geopolitics.
• A softer-than-expected US PPI release caused a temporary jump in Gold prices.
• The upcoming US CPI release is a key event that could trigger a significant move in Gold prices.

Gold prices continue to sway back and forth as markets weigh a strong US Dollar and growing uncertainties around global trade and geopolitics. On the other end we had a strong U.S. jobs report last week which boosted the dollar, and thus weighed on Gold prices.

A softer than expected US PPI release today helped Gold jump back toward the 2670/oz handle after hovering in the 2660’s for the majority of the European session. However the print has not really moved the needle when it comes to rate cut expectations, with markets still pricing in a more hawkish Fed in 2025.

Tomorrow we do have the US CPI release which could prove to be a catalyst for a bigger move. However this will rest on the data with a big deviation from expectations required in order for a major move to occur.

Markets are expecting a CPI headline print to come in at 2.9% and the MoM to come in at 0.4%. A significant beat of the forecast would likely see US treasury yields surge and thus drag Gold prices lower. There have however been occasions of late where Gold prices have remained resilient in the face of a stronger US Dollar and US data. Any moves after data releases have proved short-lived as we saw today following the PPI print.

Yesterday news filtered through that Donald Trump’s administration is considering gradually increasing tariffs to avoid causing a sharp rise in inflation, according to sources. I covered the implications of this on the US Dollar as well as an outlook on the US CPI release tomorrow: US Inflation: PPI, CPI Release Dates, DXY Analysis & Market Impact

Technical Analysis Gold (XAU/USD)

From a technical analysis standpoint, this analysis is a follow up from the technicals last week. Read: Gold (XAU/USD) Price Analysis: Will Prices Continue to Soar in 2025?

Gold appears poised for another leg higher looking at basic price action on a daily timeframe.

The precious metal saw a significant pullback yesterday printing a bearish engulfing candle on the daily timeframe. Today however has not resulted in any follow through with the precious metal now on course for a bullish inside bar candle close.

This would hint at further upside tomorrow with US CPI waiting in the wings. Gold does appear to have found support at the previous swing high around the 2658 handle and this is why from a price action perspective on the daily timeframe I am inclined to believe that we could be set for another push to the upside.

The 14-period RSI also supports this as the 50 level on the RSI has held firm indicating that bullish momentum remains in play.

The question will be whether the precious metal will have enough to break above the psychological 2700/oz handle.

Gold (XAU/USD) Daily Chart, January 14, 2025

Source: TradingView (click to enlarge)

Dropping down to a H1 chart and as you can see below, the red block has been holding prices in a tight $16-$17 range between the 2674 and 2658 handles respectively. 

A one-hour candle close outside of the red block may lead to a breakout in that direction. I would however urge caution especially if the breakout occurs during the CPI release tomorrow.

What we have seen from recent price action is that such moves have failed to gain traction of late, usually reversing in the hours after the news or data release.

Gold (XAU/USD) One-Hour H1 Chart, January 14, 2025

Source: TradingView (click to enlarge)

Support

• 2664
• 2658
• 2650

Resistance

• 2674
• 2685
• 2700

US producer prices rose at a slower-than-expected pace in December, easing fears of tighter monetary policy.

The PPI rose 0.2% in December, down from 0.4% in the previous month. And while price growth accelerated to 3.3% from 3.0% a year earlier, this was below the average forecast of 3.5%. Core PPI, which excludes volatile food and energy, was virtually unchanged over the month and maintained its year-over-year growth rate at 3.5% against the expected acceleration to 3.8%.

This is positive news for markets, where expectations of a more hawkish Fed in 2025 have gained momentum in recent weeks. The local high was reached on Monday morning when markets were pricing in a 32% probability of no change in the Fed Funds rate by the end of the year. The latest data shows that this estimate has fallen to 27.5%.

The softer report fuels tentative hopes that we may be seeing the start of a turnaround. This would be especially true if such a shift is confirmed in Wednesday’s consumer inflation report. Typically, these two publications miss expectations by about the same amount. However, the CPI has much greater potential to influence market prices, and it would be too presumptuous to rule out surprises altogether.

The Dollar Index fell 0.2% on release but quickly recovered its initial losses. In this case, the logic is clear: the dollar’s main competitors will have to ease policy by 50-100 points in the face of a significant cooling of the economy. This is the main factor in the tug-of-war over whether we will see 25 or 50 points of Fed easing within a year.

If confirmed on Wednesday, soft inflation could trigger profit-taking by dollar bulls, who took the DXY to 110 the previous afternoon. That said, a reversal for the dollar seems unlikely in the near future. It is more likely that the medium-term consolidation of positions will be followed by a new growth impulse towards the 112-113 area.

The yen remains calm and is lower on Tuesday. In the North American session, USD/JPY is trading at 157.98, up 0.34% on the day.

US inflation expected to rise

There are no tier-1 events out of Japan this week and the yen is having a relatively quiet week. That could change with the release of US inflation on Wednesday. Headline CPI is expected to rise to 2.9% y/y in December from 2.7% in November, while core CPI is expected to remain at 3.3% y/y for a third straight month. Inflation reports have had significant impact on rate expectations but the December inflation rate might not be all that significant, as expectations of a rate cut have fallen in recent weeks.

Since the December meeting, the Fed has tried to dampen rate-cut expectations and the market is not expecting a rate cut in the first quarter of 2025. The money markets have currently priced in a quarter-point cut at the Jan. 29 meeting at below 3% and at the March meeting at around 20%. With inflation largely under control and a solid labor market, there is little reason for the Fed to cut rates in the near term.

BoJ’s Himino: BoJ will discuss rate hike at Jan. 24 meeting

The Bank of Japan tends not to telegraph its rate plans, leaving investors in the dark and on the hunt for clues about the central bank’s rate plans. The uncertainty adds to the drama ahead of BoJ meetings and means that each meeting should be treated as a market-mover.

BoJ’s Deputy Governor Ryozo Himino said on Tuesday that the BoJ would discuss a rate hike at the Jan. 24 meeting. Himino didn’t say what decision he expected the BoJ to make but reiterated Governor’s Ueda recent comments that wage growth was solid and that there was a lot of uncertainty surrounding Donald Trump’s trade policies.

USD/JPY Technical

• USD/JPY tested resistance at 158.13 earlier. Above, there is resistance at 158.49
• There is support at 157.78 and 157.42

Cable came under fresh pressure on Tuesday and looks for retest of new multi-month low (1.2099) after recovery from Monday’s strong downside rejection failed repeatedly at 1.2250 zone.

Bears regained control after a mild correction, with loss of 1.2099 low (also monthly cloud base) to open way for test of 1.2037/00 targets (4 Oct 2023 low / psychological).

Daily studies remain in full bearish setup, though oversold conditions may keep near term action on hold for some time.

Upticks are likely to be limited and ideally capped under 1.2350/60 zone falling 10DMA / broken Fibo 76.4% support) as fundamentals are dollar positive.

US Dec PPI missed expectations but came above previous month’s figure (y/y), which signals that inflation remains elevated and to further soften Fed’s rate cut outlook for 2025.

Markets focus on UK and US December inflation reports (due on Wednesday) which would further pressure pound, as price pressure is expected to rise, and UK economy remains on fragile legs.

The dollar would benefit more from the anticipated implementation of tariffs, proposed by Trump’s administration, even on the latest comments that tariff implementation might be gradual at the beginning.

Res: 1.2250; 1.2299; 1.2360; 1.2400.
Sup: 1.2099; 1.2069; 1.2037; 1.2000.

Markets

Yesterday’s Bloomberg story brought some relief to markets. The news company citing people familiar reported that president-elect Trump’s team is working on a phased introduction of import tariffs. Raising levies 2%-5% each month instead of everything all at once reduces its shock effect both on US inflation and exporting areas, including the EU. The article shouldn’t be taken by face value though. A previous report by the Washington Post about a targeted tariff approach on a product level was quickly rebuffed by the present-to-be. Lacking such denial for the time being, however, and helped somewhat by lower-than-expected US PPIs, that eased the upward pressure on (US) bond yields, Euro area stocks rise about 1%, Wall Street between 0.4-0.9%. Producer prices were flat to +0.2% higher in December, depending on the gauge. This compared to a consensus estimate varying between +0.3-0.4%. With tomorrow’s more important consumer price inflation on the agenda, it triggered a kneejerk reaction lower in short-term US bond yields. Net daily changes vary between -1.4 (2-yr) to +1.4 bps (30-yr). European yields overcame morning weakness to trade slightly higher in a bear steepener. Long-end underperformance remains the name of the game since the short end is more or less locked in. A reasonable 100 bps of additional ECB easing is discounted. Swap yields add up to 5 bps. Maturities from 10-yr on hit new multi-month highs. The beginning-of-the-year bond market taps continue to be in high demand. A dual tranche European offering consisting of a new €6bn 3-yr benchmark and a €5bn Oct2054 tap attracted a combined €170bn. Books for Greece’s €4bn 10-yr syndicated sale ran above $40bn. Oil prices fluctuated near their 5-month highs (Brent +$80 per barrel) amid cease fire talks between Israel and Hamas reported to be in their final stages. Currency markets trade mixed with sterling the noticeable underperformer. Chancellor Reeves sought to reassure markets by repeating a pledge to stick by her own fiscal rules “at all times”. GBP investors send the currency nevertheless lower against the euro (EUR/GBP >0.84) and the dollar (GBP/USD 1.215, on track for its lowest close since October 2023). EUR/USD trades around the recent lows of 1.025.

News & Views

Inflation in Hungary accelerated more than expected in December, surpassing the upper limit of its 3.0% +/- 1.0% MNB tolerance band. Price rose 0.5% M/M and 4.6% Y/Y, up from 3.7% in November. The rise was mainly due to higher prices for food (0.4% M/M), gas and electricity (1.7% M/M) and durable goods (0.6% M/M). Services prices stay elevated at 0.4% M/M and 6.8% Y/Y. The National Bank of Hungary’s core inflation measures all rose on a Y/Y year basis compared to November to between 4.7% and 5.4%. The NMB in its December inflation update indicated that inflation could rise to 4.6% Y/Y in January. With this level already reached in December, the risk is the hoped-for 2025 disinflation process will start from a higher level. The MNB in December also raised its 2025 inflation estimate to 3.3%-4.1% before returning sustainably to 3.0% in 2026. The MNB since end-September kept the policy rate unchanged at 6.50%. Current inflation data and the still-weak forint suggests that there is no room to restart easing anytime soon. The 2-y swap adds 5.0 bps (6.67%) and the 10-y also moves further north (+6.0 bps at 7.16%). The forint gains modestly from the EUR/HUF 413 area to currently 411.9, but this is rather due to global sentiment.

The National Federation of Independent Business (NFIB) sentiment indicator among small US business improved further in December. The index rose 3.4 points to 105.1 after already having jumped at the fastest pace on record in November. It’s the highest reading since October 2018. “Optimism on Main Street continues to grow with the improved economic outlook following the election,” NFIB Chief Economist Bill Dunkelberg was quoted. “Small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.” Of the 10 index components, seven increased. The uncertainty index declined substantially for the second consecutive month. Amongst others, the net percent of owners expecting the economy to improve rose 16 points to a net 52%, the highest since Q4 of 1983. Both the percentage of owners expecting higher real sales to rise and believing it is a good time to expand business rose to the highest level since early 2020. 20% reports inflation is their single most import problem, unchanged from November.

Daily Pivots: (S1) 1.0198; (P) 1.0224; (R1) 1.0270; More...

EUR/USD is staying in consolidations above 1.0176 temporary low and intraday bias stays neutral for now. While stronger recovery cannot be ruled out, outlook will stay bearish as long as 1.0435 resistance holds. On the downside, break of 1.0176 will resume the fall from 1.1213 and target 61.8% projection of 1.1213 to 1.0330 from 1.0629 at 1.0083.

In the bigger picture, fall from 1.1274 (2023 high) should either be the second leg of the corrective pattern from 0.9534 (2022 low), or another down leg of the long term down trend. In both cases, sustained break of 61.8 retracement of 0.9534 to 1.1274 at 1.0199 will pave the way back to 0.9534. For now, outlook will stay bearish as long as 1.0629 resistance holds, even in case of strong rebound.

Daily Pivots: (S1) 0.9150; (P) 0.9176; (R1) 0.9196; More…

Intraday bias in USD/CHF remains neutral for the moment. More consolidations could be seen and deeper pullback cannot be ruled out. But near term outlook will stay bullish as long as 0.9007 support holds, in case of deep retreat. On the upside, decisive break of 0.9223 will carry larger bullish implications.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with rise from 0.8374 as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes. However, decisive break of 0.9223 will be an important sign of bullish trend reversal.

Daily Pivots: (S1) 156.94; (P) 157.46; (R1) 157.99; More...

No change in USD/JPY's outlook as sideway trading continues. Intraday bias remains neutral for now. Further rally is in favor as long as 156.0 support holds. On the upside, decisive break of 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25 will extend the rally from 139.57 to retest 161.94 high. However, considering bearish divergence condition in 4H MACD, firm break of 156.01 support will indicate short term topping. Intraday bias will then be back on the downside for 55 D EMA (now at 154.37) instead.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.