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• The ECB meeting next week is expected to end with yet another 25bp rate cut, bringing the policy rate to 2.5%, 150bp lower than the peak last year. While the cut decision is relatively straightforward, divergences in the ECB GC members’ assessment of the policy stance is starting to show, thus a key question will be whether the ECB will start now to soften its assessment on monetary policy restrictiveness.
• We continue to expect the three-tiered reaction function to prevail (inflation outlook, underlying inflation and strength of monetary policy transmission) and the data dependency to be reiterated. We expect the new staff projections to show higher inflation this year (2.3% y/y, December projection: 2.1% y/y) due to higher energy prices, while core inflation, more importantly, is likely to be revised down to 2.2% y/y for 2025 from its 2.3% level in December. We expect no changes to the growth forecast except a small downward revision to 1.0% y/y for 2025 due to a lower growth overhang from 2024.
• Markets are pricing another 59bp worth of rate cuts this year, following next week’s 25bp rate cut. We expect ECB to cut more than this to end with a terminal rate of 1.5% in H2 this year, albeit risks are slightly skewed to the upside.

Diverging views

The ECB GC members have started to position themselves more vocally ahead of the upcoming ECB meetings, and at least two camps have emerged. These differences do not seem significant enough to affect the policy decision of a rate cut that we and markets expect in March, but there appears to be a significant difference of opinion on the risks emerging as the easing cycle is maturing. The views may converge once more data comes in, but with the difference in views, we can expect front-end volatility to be higher than it would be otherwise.

We identify the hawkish camp, with comments from Schnabel and Wunsch, against the dovish camp, with comments from Panetta and Stournaras. The difference of views emerges from the degree of restrictiveness that we currently have. Last week, Schnabel said that she is ‘no longer sure whether it is still restrictive’, while the dovish camp was of the view from the ECB assessed in January that ‘financing conditions continue to be tight, also because monetary policy remains restrictive’. To nuance this discussion, one first has to agree on what levels of interest rate are actually restrictive, neutral and accommodative, and here we also expect to see a diverging set of views, which we discussed in our previous ECB preview ahead of the January meeting. In the end, we expect the ECB to guide that the past policy rate cuts are starting to transmit to the economy and it is warranted to assess the required level of monetary policy restrictiveness on an ongoing basis, thus using a more vague language on the exact restrictiveness level. We believe this is a compromise that both the doves and the hawks can subscribe to.

To guide for a halt or pause?

The ECB’s influential GC member Schnabel last week suggested that it may be time to discuss when to pause or halt the rate cuts that commenced in summer last year. We find this discussion too early to give a conclusion on whether there should be a pause or a halt now, but it is naturally something that eventually will come. At the current juncture, no one gains from committing to either outcome for the April meeting, and that means more volatility in front end pricing can be expected.

Staff projections to show higher headline inflation but lower core and growth

Inflation rose to 2.5% y/y in January mainly due to energy inflation. While energy prices have generally come down following talks of a potential end to the war in Ukraine, there is considerable uncertainty on the headline inflation estimate for this year due to the cut-off date for the technical assumptions which is likely to be on 12 February. At that point in time the gas price and futures were 19% higher compared to the December cut-off date, while it was about 5% higher for oil. We thus expect the staff projections to revise up the headline inflation forecast to 2.2% y/y for this year from 2.1% y/y. More importantly, we expect a small lowering of the core inflation forecast to 2.2% y/y (from 2.3%) due to lower wage growth and weaker than expected core inflation in January. The December staff projections estimated Q1 25 core inflation at 2.7% y/y, which seems unlikely as an average given the 2.7% print in January and as base effects in services inflation are set to pull it significantly lower in February and March (the February number is expected to be released on Monday 3 March).

So, while the headline inflation forecast is expected to be revised up, we do not expect that to change the ECB’s view on inflation, as the cooling momentum in core inflation continues. Lagarde will likely receive questions in the case of a revision, which she can use as an opportunity to highlight the risks to the inflation profile from energy prices, but at the same time stress the falling momentum in core, anchored inflation expectations, and that inflation is expected close to target in 2026 and 2027.

Growth in the final quarter of 2024 turned out to be weaker than projected by the ECB. The December staff projections saw GDP rising by 0.2% q/q while the actual number was just 0.05% q/q due to a contraction in Germany while Spain grew 0.8% q/q. Momentum has since increased a bit as indicated by the PMIs that recorded 50.2 in both January and February, following an average of 49.3 in Q4, due to a rise in the manufacturing PMIs. The labour market has also remained resilient with employment rising 0.1% q/q in the final quarter of 2025 and the unemployment rate recording 6.3% in December. Hence, the new projections will likely continue to show 0.3% q/q growth in all of 2025, but the yearly growth figure is expected to be revised down to 1.0% y/y from 1.1% y/y due to a smaller overhang from Q4 24. For 2026 and 2027 we do not expect any changes to the projections

Another well-telegraphed meeting should have limited market impact

Despite several non-traditional drivers influencing EUR/USD – including the German election, developments around a potential Ukraine ceasefire, and ongoing US economic policy uncertainty – the pair has stabilised around 1.05 in recent weeks. In this context, the March ECB meeting provides clarity for markets, as another rate cut is fully priced in. A data-dependent, meeting-by-meeting approach with no pre-commitment to a specific rate path is likely to be maintained, limiting market impact. With the next cut not fully priced until June, the forward rate path will be the key focus.

A central question is whether the ECB will drop its ‘restrictive’ policy label, a move that would signal a hawkish stance and pose upside risk for EUR/USD. While some policymakers, including Schnabel, have called for a discussion on this, the statement is unlikely to make such a shift just yet, as the ECB seeks to avoid unintended hawkish signals. However, post-meeting commentary may provide insights into when such an adjustment could occur.

For EUR/USD, the February US jobs report, released the day after the ECB meeting, is likely to be more pivotal. The recent USD depreciation has narrowed the rate differential gap, and our short-term model suggests EUR/USD is now trading closer to fundamentals, as the tariff risk premium has eased. In the near term, we expect the pair to remain range-bound around 1.05. However, if softer US data momentum persists, risks are skewed toward some tactical upside. On a strategic basis, our outlook for stronger relative structural growth in the US keeps us bearish on EUR/USD, with a move toward parity expected over the next 12 months.

Markets

President Trump seriously shook up a growth-focused market with some renewed tariffs threats. A nasty equity sell-off, compounded by tech heavyweight Nvidia, ended up in declines of almost 3% on Wall Street yesterday. It resulted in a break lower that worsened the technical picture. Sentiment deteriorated in European after-market hours, meaning stocks on the continent had to catch up somewhat today. The EuroStoxx50 pared opening losses of 1%+ to 0.5% currently. US investors show little appetite to buy the dip so far. Stocks open mixed despite in-line January PCE deflators marginally raising bets for Fed easing this year. Both the headline (0.3% m/m and 2.5% y/y) and core (0.3% m/m, 2.6%) eased from December. They go against the message delivered by the CPIs released earlier this month. Several Fed members (including Waller) already said they didn’t expect PCE to be as alarming. US yields decline up to 2 bps with sentiment having grown more vulnerable into the first minutes of the US session. Other eco data included a sharp rise in personal income (0.9% m/m vs 0.4% expected), which was counterbalanced by an unexpected drop in spending, both nominally and real. German net daily rate changes vary between -1 and -2 bps. A small uptick in the wake of slightly higher-than-expected German inflation was overturned quickly. Prices rose 0.6% m/m and 2.8% y/y, a 0.1 ppt beat vs consensus in both measures. A miss in the French CPI (flat on a monthly basis, 0.9% y/y) will have offset the German impact in next week’s European print anyway. US growth concerns eventually dominated over the weak sentiment in the dollar FX market. EUR/USD ekes out a slight gain to north of 1.04. DXY hovers near yesterday’s closing level.

Next week offers new chances to crosscheck the market’s changed reaction function with the US ISMs, ADP job report and payrolls. After the European CPI on Monday, special attention shifts to March 6, when European leaders hold a special summit dedicated in finding ways to fund a huge defense investment need. The ECB meets that day as well. A 25 bps rate cut to 2.5% is all but certain. Question is how loud the hawks (Schnabel in particular) will have shout at the current point in the easing cycle. Amongst others, we suspect the ECB will no longer label policy as “restrictive” in the statement.

News & Views

Czech Q4 GDP was upwardly revised from 0.5% to 0.7% Q/Q and the economy grew by 1% for the whole of 2024. Czech consumption grew by 1.5% Q/Q and by more than 3% Y/Y at the end of the year, while investment (-1.5% Q/Q and -2.4% Y/Y) and foreign trade (real exports down by 1.5% and imports down by 1.9% Q/Q) continued to fall significantly. While today's advanced GDP numbers could theoretically lead to a slight upward revision of GDP for 2025 in aggregate, we are not doing so. We perceive quite significant risks to investment - in particular, given rising uncertainties associated with global trade - and therefore continue to forecast growth near 2% this year (with risks skewed to the downside). From a CNB perspective, the revised GDP number is a slightly positive surprise - overall GDP is growing 0.4 %pts faster than the latest staff forecast suggested. Underlying details give both hawkish and dovish voices in the Bank Board arguments. The mood at the CNB Board will be determined in coming weeks mainly by more industry figures, January inflation, wage growth and possible geopolitical shocks (25% tariffs on exports).

Both Canadian and Swedish Q4 GDP was stronger than expected than well. The Swedish economy accelerated from an upwardly revised 0.6% Q/Q pace in Q3 to 0.8% in Q4 (2.4% Y/Y). Details showed consumption adding 0.7%, gross fixed capital formation rising by 1.8% and net exports contributing to growth with exports rising by 0.7% and imports falling by 0.5%. Households real disposable income increased by 3.5% Y/Y. Together with higher CPI readings earlier this month, these activity figures strengthen the Riksbank’s case of ending the rate cut cycle at the current level of 2.25%. Canadian GDP accelerated from 0.5% to 0.6% Q/Q with household spending increasing by the most in over two years (1.4% Q/Q), residential construction increasing at the fastest pace in over one year (+3.9%), export growth (1.8%) outpacing import (1.3%) growth and business investment up.

Bitcoin was the top loser on Friday following over 6% drop during Asian and early European trading.

The biggest crypto currency remains under increased pressure, mainly due to broader risk aversion, driven by the US tariff policies which continue to fuel uncertainty and prompt investors’ migration into safety.

The sentiment also soured by lack of expected overhaul of US crypto market regulations that was promised by President Trump.

Bitcoin price dipped below psychological 80K support and cracked important Fibo level at $79160 (50% retracement of $48738/$109582), trading at these levels for the first time since early November.

It is also on track for weekly loss of 16% and a record monthly drop in February, which so far retraced more than a half of strong gains in Nov/Jan, driven by euphoria after Trump’s election victory.

Technical picture on daily chart is bearish and supportive for further losses, but oversold conditions and significance of $80K zone (100DMA / psychological / Fibo 50%) suggest that bears may take a breather.

Profit taking at the end of the week and month is also expected to contribute to corrective action.

Session high ($84838) and broken Fibo 38.2% ($86339) reverted to resistances, guarding key barrier at $90K (former key support) which should cap extended upticks and keep bears in play.

Res: 81582; 82556; 84838; 86339
Sup: 90000; 79160; 78115; 75801

Personal income rose strongly in January, increasing by 0.9% month-over-month.

Meanwhile, consumer spending took a breather. Following a streak of strong gains in a prior four months, nominal spending edged lower by 0.2% m/m.

The volume of spending (which excludes the impact of inflation) pulled back more strongly, declining by 0.5% m/m. The volume of spending on goods declined 1.7%, with lower spending on both durable and non-durable goods. Spending on services was little changed, edging up by 0.1% m/m.

The Fed's preferred inflation metric, the core PCE price deflator, rose 0.3% m/m, up slightly from the 0.2% increase seen in December. In year-over-year terms, core PCE inflation fell to 2.6% from 2.9% in the prior month thanks to favourable base-year effects.

Strong income gains alongside soft spending pushed the savings rate up to 4.6% from 3.5% in the prior month. It is notable that the same large increase in the saving rate happened in January of 2024, followed by a continuous decline throughout the year.

Key Implications

Given the drop in retail sales in January, the soft print on consumer spending in today’s report comes as no surprise. As we mentioned previously, one-off factors, such as the wildfires in California and inclement weather, may have contributed to the slower pace of spending at the start of the year. This suggests a potential bounce-back in spending in the coming months. Still, the slower start to the year indicates that growth in real consumer spending in Q1 is likely to come in around to 2.0-2.5% (annualized), down from our prior estimate of 3.0%.

Broadly speaking, U.S. households remain in good financial shape, supported by a still healthy labor market and a significant wealth cushion. As long as this remains the case, we expect real consumer spending to stay resilient this year, with growth moderating to around 2%. However, given the rapid policy changes, the outlook remains fraught with risks. Consumer sentiment has weakened noticeably in recent months, weighed down by policy uncertainty. Consumers also remain highly sensitive to inflation, and concerns over the impact of tariffs have caused a significant increase in year-ahead inflation expectations in the latest consumer confidence surveys.

Daily Pivots: (S1) 148.98; (P) 149.57; (R1) 150.39; More...

Intraday bias in USD/JPY remains neutral first. Further decline is expected with 150.92 support turned resistance intact. Current fall from 158.86 is seen as the third leg of the pattern from 161.94 high. Below 148.55 will target 61.8% retracement of 139.57 to 158.86 at 146.32 next. On the upside, however, break of 150.92 will indicate short term bottoming and bring stronger rebound.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). In case of another fall, strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 1.2569; (P) 1.2630; (R1) 1.2663; More...

Intraday bias in GBP/USD stays mildly on the downside for the moment. Fall from 1.2715 short term top would target near term channel support (now at 1.2438). Firm break there will argue that whole rebound from 1.2099 has completed as a correction. On the upside, though, break of 1.2715 will resume the rebound to 1.2810 resistance next.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433 (2024 high), and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move. However, firm break of 1.2810 will dampen this bearish view and bring retest of 1.3433 high instead.

The Canadian economy topped expectations in the fourth quarter of last year, advancing 2.6% quarter/quarter annualized (q/q, AR). The third quarter was also revised higher (+2.2% q/q from +1.0 q/q). Stripping out external factors, final domestic demand came in at a very strong 2.4% q/q. The flash estimate for January showed a very strong 0.3% monthly increase.

Consumer spending was a major contributor in the quarter (+5.6% q/q from 4.2% q/q in Q3). Spending was concentrated on durable items (+14.2% q/q) like trucks, vans, and SUVs, as well as telecommunication and financial services (+5.8% q/q).

Residential investment shot higher (+16.7% q/q), with greater resale activity and increases in new construction/renovations all driving the gain. Non-residential investment was also strong (+8.1% q/q), as aircraft shipments in the quarter provided a one-time boost.

Exports gained 7.4% q/q, while imports were up by 5.4% q/q. The difference added 0.6 percentage points to overall GDP. High demand for precious metals, energy, and cars led the export gain, with most of this coming in December, when tariffs started flooding news headlines.

Key Implications

The Canadian economy flexed its muscles in the back half of 2024. Consumers were once again the driving force, as lower interest rates and the GST/HST tax break spurred spending on luxuries like autos and dining out. There was also evidence of businesses front-running tariffs, with exports to the U.S. surging in December. Elsewhere, non-residential business investment may have been strong in Q4, but we don't expect that to persist given the souring of business sentiment in Canada. All told, it was a strong quarter for Canadian growth. And while some of this momentum appears to have carried forward into 2025, with tariffs potentially on deck next week, today's report seems to be telling a story of what could have been for the Canadian economy.

Today's GDP release isn't going to sway the BoC. Yes, the report was strong. But Governor Macklem is more concerned about the risks on the horizon rather than what happened last year. The bank's own research shows huge downside risks to the economy should tariffs come to pass.  Market pricing is still effectively a coin flip for the BoC's meeting on March 12th. This feels right, as the BoC could go either way. No one would complain if the BoC took out more insurance against the downside risks with another 25 bp cut, while a hold could also be justified should the bank prefer to take a wait-and-see approach.

Daily Pivots: (S1) 1.0365; (P) 1.0430; (R1) 1.0462; More...

Intraday bias in EUR/USD stays on the downside at this point. Consolidations from 1.0176 should have completed with three waves up to 1.0527. Deeper fall should be seen to retest 1.0176/0210 support zone. Firm break there will resume whole decline from 1.1213. For now, risk will stay on the downside as long as 1.0527 holds, in case of recovery.

In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.

Risk sentiment received a boost in early US trading as January’s PCE inflation data came in line with expectations, lifting hopes that Fed may have room to cut rates in the first half of the year. Both headline and core PCE inflation slowed, adding to expectations that disinflation remains on track. Fed fund futures now indicate a roughly 70% chance of a 25bps rate cut in June, up from around 63% just a week ago.

However, it remains to be seen whether the bounce in equities, as suggested by higher futures, can hold. Market sentiment remains fragile, particularly with ongoing uncertainty surrounding US tariff policies. Investors are cautious about the economic fallout from trade measures, which could overshadow any optimism from cooling inflation data.

In the currency markets, Dollar is on track to close the week as the best performer, followed by Sterling and Swiss Franc. Meanwhile, Kiwi remains the weakest, followed by Aussie and Loonie, with little sign of a reversal. Euro and Yen are positioning in the middle.

In Europe, at the time of writing, FTSE is up 0.36%. DAX is down -0.57%. CAC is down -0.55%. UK 10-year yield is down -0.024 at 4.490. Germany 10-year yield is down -0.026 at 2.394. Earlier in Asia, Nikkei fell -2.88% Hong Kong HSI fell -3.28%. China Shanghai SSE fell -1.98%. Singapore Strait Times fell -0.65%. Japan 10-year JGB yield fell -0.02 to 1.376.

US PCE inflation slows as expected, personal income surges but spending contracts

The latest US PCE inflation data showed price pressures moderating slightly in January. Both headline and core PCE (excluding food and energy) price indices rose 0.3% month-over-month, aligning with market expectations.

On an annual basis, headline PCE inflation slowed to 2.5% yoy from 2.6% yoy, while core PCE eased to 2.6% yoy from 2.9% yoy, reinforcing the view that disinflation remains on track despite persistent price pressures in some sectors.

However, the consumer sector showed signs of strain. Personal income surged 0.9% mom, far exceeding expectations of 0.3%, but personal spending unexpectedly declined by -0.2%, missing the anticipated 0.2% gain.

Canada's GDP grows 0.2% mom in Dec, misses expectations

Canada's GDP expanded by 0.2% mom in December, falling short of the expected 0.3% growth. Both services-producing (+0.2%) and goods-producing industries (+0.3%) contributed to the increase, marking the fifth gain in the past six months. A total of 11 out of 20 industrial sectors posted growth.

Looking ahead, preliminary data suggests GDP grew by 0.3% mom in January, with gains led by mining, quarrying, oil and gas extraction, wholesale trade, and transportation. However, retail trade remained a weak spot, partially offsetting the overall growth.

BoE’s Ramsden sees inflation risks two-sided

BoE Deputy Governor Dave Ramsden indicated a shift in his inflation outlook, stating that he no longer views risks to achieving the 2% target as skewed to the downside. Instead, he now sees inflation risks as "two-sided," acknowledging the potential for "more inflationary as well as disinflationary scenarios".

Ramsden also raised concerns about the UK's sluggish economic growth, highlighting the possibility that the economy's supply capacity might be "even weaker" than previously assessed by BoE.

If this proves true, the UK’s "speed limit" for growth would be lower, leading to prolonged tightness in the labor market and sustained wage pressures. That would result in "greater persistence in domestic inflationary pressures."

Swiss KOF falls to 101.7, manufacturing and services under pressure

Switzerland's KOF Economic Barometer declined from 103.0 to 101.7 in February, missing expectations of 102.1.

The data suggests weakening momentum in the economy, with most production-side sectors facing increasing pressure. According to KOF, manufacturing and services sectors saw the most notable deterioration.

However, the report also pointed to some stabilizing factors, as foreign demand and private consumption showed resilience, helping to offset some of the negative trends.

BoJ’s Uchida: Yield rise reflects market’s views on economic and global developments

Speaking in parliament today, BoJ Deputy Governor Shinichi Uchida said recent rise in JGB yields "reflects the market's view on the economic and price outlook, as well as overseas developments."

"There's no change to our stance on short-term policy rates and government bond operations," he emphasized, adding that the bond holdings "continue to exert a strong monetary easing effect" on the economy.

When asked whether the prospect of further rate hikes and tapering would continue to drive yields higher, Uchida responded that it is ultimately “up to markets to decide.”

Japan's Tokyo CPI slows to 2.2% yoy in Feb, industrial production down -1.1% mom in Jan

Tokyo’s core CPI (ex-food) slowed to 2.2% yoy in February, down from 2.5% yoy and below market expectations of 2.3% yoy. This marks the first decline in four months, largely due to the reintroduction of energy subsidies. Meanwhile, core-core CPI (ex-food and energy) held steady at 1.9% yoy. Headline CPI slowed from 3.4% yoy to 2.9% yoy.

In the industrial sector, production contracted by -1.1% mom in January, a sharper decline than the expected -0.9%. Manufacturers surveyed by Japan’s Ministry of Economy, Trade, and Industry anticipate a strong 5.0% mom rebound in February, followed by a -2.0% mom drop in March.

On the consumer front, retail sales grew 3.9% yoy in January, slightly missing the 4.0% yoy forecast, but still pointing to resilient domestic demand.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0365; (P) 1.0430; (R1) 1.0462; More...

Intraday bias in EUR/USD stays on the downside at this point. Consolidations from 1.0176 should have completed with three waves up to 1.0527. Deeper fall should be seen to retest 1.0176/0210 support zone. Firm break there will resume whole decline from 1.1213. For now, risk will stay on the downside as long as 1.0527 holds, in case of recovery.

In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.

The latest US PCE inflation data showed price pressures moderating slightly in January. Both headline and core PCE (excluding food and energy) price indices rose 0.3% month-over-month, aligning with market expectations.

On an annual basis, headline PCE inflation slowed to 2.5% yoy from 2.6% yoy, while core PCE eased to 2.6% yoy from 2.9% yoy, reinforcing the view that disinflation remains on track despite persistent price pressures in some sectors.

However, the consumer sector showed signs of strain. Personal income surged 0.9% mom, far exceeding expectations of 0.3%, but personal spending unexpectedly declined by -0.2%, missing the anticipated 0.2% gain.

Full US Personal Income and Outlays release here.