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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.

Full Canada GDP release here.

The Canadian dollar is calm in the European session, trading at 1.4438, up 0.02% on the day. Later today, Canada releases GDP and the US publishes the Core PCE Price Index. USD/CAD has rallied for five straight trading days, gaining 1.8% during that time and hitting a three-week high.

Canada’s GDP expected to rebound in January

Canada’s economy is projected to have gained 0.3% m/m in December, following a 0.2% decline in November. Canada will also release GDP for fourth-quarter 2024, which is expected at 1.8% y/y, up from 1% in the third quarter. The forecast for an improvement in GDP is based on a busy December shopping season, as consumers took advantage of a sales tax holiday which started on December 15.

The Bank of Canada has also projected at 1.8% gain in GDP for Q4 2024 but remains concerned about the damage from potential US tariffs on Canadian products. The Trump administration has sent mixed messages as to whether the tariffs will take effect on March 4, leaving Canadian officials in the dark. The US imposed and then revoked 25% tariffs on Canada on Feb. 4 and suspended the tariffs for 30 days.

The BoC has said that a trade war with the US would inflict “permanent” damage on Canada’s GDP and raise inflation. Canada sends about 75% of its exports to the US and is extremely vulnerable to US tariffs. The BoC lowered rates by a quarter-point at the January 29 meeting but if the US reinstates tariffs against Canada next week, it would complicate any plans to continue lowering rates. The BoC meets next on March 12.

The US delivers core PCE inflation, the Fed’s preferred inflation gauge, later today. The market estimates for January stand at 2.6% y/y (vs. 2.8% in December) and 0.2% m/m (vs. 0.3% in December). This would indicate that inflation remains sticky and is above the Federal Reserve’s target of 2%. The Fed is in no rush to cut rates, unless inflation drops more than expected or the labor market, which has been cooling slowly, suddenly deteriorates.

• USD/CAD recoups drop below EMAs as March tariffs become reality.
• Technical indicators suggest quick rebound is fragile; focus on 1.4470.

USD/CAD made a strong comeback just when traders were getting nervous about the bearish correction below the 20- and 50-day exponential moving averages (EMAs). Surprising news that the US president will not extend the monthly pause, and tariffs on Canadian, Mexican and Chinese imports could happen next week after the March 4 deadline fueled fresh demand for the greenback. Having set a solid footing near the 1.4150 support area, the pair accelerated straight towards the key resistance of 1.4470.

While the rebound is encouraging, technical indicators suggest that this could be a fragile recovery. The RSI and the stochastic oscillator are already knocking on overbought territory, meaning the rally could run out of steam unless there is a solid push past 1.4470. If that level breaks, the price may initially test the 1.4530 level before surging towards the 2020 peak of 1.4667. And if the bulls stay in control, the elusive 1.4800 round level could be back on the radar.

On the downside, the 20- and 50-day EMAs coupled with the 38.2% Fibonacci mark of 1.4270 could limit selling pressures. A clear close below this floor could send the pair sliding back to 1.4100-1.4150. Failure to hold there may confirm an extension towards the 1.4000 psychological level and the 200-day SMA.

In brief, USD/CAD’s latest bounce is promising but don’t pop the champagne just yet. If the pair can’t decisively clear 1.4470, this could turn into a classic bull trap.

As we reported on 3 February, Trump’s tariffs pushed USD/CAD to a 22-year high.

However, a one-month tariff delay led to a sharp drop, sending USD/CAD to its 2025 low near 1.41550. As the end of the delay approaches, the pair has been climbing again since mid-February (as shown by the arrow).

Yesterday, President Trump confirmed that his proposed 25% tariffs on Mexican and Canadian goods will take effect on 4 March. This dashed hopes for another delay and triggered a breakout above the 1.43600 resistance level.

Technical Analysis of USD/CAD

Above current levels, key resistance lies at 1.44600, which has held firm since mid-December. However, drastic measures from Trump’s administration could drive further price movement within the blue-marked channel.

Expect volatility spikes ahead of Canada’s GDP release, scheduled for today at 16:30 GMT+3.

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The Japanese yen has extended its losses on Friday. In the European session, USD/JPY is trading at 150.39, up 0.40% on the day.

Tokyo core CPI edges lower to 2.2%

After a string of releases that pointed to an upswing in inflation, Tokyo core CPI for February reversed the trend on Friday. Japan’s CPI, PPI and the Bank of Japan Core CPI all accelerated in the most recent releases but Tokyo Core CPI surprised to the downside, with a gain of 2.2% y/y. This was down from 2.5% in January and below the market estimate of 2.3%.

The soft Tokyo Core CPI reading is unlikely to raise many eyebrows at the Bank of Japan. The index remained above the BoJ’s 2% target for a fourth consecutive month and Bank policymakers are expected to remain hawkish about monetary policy. The BoJ raised rates in January and also revised its inflation forecasts upwards, a signal that further rate hikes are on the table.

The markets are expecting the BoJ to continue tightening and this has been resulted in higher yields for Japanese government bonds, which hit a 15-year high earlier this month. Governor Kazuo Ueda responded to the sharp rise in bond yields with a warning that the central bank stood ready to intervene in the bond markets. Ueda’s threat appears to have worked as bond yields have retreated slightly.

US Core PCE expected to tick lower

The US wraps up the week with core PCE inflation, the Fed’s peferred inflation gauge. The market estimates for January stand at 2.6% y/y (vs. 2.8% in December) and 0.2% m/m (vs. 0.3% in December). This would still be above the Federal Reserve’s target of 2%. The Fed is not expected to lower rates before May, barring an unexpected surprise from inflation or employment data.

USD/JPY Technical

• USD/JPY tested resistance at 150.39 earlier. Above, there is resistance at 150.98
• There is support at 149.57 and 148.98

Market Picture

Crypto market capitalization collapsed by 7.5% in the last 24 hours to $2.65 trillion, the lowest level since November 10th. Unlike the dynamics of the previous two days, there was no rebound at the beginning of Friday; there was just a timid attempt at consolidation. It seems that the market has found the pain point of short-term buyers, knocking out the “weak hands.”

Bitcoin has lost 8.6% over the last day, having pulled back under $79,000. The formal bearish trend boundary and the 200-day moving average remain above the current price level. Bitcoin will completely nullify Trump’s rally if it pulls back to the $70K area, which has acted as resistance for most of the past year. Going below will not be easy—the market is too oversold.

Ethereum has pulled back below $2100, trading in the area of last year’s lows and attempting to break lower. This bad news is amplified by the “death cross,” a bearish signal that occurs when the 50-day moving average dips below the 200-day moving average. Ironically, this signal was followed by stabilization last August, although a full-fledged return of buyers had to wait three months.

News Background

Presto Research attributes the sharp drop in Bitcoin in recent days to hedge funds winding down positions focused on “basis spread” arbitrage. Basis on CME and Binance, in terms of annualized rates, are not yet showing signs of recovery.

SignalPlus draws attention to the weakening of Bitcoin’s implied volatility as prices fall, which acts as a symptom of speculators abandoning near-term growth expectations.

Gemini cryptocurrency exchange co-founder Cameron Winklevoss said that the US SEC has stopped investigating the platform and will not recommend any enforcement action.

Tether’s USDT stablecoin will soon support transactions on the Tron blockchain with no fees in TRX. According to Justin Sun, founder of the Tron ecosystem, the new option will become available in early March.

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.

Full Swiss KOF release here.

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."

Markets

The stars aligned for a significant risk-off correction yesterday. First and foremost, the market narrative changed since the end of last week with investors attaching a higher probability to a mid-term US recession. Especially sentiment surveys highlighted numbing uncertainty with consumers and businesses as DOGE efforts bite and as the overall policy mix risks working inflationary. A (too) restrictive monetary policy (from a growth point of view) could end up being the straw that breaks the camel’s back. In this respect, we started noting a first change of tone in some Fed speeches. Cleveland Fed Hammack said that rates are restrictive enough to lower inflation. Kansas City Fed Schmid suggested that the Fed could have to balance inflation risks against growth concerns. Philly Fed Harker thinks that the policy rate remains restrictive enough to continue putting downward pressure on inflation over the longer term. Second, tariffs have an amplifying market impact in this negative setting. The confirmation of the March 4 deadline for 25% tariffs on Mexico and Canada, the 10%pts increase on the earlier 10% on Chinese goods, the April 2 deadline for reciprocal tariffs and the first growl against Europe (“25% on autos, other things”) added to the rally in US Treasuries and weakness in stock markets. In FX space though, it sparked a turnaround in the USD’s fortunes: currencies of trading partners yesterday underperformed a USD being vulnerable to the idea of a US recession. A battle of weakness. EUR/USD slipped back below 1.04 after a failed test of first resistance at 1.0533 earlier this week. USD/CAD left YTD lows below 1.42 at the start of the week to currently change hands around 1.4450. Finally, the reigning negative risk sentiment determined the interpretation of AI-bellwether Nvidia’s Q4 earnings. Strong and a beat, but not fantastic as investor’s got used too. The stock entered the ongoing vicious spiral, correcting around 8.5% and dragging the AI- and tech-heavy Nasdaq almost 3% lower with the index losing support at 18831 (YTD low and downside of sideways trend channel since December).

Risk sentiment remains key today and we continue to err on the side of caution. Last-minute deals to fend off the 25% tariffs in Mexico and Canada are possible but risk-reward it could be more interesting to await the facts. There are asymmetric risks to US PCE deflators today with in-line or lower outcomes able to extend a continuation of trends in especially US Treasuries. German and French CPI data serve as a prelude for the EMU number on Monday and could bolster the case of an April pause in the ECB’s cutting cycle.

News & Views

Tokyo February inflation eased a little more than expected in February. The headline gauge fell from 3.4% to 2.9% vs a 3.2% estimate. The central bank’s preferred measure which excludes fresh food retreated from 2.5% to 2.2% (2.3% expected). Both continue to be impacted by government subsidies that offset some of the energy costs though, masking some of the underlying price strength. CPI ex fresh food and energy matched last month’s 1.9% in a sign of ongoing steady price rises. Tokyo inflation is often seen as a good indication of the national figure’s (March 21) direction. Education subsidies in the country’s capital keeps the pace slower than in the rest of Japan, though. Other data showed Japanese industrial production tumbling 1.1% m/m. This sharp drop is partially the result of the Chinese Lunar New Year, which probably disrupted trade flows. Retail sales in Japan climbed 0.5% m/m to 3.9% y/y. The Japanese yen holds up pretty well this morning against overall USD strength after the data releases. USD/JPY trades around 150.

Bloomberg had a sneak peak in the European Council’s draft conclusions ahead of the important March 6 summit during which EU leaders will be seeking ways to finance massive - to the tune of €500bn - rearmament investments. It will call on the Commission “to propose additional funding sources for defense at EU level, including by means of additional flexibility in the use of structural funds, and to present swiftly relevant proposals,” the news agency reported. The draft text also said the Council will ask the European Investment Bank to adapt lending practices to the defense industry, noting it should re-evaluate the list of excluded activities, as well as urge the Commission to present options to use the flexibility within the fiscal rules. The latter should allow for “significant defense spending” at the national level without breaching the 3% deficit rules.

Despite beating both revenue and earnings expectations and the forecasts for the current quarter, Nvidia got beaten by the market. The share price tanked 8.50% in yesterday’s post-earnings session, took out the 200-DMA and closed near the $120 level – which also matches the minor 23.6% Fibonacci retracement on the AI rally. The stock remains in the bullish trend, from a technical perspective, following a more than 900% surge since the beginning of 2023, and will remain in the bullish trend above the $100 per share – which beautifully matches the major 38.2% Fibonacci retracement that could distinguish between the AI rally and a medium-term and a more persistent pullback. But the short-term direction looks bearish, with trend and momentum indicators hinting at the possibility of a deeper pullback.

And while Nvidia was bearing the brunt of having fallen short of the most euphoric analyst expectations this Wednesday, Amazon revealed an update to its Alexa which now uses AI to answer questions. The company also announced to have built its first quantum-computing chip – that may not be excellent news for Nvidia. But Amazon fell too, by more than 2.50%, on the kind of news that could’ve easily trigger a rally. Salesforce’s results also fell short of market expectations and further weighed on optimism that their AI product would boost sales. CRM is on its way to test an important critical support range between $275/290 area including the 200-DMA and the major 8.2% Fibonacci retracement on the AI-boosted rally since the beginning of 2023. One bright spot this week was Snowflake. The company forecasted a better-than-expected revenue growth thanks to its AI products and expanded a deal with Microsoft Azure to give access to OpenAI’s services. The share price jump opened but couldn’t resist to the overall selloff and spent the session giving back gains. It closed some 4.50% higher. Microsoft lost 1.80%.

Overall, Nvidia’s failure to satisfy the increasingly-hard-to-satisfy investors weighed on market mood, along with new tariff talk from Donald Trump. The Tariff Man said that he would go ahead with tariffs on Mexico and Canada as soon as the beginning of March and unveiled plans to impose 25% tariffs on EU imports – details will land soon. The Stoxx 600 eased yesterday, the DAX lost more than 1% as the carmakers, there, will almost certainly be concerned by the 25% levies that Trump is referring too. But the European defense stocks continued to see demand. BAE Systems rose near 3.50% yesterday, Rheinmetall gained 3.50% and traded at a record high, and Leonardo gained nearly 4% and hit a fresh ATH level, too.

Meanwhile, the British PM Keir Starmer met Trump in Washington yesterday to try to smooth things over between the two old friends. And he probably did better than Macron earlier this week... who couldn’t prevent the announcement of 25% tariffs on the EU products hours later... As such, the FTSE 100 index was standing out yesterday, as the index eked out gains as its European peers were hit by tariff fears.

In the FX, the fresh tariff threats hammered both the euro and sterling. The EURUSD slipped below the 1.04 level and is testing the 50-DMA to the downside this morning despite higher-than-expected Spanish CPI update yesterday. More CPI updates from euro are countries are due today but the data could remain under the shadow of the tariff fears. Potentially stronger-than-expected numbers may not weaken European Central Bank (ECB) rate cut expectations; the tariffs and their negative implications are expected to hit the European economies enough to give the ECB doves a leverage beyond data.

Across the Channel, Cable slipped below its 100-DMA and sterling bulls abandoned the fight near the major 38.2% Fibonacci retracement front on September to January Trump-led selloff, and is preparing to close the week without having successfully reversed the bearish trend. The USDJPY is testing the 150 resistance on the back of a broadly stronger US dollar and weaker-than-expected inflation numbers released in Japan. You want to laugh? The latest Marvel movie pictures US entering in war with Japan, apparently. Anyway, even gold fell yesterday faced with a stronger US dollar. The price of an ounce slipped below the $2900 level. While a pullback after having flirted with the $3000 level is healthy, the outlook for gold remains positive on the back of tense global geopolitical environment.
US PCE in focus

Yesterday, the US GDP data confirmed that the US grew 2.3% in Q4, as expected, but the price pressures were stronger than pencilled in by analysts. Initial jobless claims, on the other hand, hit the highest level since last October, with a visible rise in Washington’s jobless claims – as Federal workers are being thanked en masse by Elon Musk’s DOGE. Will the latter soften the Federal Reserve (Fed) outlook and increase bets for more rate hikes this year? It depends on the inflation’s trajectory. Due today, the US will reveal its latest core PCE data – the Fed’s favourite gauge of inflation - that could show easing in January. If that’s the case, we could maybe see the US indices recover a part of the latest weakness.