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GBP/JPY's strong rebound last week suggests that fall from 198.94 has completed at 187.04 already. But with a temporary top formed at 193.04, initial bias remains neutral this week first. Overall, corrective pattern from 180.00 is extending, possibly with rebound from 187.04 as another upleg. Above 193.04 will target 194.73 resistance first. Firm break there will solidify this case and target 198.94 next.

In the bigger picture, price actions from 208.09 are seen as a correction to rally from 123.94 (2020 low). Strong support should be seen from 38.2% retracement of 123.94 to 208.09 at 175.94 to contain downside. However, sustained break of 152.11 will bring deeper fall even still as a correction.

In the longer term picture, while a medium term top was formed at 208.09 (2024 high), it's still early to conclude that the up trend from 122.75 (2016 low) has completed. But GBP/JPY is at least in a medium term corrective phase, with risk of correction to 55 M EMA (now at 173.92).

EUR/JPY's strong rebound last week suggests that fall from 164.89 has completed at 155.72 already. But with a temporary top formed at 161.17, initial bias remains neutral this week first. Overall, sideway pattern from 154.40 is still extending with another upleg. On the upside, above 161.17 will target 164.07 resistance and then 164.89.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). Strong support should be seen from 38.2% retracement of 114.42 to 175.41 at 152.11 to contain downside. However, sustained break of 152.11 will bring deeper fall even still as a correction.

In the long term picture, while 175.41 is at least a medium term top, it's still early to conclude that up trend from 94.11 (2012 low) has completed. A medium term corrective phase is in progress with risk of deeper fall back to 55 M EMA (now at 148.27).

Range trading continued in EUR/GBP last week and near term outlook remains mixed. Initial bias stays neutral this week first. On the upside, above 0.8376 minor resistance will bring stronger rally towards 0.8472. However, on the downside, break of 0.8290 will resume the fall from 08472 to retest 0.8221 low.

In the bigger picture, rebound from 0.8221 medium term bottom could extend higher through 55 W EMA (now at 0.8435). However, medium term outlook will be neutral at best as long as 0.8624 cluster resistance zone (38.2% retracement of 0.9267 to 0.8221 at 0.8621) holds. Another decline through 0.8221 would remain mildly in favor.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD drew support from 55 W EMA last week and rebounded after dipping to 1.6391. But it then lose momentum after hitting 1.6631. Initial bias is turned neutral this week first. Current development suggests that corrective pattern from 1.6800 has completed at 1.6391 already. On the upside above 1.6631 will bring retest of 1.6800 first. Firm break there will resume the rally from 1.5963 to 61.8% projection of 1.5693 to 1.6800 from 1.6391 at 1.6908.

In the bigger picture, with 1.5996 key support (2024 low) intact, larger up trend from 1.4281 (2022 low) is still in favor to resume through 1.7180 at a later stage. Nevertheless, sustained break of 1.5996 will indicate that such up trend has completed and deeper decline would be seen.

In the longer term picture, rise from 1.4281 is seen as the second leg of the pattern from 1.9799 (2020 high), which is part of the pattern from 2.1127 (2008 high). As long as 55 M EMA (now at 1.6090) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF's rally was limited below 0.9516 resistance last week and outlook is turned mixed for now. On the downside, break of 0.9359 support will revive the case that choppy rise from 0.9204 is merely a correction and has completed. Deeper fall should then be seen back to retest 0.9204 low. However, firm break of 0.9516 and sustained trading above 0.9481 fibonacci level will carry larger bullish implication and extend the rise from 0.9204.

In the bigger picture, sustained trading above 38.2% retracement of 0.9928 to 0.9204 at 0.9481 should confirm that whole fall from 0.9928 has completed at 0.9204. Further rally should then be seen back to 61.8% retracement at 0.9651 and above. However, another rejection by 0.9481 will keep outlook bearish for extending larger down trend through 0.9204.

In the long term picture, as long as 0.9928 resistance holds, the multi-decade down trend remains intact, with fall from 1.2004 (2018 high) as another falling leg. Decisive break of 0.9252 (2023 low) will confirm long term down trend resumption to 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851.

Canadian Highlights

• President Trump announced the re-imposition of steel and aluminum tariffs. This time both metals will face a 25% tariff starting March 12th, with no carve-outs.
• The Bank of Canada’s Summary of Governing Council Deliberations highlighted concerns that tariff threats could dampen business investment.
• On inflation, policymakers noted that the BoC might look through a one-time price shock impact but warned on the risk that higher import prices could spill over into other costs, amplifying price pressures.

U.S. Highlights

• President Trump announced a universal 25% tariff on all steel and aluminum imports, effective March 12th.
• January CPI came in hotter than expected, with core inflation rising at its fastest monthly pace since March 2024.
• Speaking at a semiannual congressional hearing, Chair Powell emphasized that policymakers were in no rush to cut rates.

Canada – Another Week of Tariffs, And Counting

Four weeks into the new U.S. administration, the continued stream of tariff orders has made assessing their economic impact feel like a Sisyphean task – every time progress is made, new complexities roll in to take its place. On Monday, President Trump announced the re-imposition of steel and aluminum tariffs, originally implemented in 2018 at 25% and 10%, respectively. This time both metals will face a 25% tariff starting March 12th, with no carve-outs. If Canada and Mexico fail to meet U.S. demands on border security and drug trafficking, these tariffs will be stacked on top of the previously announced blanket tariffs, pushing steel and aluminum to 50% each. Market reaction was mixed. Steel prices rose slightly, while stock and bond markets remained relatively numb to tariff news, focusing on the hotter-than-expected U.S. CPI data.

Canada is the most exposed to these tariffs as the largest supplier of U.S. steel and aluminum, accounting for nearly 50% of aluminum and 20% of steel imports (Chart 1). However, these metals make up only 6% of Canada’s total merchandise exports. Regionally, Quebec dominates aluminum, while Ontario leads in steel exports, making both provinces most exposed.

During the 2018 tariffs, Canada’s steel exports fell sharply and output only recovered to 2018 levels by early 2022. Aluminum exports fell by a smaller magnitude, however its output remained largely unaffected. The overall economic impact of steel and aluminum tariffs was limited last time both for Canada and the U.S., though they temporarily pushed U.S. consumer prices higher. This time, the backdrop is different. The higher aluminum tariff this round could have a more detrimental effect on Canada’s exporters. Additionally, inflation was subdued in 2018, while now it’s a primary concern.

Meanwhile, the uncertainty surrounding U.S. trade policy is already weighing on Canada’s economy. The Economic Policy Uncertainty Index for Canada hit a record high in January, before the first tariff announcement (Chart 2). Research suggests that heightened policy uncertainty discourages business investment, as firms delay or scale back capital expenditures. The Bank of Canada’s Summary of Governing Council Deliberations, released Wednesday, reinforced this concern, noting that tariff threats “would almost certainly damage business investment in Canada”.

Tariffs also increase inflation risks. Canada will likely respond with countermeasures, raising prices for imported goods. While the Bank of Canada might look through a one-term impact, policymakers warned that “given the size of the shock, there was a risk that higher import prices could feed into other prices”. Supply chain disruptions could further exacerbate these pressures, though a weaker global trade environment might curb demand and lower oil prices. Meanwhile, a weaker Loonie could help offset export losses but would also make imports more expensive. With these competing forces at play, the BoC faces a delicate balancing act, just like the rest of Canada, bracing for another week of tariff threats.

U.S. – Hot CPI + Trade Uncertainties = Extended Fed Pause

Tariffs remained the policy focus of the new administration this week, with President Trump announcing a universal 25% tariff on all steel and aluminum imports into the U.S., effective March 12th. Financial markets were largely unperturbed by the announcement, perhaps because the more targeted measures hinted towards a broader pivot on how the administration planned to implement its tariff agenda. But a hotter-than-expected CPI reading for January and a firm commitment from Chair Powell that policymakers were in no hurry to cut rates, helped to temporarily sour the mood by mid-week. Treasury yields across the curve briefly pushed higher only to completely retrace on Thursday, as President Trump’s threat of announcing further reciprocal tariffs showed no immediate action. The S&P 500 ended the week 1.6% higher, while Treasury yields were largely unchanged, with the 10-year currently sitting at 4.47% (Chart 1).

The steel and aluminum tariffs announced on Monday come just a week after Canada and Mexico were able to get a 30-day delay on the blanket 25% tariffs that were supposed to go into effect on February 1st. But unlike those tariffs, the administration has some historical precedence for the steel and aluminum tariffs, with President Trump having enacted similar measures back in 2018/19. For most countries, the previous tariffs had been lifted. However, this week’s announcement would reinstate the 25% tariff on steel and ups the tariff on aluminum to 25% (previously 10%), with no country exemptions.

The ratcheting up of trade tensions has come at particularly challenging time for policymakers, as the Fed’s fight to return price stability has hit a wall. The January CPI reading showed headline inflation rising at its fastest monthly pace in nearly a year and a half, while core inflation’s gain was the largest since March 2024 (Chart 2). Residual seasonality looks to be at least partially responsible for January’s uptick – as it was in the early months of last year. This appears to be a legacy issue stemming from the pandemic.

Historically, businesses tend to build in big price adjustments at the beginning of each year, which would normally be corrected for with appropriate seasonal factors. But during the COVID pandemic, firms were much faster to pass on price increases, distorting the seasonal patterns, and biasing the January inflation readings higher in recent years.

But it’s unlikely that residual seasonality is telling the whole story. Consumer spending remained incredibly strong through the second half of last year – averaging an impressive 3.6% annualized. Moreover, spending on both goods and services was very healthy in Q4, helping to explain the breadth of price pressures last month. While the January retail sales data point to a sharp slowing in spending, those figures were likely impacted by inclement weather and the California wildfires – suggesting some giveback in spending in February.

At this point, the Fed appears to have plenty of runway to maintain its current policy rate and wait for more clarity on the inflation front. This is unlikely to come with just the next few inflation readings, which means the Fed is on hold until at least the summer.

Monday, Feb 17, 2025

Tuesday, Feb 18, 2025

Wednesday, Feb 19, 2025

Thursday, Feb 20, 2025

Friday, Feb 21, 2025

In the coming week, the key scheduled macroeconomic events include rate decisions in Australia and New Zealand, Canadian inflation data, and Flash PMIs for Europe.

On February 18th, the Reserve Bank of Australia (RBA) is expected to cut the key rate for the first time in this monetary cycle. Australia has been less aggressive in raising rates and is now cutting them somewhat belatedly. The AUDUSD struggled at the end of the year, but the RBA’s decision could significantly impact this trend.

On Tuesday afternoon, Canadian consumer inflation data will be released. Inflation has hovered just above 2% in recent months but may increase due to the depreciating CAD and accelerating US inflation.

The Reserve Bank of New Zealand will announce its rate decision on February 19th. Having already cut rates by 125 basis points, it may choose to pause and assess the economic landscape.

On February 21st, European session trading will be influenced by Flash PMI estimates. Recent data hinted at improving sentiment. Confirmation in the latest batch of data could encourage euro buyers.

Summary

United States: FOMC in No Hurry

• A hot reading on the CPI to start 2025 amplified worries that progress in getting inflation back to target has stalled out as new risks arrive from changing trade policy. Meanwhile, retail sales unexpectedly plunged in January, suggesting consumers tightened their belts to start the year.
• Next week: Housing Starts (Wed.), Existing Home Sales (Fri)

International: Global Economic Activity and Price Data Are in the Air

• This week saw the release of economic activity and price data across advanced and emerging economies. In the United Kingdom, fourth quarter GDP growth figures were somewhat underwhelming. In Norway, the economy slowed at the end of last year, and while inflation came in a touch higher than expected, we still look for Norges Bank to initiate its easing cycle in March. The Swiss CPI report was somewhat mixed, and although Brazil inflation eased a touch, it remains elevated, and we look for further Brazilian Central Bank tightening this year.
• Next week: Japan GDP (Mon.), Reserve Bank of Australia Policy Rate (Tue.), Eurozone PMIs (Fri.)

Interest Rate Watch: Mortgage Rates Likely Will Remain Elevated

• We did not make any meaningful changes to the interest rate forecasts we published this week. We believe the 30-year fixed rate mortgage will remain elevated for as far as the eye can see, which will continue to exert headwinds on the housing market.

Topic of the Week: The Rising Tide of Employment Among Black Men

• In commemoration of Black History Month 2025, we focus on recent labor market developments in the Black & African American community. We find that Black & African Americans have made meaningful economic progress over the past five years, resulting in higher labor force participation, employment and earnings.

Full report here.

Canada’s January inflation data will continue to be distorted by the temporary GST/HST tax holiday running from mid-December to mid-February. The drop in taxes lowered price growth by about 0.4% in December, slowing to 1.8% year-over-year in December from 1.9% in November. It would have ticked up to 2.2% without the temporary tax reduction.

We expect annual price growth (including the tax change) to edge down to 1.7% in January, with the slowing again entirely due to the change in taxes. The tax holiday will continue to muddy inflation readings until March when we can get a cleaner read of the consumer price index that are clear of distortions.

Still, the Bank of Canada will be focused on their preferred “core” CPI measures, which exclude the impact of indirect taxes, for clues on how underlying inflation trends are shaping up. Recent readings have surprised to the upside. In December, the CPI trim and median measures grew by an average 0.3% month-over-month—matching the rate in the previous two months, but with a monthly pace still above the 2% target on an annual basis.

Annual rates for the median and trim measures are likely to move higher again in January, we expect to 2.6% from 2.5% in December. The better news is the scope of inflation pressures has not widened significantly. By our count, the share of consumer goods and services (outside of shelter) seeing elevated price growth at the end of 2024 was not meaningfully different from where it was at the start of the year.

Overall price growth continues to be disproportionately impacted by high growth in mortgage interest costs (accounting for 30% of annual CPI growth in December), which will continue to slow as the lagged impact of BoC interest rate cuts filters through to mortgage renewals. The core measures are, by design, less impacted by unusual movements in any one subcomponent, but still would have been running right around the BoC’s 2% inflation target if mortgage interest costs were not included in the calculations.

Moving forward, we continue to expect a soft domestic demand backdrop will allow for more unwinding in inflation this year. The labour markets have shown signs of stabilization, but lower job openings combined with a higher unemployment rate have started to push wage growth significantly lower. Trade uncertainties are clouding that outlook. But given announced targeted measures , we continue to look for an overall muted impact on growth and inflation, and expect past interest rate cuts will help with a turnaround in activity as soon as the second half of this year.

Week ahead data watch

In line with StatCan’s prelim estimate, we expect Canadian retail sales rose by 1.6% in December as holiday spending got a boost from the Federal tax holiday. In January, there were signs that spending was pared back. Unit auto sales were also weaker in the same month – we expect the advance estimate will show slower spending at the start of 2025.