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Canadian Highlights

• The inaugural week of Trump’s presidency reminded markets how quickly sentiment can shift. The looming threat of tariffs could raise costs for businesses and consumers on both sides of the border.
• For now, inflation is easing. December inflation data moved closer to the Bank of Canada’s target, with consumer inflation expectations anchoring around historical norms.
• Retail sales were weak in November, but December’s rebound in the flash estimate suggest stronger year-end activity, supporting a more gradual 25-basis-point cut next week.

U.S. Highlights

• President Donald Trump was sworn in as 47th President on Monday and wasted no time signing a barrage of executive orders.
• While President Trump did not impose any tariffs in Week 1, he threatened Canada and Mexico with a 25% tariff (and later China with a 10% tariff) as early as February 1st.
• But without any immediate action, financial markets breathed a sigh of relief, though this could be short lived as the February 1st deadline quickly approaches.

Canada – Tariff Threat Looms Just as Economy Shows Improvement

If the inaugural week is anything to go by, the next four years of Trump’s presidency promise to be a roller coaster for Canada. Volatility in the Canadian dollar underscores how quickly sentiment can shift: reports of delayed tariffs early Monday lifted the Loonie by more over 1%, only for it to erase those gains later in the day, when Trump announced plans for tariffs as high as 25% on Mexico and Canada by February 1st. At the time of writing, the exchange rate has stabilized around $0.698 per CAD, about a percent lower than last week.

As history shows tariffs beget tariffs. The Canadian government warned that if imposed, these tariffs will trigger retaliatory measures on up to C$150 billion worth of U.S. goods. Our report this week sets the record straight: Canada is America’s largest export market, with nearly US$350 billion goods and services crossing Canada’s border over the first three quarters of 2024. The negative impact of tariffs would ripple through business supply chains, raising costs and creating inflationary pressures at the retail level – far from the economic relief Trump promised during his campaign.

A full-blown trade war remains an outlier scenario, but even targeted tariffs could undermine consumer demand on both sides of the border. The Bank of Canada’s recent Business Outlook Survey, sheds light on how firms perceived these risks in the fourth quarter of last year. Conducted after the presidential election but before Trump’s 25% tariff threat on Canada and Mexico in late November, businesses reported concerns over potentially higher input costs due to trade tensions. These costs, if realized, are likely to be passed on to consumers to some extent.

This disruption comes just as the Canadian economy shows signs of recovery. December’s inflation data moved closer to the Bank of Canada’s 2% target (Chart 1). While some price categories were temporarily affected by GST tax break, others, like shelter inflation, have seen relief from lower rates. In addition, consumer inflation expectations – as measured by the Canadian Survey of Consumer Expectations – are settling around historical norms, reinforcing confidence in the Bank’s ability to instill price stability.

Consumer demand, though soft, continues to recover. November’s retail sales data showed core retail sales (excluding autos and gas) declined by a sizeable 1.0%, but the three-month trend in real core retail sales per capita continued to recover (Chart 2). Spending at restaurants also saw robust gains in November, suggesting consumers are increasing outlays on discretionary areas. Furthermore, the strong flash estimate for December is encouraging, as the GST tax break would weigh on nominal spending tallies as they include GST receipts. On balance, this week’s data suggests that the Bank of Canada still needs to continue easing its key rate but proceed more cautiously, with a 25-basispoint cut next week. Markets will also scrutinize the accompanying Monetary Policy Report for insights into how the Bank is incorporating trade risks to its outlook.

U.S. – A Wild First Week

President Trump started his second term in office with a blitz of executive orders targeted at overhauling border and energy policies, pulling out of the global tax deal, unwinding signature Biden administration policies, and imposing a temporary freeze on federal hiring. But perhaps the most surprising development of the week was what didn’t materialize – an executive order to impose universal tariffs on major trading partners.

However, President Trump did put Canada and Mexico (and later China) on notice, threatening each with a 25% tariff (10% on China) as early as February 1st, citing increased illegal immigration and drug flows as the primary motive. In addition, the President directed federal agencies to investigate “unfair and unbalanced” trade practices with the U.S. and has set a deadline of April 1st for specific policy recommendations. For now, President Trump has said “he isn’t ready to move ahead with universal tariffs on goods from around the world”, but his actions this week suggest that the tariff threats shouldn’t be taken lightly.

Financial markets appeared to breath a sigh of relief, with the S&P 500 ending the week 2% higher. However, longer-term Treasury yields were little changed on the week, with the 10-year Treasury yield at 4.65% at the time of writing. Fed funds futures also remained largely unchanged, with 40 bps of cuts priced in by year-end.

Should President Trump follow through on his tariff threats to Canada and Mexico, he would likely have to invoke the International Emergency Economic Powers Act due to both the tight timeline and the fact that he’s tying the tariffs to non-trade related issues. But we view this scenario as unlikely and see the tariff threats as a way of applying pressure to extract concessions. This would include tighter border security from its neighbors and perhaps and early reopening of the North American Trade deal ahead of the scheduled 2026 joint review.

While a full blown North American trade war would benefit no one, it’s clear that the northern and southern neighbors would feel the brunt of the impact. Measured as a share of GDP, exports from Canada and Mexico to the U.S. account for roughly 19% and 26% of their economies. However, combined U.S. exports to these two countries account for little more than 2% of its GDP (Chart 1). But beyond the hit to growth, there’s also the inflation impact to consider. Nearly 60% of the oil & gas imported into the U.S. comes from Canada. Should the U.S. impose a 25% tariff on these imports, or Canada restrict its oil exports as a retaliatory measure, then that alone would have an immediate price impact on U.S. consumers. Beyond the energy dependencies, the North American auto supply chain is also heavily intertwined. Disentangling the production process would be a costly endeavor.

Recent surveys of consumer confidence have already shown a growing unease on the future economic outlook and a jump in inflation expectations (Chart 2). Heighten inflation played a huge role in getting President Trump reelected, and it’ll likely serve as a governor on how far the Republicans are willing to push on tariffs.

Summary

United States: Changing of the Guard

• Considering a reasonably light domestic indicator schedule this week and the Fed's media blackout period ahead of next week's FOMC meeting, attention was understandably focused on the changing of the guard in Washington and the eagerly anticipated policy details from the new administration which will heavily influence the economic performance over the coming years.
• Next week: FOMC Statement (Wed.), GDP (Thu.), Personal Income and Spending (Fri.)

International: Tariff Discussions Circulate During Trump's First Week

• International economic data flow was relatively light this week. The majority of market participants' attention has been directed toward President Trump's first few days in office, especially pertaining to tariff discussions. Foreign central banks were not particularly active this week, but the Turkish central bank and Bank of Japan met to assess monetary policy.
• Next week: China PMIs (Mon.), Bank of Canada Policy Rate (Wed.), European Central Bank Policy Rate (Thu.)

Interest Rate Watch: 100 Basis Points Lower & 100 Basis Points Higher

• No change in the fed funds rate is expected at next week’s Fed meeting. We explore how a rise in longer-dated Treasury yields could provide a restrictive offset to the Fed’s accommodative moves at the short end of the curve.

Credit Market Insights: Credit Spread Slide

• Credit spreads continued their fall last year, indicating an ongoing uptick in optimism toward the economy among market participants. While spreads have been performing better, investors still remain cautious.

Topic of the Week: Impact of L.A. Wildfires on Shelter Inflation

• The fires that have devastated Los Angeles have led to a frenzied search for rental properties in the area as residents whose homes have been lost or damaged seek new housing. The shock to the region's housing market will materially affect costs in L.A., but will the inflationary impact be felt more broadly in the national macroeconomy?

Full report here.

• Three central bank decisions awaited as tariff reality sets in
• Fed set to go on pause, ECB and BoC to likely cut again
• But US GDP and PCE inflation could steal the limelight
• Australian CPI and China PMIs also on tap

Fed to pause rate cuts as Trump 2.0 begins

The central bank agenda will be jam-packed next week as the first round of policy meetings of 2025 heats up. The Federal Reserve will be at the focal point of all the action as it’s expected not to follow the European Central Bank and Bank of Canada in cutting interest rates.

A resilient US economy and sticky price pressures have left the Fed little room to lower borrowing costs even before President Trump and a Republican-led Congress have had a chance to enact their low taxes, high tariffs policy cocktail. Chair Powell has been keen to stress that the Fed is not on a preset course, leaving the door open to rate increases should the new administration’s policies push inflation higher.

However, in the more immediate term, the inflation picture has become somewhat more favourable, and the trend could turn downwards again in the first few months of 2025. One of the Fed’s more influential governors, Christopher Waller, recently flagged the possibility of rate cuts in the first half of this year, as markets at one point had priced in fewer than 30-basis-points reduction by year-end.

Yet, the pullback in the US dollar following Waller’s comments was fairly mild and only picked up pace on the back of the tariffs headlines when Trump signalled his intention to go easy on China before trade negotiations have taken place. This highlights how tariffs have once again become a key driver of Fed policy expectations.

Should the Fed on Wednesday decide to keep rates unchanged but strike a less hawkish tone than what investors are anticipating by suggesting that a cut is likely in the next few months if inflation resumes its decline, the market reaction may be limited if the Trump newsflow isn’t as positive.

Bar is set high for a Dollar correction

But Trump and the Fed aren’t the only things traders will be keeping an eye on. Thursday will see the release of the advance reading of GDP in the final three months of 2024. The US economy is projected to have expanded by an annualized rate of 2.6% q/q versus 3.1% in the prior quarter. A stronger print than this could counter any unexpected dovishness by the Fed.

Similarly, Friday’s PCE inflation numbers and personal income and spending data will be just as crucial in shaping rate cut expectations. The core PCE price index, which the Fed monitors closely, is estimated to have stayed unchanged at 2.8% y/y in December according to the Cleveland Fed Nowcast, with headline PCE accelerating to 2.6% y/y.

Other releases will include new homes sales on Monday, durable goods orders and the consumer confidence index for January on Tuesday, pending home sales on Thursday, and the Chicago PMI on Friday.

Overall, any renewed optimism that the Fed might express about the inflation outlook is unlikely to produce much of a dent in the dollar until it’s reflected in the data and Trump doesn’t flip-flop on his softened stance towards China.

Will the BoC turn less dovish?

Ahead of the Fed’s decision, it will be the Bank of Canada’s turn to set policy a few hours earlier on Wednesday. The Bank of Canada has slashed interest rates more aggressively than any other major central bank during this easing cycle. The latest CPI data showed a dip in headline inflation to 1.8% y/y in December and a slight moderation in core measures too, paving the way for a further 25-bps cut at the January meeting.

However, investors have priced in just one additional cut after that and the BoC may soon join the Fed in pausing. This hasn’t provided much of a reprieve to the Canadian dollar, which is languishing near five-year lows against its US counterpart. Even if the BoC were to indicate that its rate-cutting cycle is nearing the end, political uncertainty following the resignation of Prime Minister Justin Trudeau and the threat of 25% tariffs on all Canadian imports into the US by Trump are hanging over the economy.

Hence, the BoC will probably prefer to keep its options open and merely signal a slower pace of easing going forward than a pause, which will not do the loonie any favours. But there could be some support for the currency from Thursday’s wage growth figures and Friday’s monthly GDP reading.

ECB to stick to gradual approach

The ECB has been steadily trimming rates since June 2024 and is widely expected to maintain a similar pace in 2025, with President Lagarde reinforcing this gradual approach in remarks at Davos this week. The current market pricing suggests one 25-bps cut per quarter. But for the January meeting, a small fraction of investors is betting on a larger 50-bps cut.

A larger move is highly unlikely, though, given that services inflation in the Eurozone is still hovering around 4% and a closely watched gauge of wage growth climbed to a more than three-decade high in the third quarter of last year.

On the flip side of this argument are the mounting worries about growth in the euro area amid the political turmoil in France and Germany, the drag on exports from China’s sluggish economy and now, the possibility of new import levies by America if Trump gets his way.

Still, the gloomy outlook isn’t dire enough to warrant faster reductions just yet and the risk of any surprises at Thursday’s meeting is quite low. The ECB is almost certain to cut rates by 25 bps and Lagarde will probably stick to her recent script, with investors hunting for fresh clues about any policy divisions within the Governing Council and on where policymakers see the neutral rate to be.

The euro could come under pressure if Lagarde refuses to rule out a more aggressive pace in the future, but a potentially bigger risk is new developments on the tariffs front, should Trump make any comments regarding trade restrictions with the EU.

There might be some reaction too on Thursday to the preliminary Eurozone GDP estimates for Q4.

Yen unimpressed by hawkish BoJ bets

The yen has been somewhat steadier lately, finding support from rate hike expectations by the Bank of Japan as well as safety flows from the Trump-related uncertainty. The Bank of Japan upped its policy rate to 0.5% on Friday – the highest since 2008. The yield on 10-year Japanese government bond yields is also at more than decade highs.

Yet the yen hasn’t been able to stage much of a bounce back against the dollar, partly reflecting the still huge policy divergence between the Fed and the BoJ. Next week’s data might help close the gap if the January CPI figures for the Tokyo district, due on Friday, boost the odds of further rate hikes by the BoJ.

Services PPI on Tuesday and industrial output on Friday might also attract some attention.
Aussie eyes domestic CPI and China PMIs

Staying in Asia, China will publish its manufacturing PMI for January on Monday, which will be followed by the Caixin/S&P Global equivalent on Friday. Any signs of strengthening activity in China’s massive manufacturing base could add to the recent improved optimism about the recovery, lifting the risk-sensitive Australian dollar.

But for aussie traders, the main highlight will be Wednesday’s CPI report out of Australia. The Reserve Bank of Australia is edging closer to delivering its first rate cut so a soft report could fuel expectations that policymakers will lower rates as early as the next meeting in February. This could jeopardize the aussie’s recovery from near five-year lows against the greenback.

The Bank of Canada is expected to cut interest rates at a more gradual 25 basis-point pace on Wednesday following 50 bps cuts in each of the two prior meetings—widening a gap with U.S. policy rates as the Federal Reserve is widely expected to forego a January rate cut.

A weak Canadian economy has prompted earlier and more aggressive interest rate cuts from the BoC compared to other advanced economy central banks. But the 3.25% current overnight rate is still at the top end of the BoC’s 2.25% to 3.25% estimated range for “neutral,” which would not put upward or downward pressure on growth or inflation over time. It is also well above the 1.75% peak rate in the decade before the global pandemic.

The BoC clearly communicated in its December policy decision that with the interest rate no longer at obviously “restrictive” levels, the pace of future rate cuts would likely be more gradual, and contingent on economic data. Recent Canadian gross domestic product growth and inflation data have been mixed. Q4 GDP growth is tracking close to the BoC’s 2% October forecast and inflation, excluding indirect taxes, ticked higher in December. The BoC’s Q4 business outlook survey flagged some improvement in business sentiment. But, labour markets are still soft enough to argue that more interest rate cuts are needed for the economy to rebound enough to prevent inflation from undershooting the 2% target. We continue to expect the BoC will ultimately need to cut the overnight rate to a slightly stimulative 2% this year.

In December, Governor Tiff Macklem also flagged downside risks to the growth outlook from potential protectionist U.S. trade policy as a “major new uncertainty.” Those concerns have likely only become more pronounced with the new Trump administration threatening to impose aggressive tariffs on imports from Canada as early as next month. We expect policymakers would be more likely to cut interest rates faster and further should those downside risks materialize with the ultimately disinflationary growth and labour market implications from tariff hikes more a concern than a one-time increase in prices. See more on potential tariff impacts here.

The backdrop in the U.S. economy is very different. GDP growth remained firm in Q4 (we expect an 2.4% annualized increase to be reported in the week ahead) and progress on further reducing inflation has been slow. We continue to think an overly stimulative government spending backdrop is helping keep a floor under growth and inflation. Interest rates will need to stay higher for longer to keep growth in consumer prices on a downward trajectory back to the Fed’s 2% objective. The Fed is widely expected to stand pat on interest rates in January. Our base case assumption is the Fed will remain on the sidelines and not cut interest rates this year.

Week ahead data watch

Friday’s Canadian November GDP report should show a 0.1% contraction from October. Manufacturing, retail, and wholesale sale volumes all posted declines in November and oil production in Alberta appears to have largely reversed a sizable October gain. But, early data for December looks firmer with household spending bouncing back in part tied to delayed holiday shopping ahead of Cyber Monday and the start of the GST/HST holiday in mid-December.

We will be watching job openings in Canada’s November payroll report for signs on if a persistent rise in the unemployment rate is getting closer to its end. Job openings in October were still running 23% below year ago levels, but more recent data from indeed.com has shown some improvement late last year and into January.

We expect U.S. personal spending edged up 0.4% in December, mainly driven by higher auto sales and price-related sales increases at gas stations. U.S. personal income likely rose 0.4% in December, in line with the 0.3% increases in average hourly earnings during that month.

It was a sell the rumour, buy the fact kind of week, apparently. The fears of Donald Trump imposing massive tariffs on his first day in office did not materialise, and markets cheered. With previous week's US inflation data also still providing solace, equity markets gained, S&P 500 made a new record-high, and the dollar retreated. Tech stocks got a fresh boost from Trump's announced Stargate AI venture, a USD 500 billion private-funded investment program aiming to ensure "the future of technology" in the US. A bit paradoxically, considering the massive number of components the projects will need, the program will further underpin US reliance on Taiwan for chips and other critical inputs.

With regards to Trump's economic policies - tariffs or taxes - we did not get much wiser this week. Thus far, Trump has announced a likely 10% increase to tariffs against China but added he would "rather not use it", and 25% tariffs for Canada and Mexico, in line with his campaign promises. We believe more tariff hikes are in the pipeline, but in the absence of tax cuts, we think the inflationary impact from tariffs alone in the US would be short-lived. Higher prices would dampen consumption, while structural growth is set to slow down in sync with lower immigration and decelerating labour force growth.

With this in mind and considering that lending data points to US interest rates being above neutral, we think the Fed can afford to resume cutting rates in March. However, next week we expect them to pause. As this is also what the market expects, and we expect no strong forward guidance from Powell, we think market reaction will be limited. All eyes remain on Trump, read more on Research US: Fed preview - Not stealing the spotlight, 23 January.

If December rate moves by the Fed and the ECB were essentially a coin-toss, this time around markets have a strong conviction on both. For the ECB meeting next week, we and the consensus expect a 25bp cut. But similar to our Fed call, our expected ECB rate path diverges from market expectations. Markets expect ECB policy rate to land at 2%, we expect two more cuts, and policy rate to reach 1.5% by September. Euro area PMIs provided some relief in December, and hard data from the labour market remains strong. However, soft indicators paint a weaker picture, and we expect wage growth to moderate further, leaving room for the ECB to adjust rates significantly lower. Read more on Flash: ECB preview - No new signals, 23 January.

This week's central bank meetings provided no surprises. Norges Bank kept rates unchanged at 4.5% and firmly guided towards a March cut. The Bank of Japan hiked its policy rate by 0.25% to 0.50% as expected. Recent USD depreciation has been a relief for Japanese authorities and enabled a long-anticipated cut.

Next week, central bank meetings aside, we get a flurry of interesting data releases from the euro area: German Ifo index on Monday, and GDP country data on Thursday. On Thursday, we get euro area Q4 flash GDP data and January flash inflation from Spain (ahead of German and French figures on Friday, and the EA release the week after). In the US, Tuesday brings January durable goods orders ahead of Q4 GDP release on Thursday and PCE inflation on Friday.

Full report in PDF.

Summary

• In a widely expected decision, the Bank of Japan (BoJ) took another step along its monetary policy normalization path at this week's meeting, raising its policy rate by 25 bps to 0.50%. In raising interest rates, the BoJ cited firming wage and price developments, while also observing that global markets have remained relatively calm for now.
• The BoJ also forecast underlying inflation to remain at or above its 2% inflation target over the medium term, in our opinion a strong signal of further tightening to come. Comments from Governor Ueda also leaned hawkish, as he said the current policy rate is still far from its “neutral” level, and that he was not considering some specific rate level as a barrier.
• Against this backdrop, we continue to forecast a 25 bps rate hike to 0.75% at the BoJ's April announcement. We now also forecast a final 25 bps rate increase to 1.00% in July, while acknowledging that the timing of that final rate hike could get pushed back depending on how local and global economic conditions evolve. Overall, we think the outlook for Bank of Japan tightening and eventual Fed easing could lead to a reasonably resilient yen through 2025, with more sustained and substantial yen weakness perhaps more likely in 2026 as the U.S. economy recovers.

Bank Of Japan Takes A Further Step Along Its Monetary Policy Normalization Path

In a widely expected decision, the Bank of Japan (BoJ) took another step along its monetary policy normalization path at this week's meeting, raising its policy rate by 25 bps to 0.50%. In raising interest rates, the BoJ said growth and inflation have been developing generally in line with its forecasts, and also cited reasons for a firming in wage and price trends. The BoJ said:

• There have been many views expressed by firms stating that they will continue to raise wages steadily in this year's annual spring labor-management wage negotiations; and
• With wages continuing to rise, there has been an increase in moves to reflect higher costs, such as increased personnel expenses and distribution costs, in selling prices.

The Bank of Japan also noted relative stability in global financial markets, saying “while attention has been drawn to various uncertainties, global financial and capital markets have been stable on the whole, as overseas economies have followed a moderate growth path.”

The Bank of Japan's encouraging assessment of recent economic trends was also reinforced by upward revisions to its economic outlook. While the forecasts for GDP growth were little changed, there were some notable upward revisions to the central bank's inflation forecasts. CPI ex-fresh food inflation is forecast at 2.7% for FY2024 (previously 2.5%), 2.4% for FY2025 (previously 1.9%) and 2.0% for FY2026 (previously 1.9%). In a similar vein, the outlook for CPI ex-fresh food and energy inflation was revised higher to 2.2% for FY 2024 (previously 2.0%), 2.1% for FY2025 (previously 1.9%) and 2.1% for FY2026 (unchanged). The forecast for Japan's underlying inflation to remain at or above the central bank's 2% inflation target over the medium term is, in our opinion, a strong signal of further tightening to come. The Bank of Japan indicated as much in its monetary policy announcement, saying that:

• Given that real interest rates are at significantly low levels, if the outlook for economic activity and prices presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

Hawkish Comments Hint at a Higher Terminal Policy Rate

In addition to the Bank of Japan's announcement, in our view, comments from Governor Ueda also point to multiple further rate hikes from the Bank of Japan over the balance of 2025. Ueda said he expected solid results from this year's spring wage negotiations, a development we think would be supportive of another rate increase in April. Ueda also suggested global markets have been relatively calm in the initial days of President Trump's administration. Interestingly, Ueda also said that even after this week's rate increase, the current policy rate is still far from its “neutral” level, and that he was not considering some specific rate level as a barrier. He indicated that one BoJ analysis suggested the neutral rate could be somewhere between 1.00% and 2.50%. So long as overall economic trends remain encouraging, we view those comments as consistent with the BoJ eventually raising its policy rate to 1.00%, perhaps by its July announcement.

Regarding recent economic trends, labor cash earnings rose 3.0% year-over-year in November and expectations for this year's spring wage talks are upbeat. Inflation also remains elevated, with CPI ex-fresh food inflation at 3.0% year-over-year in December. Sentiment surveys, most notably the Tankan survey, have generally improved in recent quarters, consistent with steadier economic growth ahead. While these encouraging economic trends remain in place, and with global economic conditions perhaps more benign during the early part of this year as the U.S. economy advances at a steady pace and with Fed policy on hold, we view these conditions as most conducive for further Bank of Japan rate hikes. Against this backdrop, we continue to forecast a 25 bps rate hike to 0.75% at the BoJ's April announcement. We now also forecast a final 25 bps rate increase to 1.00% in July, while acknowledging that the timing of that final rate hike could get pushed back depending on how local and global economic conditions evolve. Overall, we think the outlook for Bank of Japan tightening and eventual Fed easing could lead to a reasonably resilient yen through 2025, with more sustained and substantial yen weakness perhaps more likely in 2026 as the U.S. economy recovers.

The US dollar accelerated its decline against its major peers, losing almost 2% to 107.1 this week before trimming some losses. Fundamentally, behind the dollar’s corrective pullback is the resurgence of expectations that the Fed will cut its key rate once or twice later this year. We recall that in early January, markets were pricing in a 30% chance of no rate change.

On the tech analysis side, the DXY pullback from 110 to 108 is within the scope of a typical correction. Also in favour of a corrective scenario is that the dollar got support this week on the decline to the 50-day moving average, near the November peaks. A test of this could be repeated next week. A close of the week under 107.40 (50-day MA) would force a deeper decline to 106 or potentially even 105. The ability to quickly return to the 110 area would make the 115-116 area the next bullish target.

Indices

US indices maintained a positive trend for the second week in a row, with the S&P 500 setting a new all-time high above 6100. The Nasdaq100 and Dow Jones are about 1.5% below their records but have broken the downtrend that has been building since the second half of December.

Next week’s central event will be the Fed meeting. In December, the central bank’s tough tone took about 4% off each of the key US stock indices. The markets managed to recover these losses due to strong macroeconomics and company reports. Nevertheless, there are still some concerns that the Fed’s stance may once again deliver an unpleasant surprise.

Gold price accelerated higher on Friday, offsetting initial negative signal that was developing on daily chart, from Thursday’s Hanging man candlestick.

Fresh gains (up 1% until early US session on Friday) came ticks ahead of gold’s record high ($2790, posted on Oct 31) and signaling that bulls remain firmly in play.

The yellow metal is on track for a fourth consecutive weekly gain and about 6% advance in January, with recent rally being sparked by uncertainty surrounding President Trump’s trade policies, particularly the latest signals about softer approach to China tariffs and possible trade deal, as well as his calls to lower interest rates.

Contradicting signals in first few days of Trump’s new term in the White House weakened dollar and boosted demand for safe haven gold.

Retest of new all time high and attack at nearby $2800 psychological barrier could be likely scenario in coming sessions, with sustained break higher to signal continuation of larger uptrend, which was on hold during past nearly three months for consolidation.

Fundamentals are likely to remain favorable as reality somewhat diverges from Trump’s post-election rhetoric, particularly in foreign policies, while technical studies remain in firm bullish configuration on daily and weekly chart and underpin the action.

Recent break above bull channel resistance trendline signaled that bulls tighten grip.

However, bulls may face increased headwinds from very significant $2790/$2800 resistance zone and enter consolidative phase before resuming higher.

Dips are likely to be shallow (if current environment remains unchanged) and offer better levels to re-enter bullish market.

Former breakpoints at $2730/21 zone now act as solid supports which should keep the downside protected.

Res: 2784; 2790; 2800; 2850
Sup: 2761; 2748; 2730; 2721

Daily Pivots: (S1) 155.59; (P) 156.23; (R1) 156.71; More...

USD/JPY is still bounded in range above 154.77 and intraday bias remains neutral. Further decline remains in favor for now. Sustained trading below 55 D EMA (now at 154.73) will extend the correction from 158.86 to 38.2% retracement of 139.57 to 158.86 at 151.49 next. On the upside, though, above 156.74 minor resistance will bring retest of 158.86 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.

Daily Pivots: (S1) 0.9051; (P) 0.9080; (R1) 0.9103; More…

Intraday bias in USD/CHF stays neutral for the moment. Further rally is in favor with 0.9007 support intact. Above 0.9107 minor resistance will turn bias back to the upside for retesting 0.9200 and 0.9223 key resistance. However, firm break of 0.9007 will turn bias back to the downside for deeper pull back to 55 D EMA (now at 0.8954) and possibly below.

In the bigger picture, as long as 0.9223 resistance holds, price actions from 0.8332 (2023 low) are seen as a medium term corrective pattern. That is, long term down trend is in favor to resume through 0.8332 at a later stage. However, sustained break of 0.9223 will be an important sign of bullish trend reversal.