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The bond market sell-off stabilised ahead of Donald Trump's inauguration on Monday, as the December core inflation data from the US came out on the soft side (+0.2% m/m SA, Nov. +0.3%). Easing hotel, core goods and health care inflation contributed to the cooling but importantly, broader housing and non-housing services inflation remain at moderating trends as well. The move gained further momentum on Thursday, when the Fed's influential Chistopher Waller flagged that three or four rate cuts could be possible this year if 'data cooperates'. While Trump's election win has brought inflation fears firmly back to markets' agenda, we find little reason for concern in the hard data received so far, and still think the Fed will continue cutting rates in March. Read more from Global Inflation Watch - Hard data signals continuing disinflation, 16 January.

Most of our central bank views remain on the dovish side of market pricing even after this week's rally. This also implies further downside potential to bond yields on both sides of the Atlantic. In our updated forecasts, we now see 10y Bund yield at 2.25% in 12M horizon and maintain 10y UST yield view at 4.20%, read more from Yield Outlook - The pendulum has swung too far, 13 January. We also tweaked our call for Riksbank, and now see the next cut already at the upcoming January meeting, see RtM Sweden, 17 January.

On the geopolitical front, the fear of Trump allowing 'all hell to break out' motivated Israel and Hamas to finally agree on a ceasefire set to begin on Sunday. The actual content of the deal has not changed much from preliminary plans, and the implementation remains uncertain. Importantly, the future governance of Gaza remains an open question.

Next week, all eyes will be on which executive orders Trump enacts once he enters the White House. Rumoured topics of up to 100 separate orders include everything from tariffs to immigration to regulation and more. For the near-term macro-outlook and markets, any new announcements on tariffs will be the key to follow. The mixed signals heard from news sources and Trump himself over the past weeks suggest there is at least some level of internal disagreement within the Republican party over the topic. Our best guess is that any announcements made next week would be limited to targeted tariffs against specific countries and/or goods. We would expect any broader universal tariffs to be announced only at a later stage.

The upcoming week will be a relatively quiet one in terms of macro data. The most important release will be the January Flash PMIs on Friday, where we expect the euro area composite index to recover back to the neutral level of 50.0 (Dec. 49.6). We expect some improvement to both manufacturing and services indices. The former will still likely remain well below 50, which means production continues to contract, but just at a slower pace.

Early Friday morning, we expect the Bank of Japan to hike rates by 25bp. Analysts are divided between no change and a hike while markets price in nearly 80% probability of a hike at the time of writing. The latest December CPI data is due for release just before the monetary policy decision. This week, we recommended a short USD/JPY position as part of our annual FX Top Trades 2025, 14 January.

Full report in PDF.

Gold price eased from five-week high on Friday, driven by a partial profit-taking at the end of the week, following a three-day rally.

The yellow metal was supported by recent US economic data which showed weaker than expected US core inflation numbers in December and revived narrative of more Fed rate cuts in 2025.

Markets bet for two cuts against initially signaled only one cut this year, while the latest comments from Fed Governor about possible three or four cuts if coming data show further weakening, that added to hopes of stronger policy easing by the US central bank.

However, economists remain cautious in anticipation of stronger boost of the US economic growth by Trump’s administration and new tariffs on imports to US that would provide fresh boost to inflation.

Technical picture remains firmly bullish on daily chart and underpins the action, as gold heads for the third straight weekly gain that adds to positive near-term outlook.

We look for weekly close above broken barriers at $2700/$2693 (psychological / Fibo 61.8% of $2790/$2536) to confirm bullish stance.

Also, these levels now reverted to solid supports which should ideally contain dips and keep larger bulls intact.

Immediate targets lay at $2726/30 (Dec 12 lower top / Fibo 76.4%) followed by $2749 (Nov 5/6 double top) which guards a record high at $2790 (posted on Oct 31).

Caution on dip below $2693, although broader bias is expected to remain with bulls while $2675 support (broken bear trendline / rising 10DMA) holds.

Res: 2726; 2730; 2749; 2762.
Sup: 2700; 2693; 2675; 2663.

Markets

European equities are on track to end the week with a bang. The EuroStoxx50 had an excellent week, shrugging off a weak start to finish around 5% higher and to its strongest level since 2000. Wall Street, already being near record highs had to settle for less. They do open with gains that make them head for the best week since the November US election. The European relief rally in particular is striking from a timing point of view given Trump is about to embark on its second presidential term next Monday – during which financial markets are closed for Martin Luther King Jr. Day, by the way. Similarly we’ve had few data prints over the last couple of weeks that were clearly indicating the European economy is picking up. The stock boost does coincide with core bonds taking a breather. The weekly US tally amounted to up to -20 bps at the belly of the curve. Lower-than-expected inflation numbers and Waller were responsible for the bulk of the move. The influential Fed governor expected more rate cuts in 2025H1 if more such inflation numbers arrive. Markets up until then weren’t really considering such a scenario, even after the sharp CPI repositioning. Front end yields do recover a bit today on solid housing & industrial production data. Ahead of his inauguration, Trump already had “very good” call with his Chinese counterpart, a.o. on trade. Such headlines now deserve market attention. European (swap) rates joined the US lower with weekly declines of up to around 10 bps in the same bucket of the curve. UK gilts outperformed, ending this week between -17 and -23 bps lower. A series of British data reminded investors the UK is more of a European growth story than a US. Slower-than-expected inflation, a disappointing industrial update and declining UK retail turnover (in December) brought a February rate cut by the Bank of England back to the table (90% discounted). FX experienced a similar pause this week in what was up until now a one-way stronger dollar driven market. The trade-weighted index retreated slightly after hitting a more than 2-yr high around 110 on Monday. DXY is currently changing hands around 109.2. EUR/USD at the beginning of the week was in serious peril, temporarily losing the 1.0201 mark as a last line of defense before parity. The duo has been trading within a 1 big figure range after avoiding this highly consequential technical break. It's up to Trump from next week on whether the pair can hold on to it short term. Sterling was the G10 underperformer. EUR/GBP built on a recovery that began last week to trade around its highest level since end-October (+/- 0.845). GBP oscillated against USD around 1.22, the lowest level since November 2023. The Japanese yen stood at the other side of the aisle, benefiting in from (core) bond yields easing elsewhere but rising domestically. Markets have all but fully embraced a third rate hike (25 bps) by the Bank of Japan at the meeting next week. Tactical leaks by BoJ officials over these last couple of days made sure of that. USD/JPY trades around 155.7, EUR/JPY hovers around 160.

News & Views

Aside from the 2024 GDP growth and activity data published this morning, the statistical office of China also reported the population numbers at the end of 2024. The national population was estimated at 1 408 mln, an annual decrease of 1.39 mln. The number of births and birth rate both rose slightly to respectively 9.54 mln (from 9.02 mln) and 6.77 births per 1000 people (from 6.39 in 2023). However, the rise is mostly a delayed rebound after COVID and is expected to reverse in 2025 again. The number of deaths in 2024 also declined to 10.93 mln. The urbanization rate in the country rose further, with the share of urban population in the total population at 67% (+0.84 ppts). This higher urbanization rate is seen as one factor behind the structurally declining birth rate.

The National Bank of Poland yesterday as expected left its policy rate unchanged at 5.75%. The press release didn’t contain any signs that it might consider a less hawkish stance anytime soon even as recently published December inflation data came out on the softer side of expectations (headline 4.8%, core 4%). The NBP expects inflation to remain markedly above the 2.5% target, driven by the effects of the already introduced increases in energy prices, as well as rises in excise duties and administered services prices. Core inflation will probably also stay elevated. Some factors easing the inflationary pressures mentioned in the December statement were not mentioned anymore. At today’s presser, governor Glapinski indicated that CPI will exceed 5% in the coming months and won’t fall to target in the nearest quarters (expected at current level end this year). Glapinski concludes that the decision on rate cuts has to be delayed for some time.

Daily Pivots: (S1) 1.4336; (P) 1.4370; (R1) 1.4427; More...

Immediate focus is now on 1.4466 resistance with current strong rally ins USD/CAD. Decisive break there will resume larger up trend to 1.4667/89 long term resistance zone. On the downside, break of 1.4279 support will bring deeper correction. But downside should be contained by 55 D EMA (now at 1.4187) to bring rebound.

In the bigger picture, up trend from 1.2005 (2021) is in progress for retesting 1.4667/89 key resistance zone (2020/2015 highs). Medium term outlook will remain bullish as long as 1.3976 resistance turned holds (2022 high), even in case of deep pullback.

Sharp selloff in commodity currencies against Dollar is dominating market action as the US session unfolds. While broader trading remains subdued, the sudden weakness in these currencies appears tied to trader caution ahead of President-elect Donald Trump's inauguration on Monday. Concerns over tariff policies could be the main driver of the moves, in the absence of other clear fundamental catalysts.

Canada, Mexico, and China are widely speculated to be high on Trump’s tariff agenda. The tariffs may serve as leverage to address issues like fentanyl exports or re-exports impacting the United States.

However, the specifics of Trump’s strategy remain a “wild card.” Possible scenarios include blanket tariffs on major trading partners, sector-specific measures, immediate enactment via executive orders, or staggered monthly increases. Or, it could be a mix of these approaches.

For the week, Sterling remains the weakest performer, followed by Loonie and Dollar. On the other hand, Japanese Yen leads gains with the Aussie and Swiss Franc rounding out the top three. Kiwi and Euro are trading in mixed positions. However, the current selling pressure on commodity currencies could alter these rankings as the week comes to the close.

ECB's Nagel: Should avoid rushing monetary policy normalization

German ECB Governing Council member Joachim Nagel in an interview with Platow Brief, highlighted persistent services inflation and a "high level of uncertainty," referencing concerns about global trade dynamics as Donald Trump prepares to return to the White House next week.

"We should therefore not rush into anything on the path to monetary policy normalization," Nagel stated.

Meanwhile, he defended the ECB’s discussions of a more aggressive 50-basis-point rate cut during its December meeting, noting that such debates are a normal part of policy deliberations.

ECB's Elderson: Rate setting is a question of speed and magnitude

ECB Executive Board member Frank Elderson emphasized the delicate balance the central bank must strike in setting interest rates during an interview with Het Financieele Dagblad.

He warned, "If we lower the interest rate too quickly, dialling down services inflation sufficiently could become complicated." At the same time, he acknowledged the risks of maintaining rates too high for too long, which could lead to undershooting ECB's inflation target.

"The markets don’t think we’ve finished easing now that we’re at 3% and I don’t think we have, either," he added. "Setting interest rates is ultimately a question of how fast and how much."

Eurozone CPI finalized at 2.4% in Dec, core CPI at 2.7%

Eurozone inflation was finalized at to 2.4% yoy in December, up from November's 2.2% yoy. Core CPI, which excludes energy, food, alcohol, and tobacco, held steady at 2.7% yoy. Services made the largest contribution to the annual headline inflation rate (+1.78 percentage points), followed by food, alcohol, and tobacco (+0.51 pp), non-energy industrial goods (+0.13 pp), and energy (+0.01 pp).

In the broader EU, inflation was finalized at 2.7% yoy, up from 2.5% yoy in November. Ireland recorded the lowest annual inflation rate at 1.0%, followed by Italy at 1.4%, with Luxembourg, Finland, and Sweden at 1.6% each. On the other end, Romania (5.5%), Hungary (4.8%), and Croatia (4.5%) posted the highest inflation rates.

Across the EU, annual inflation rose in 19 member states, remained unchanged in one, and fell in seven compared to the previous month.

UK retail sales fall -0.3% mom in Dec, down -0.8% qoq in Q4

UK retail sales volumes declined by -0.3% mom in December, significantly missing expectations for 0.4% mom increase. The drop was primarily driven by reduced supermarket sales, partially offset by a rebound in non-food stores such as clothing retailers, which saw recovery after recent declines.

On a quarterly basis, sales volumes in Q4 fell -0.8% qoq compared with Q3, highlighting a slowdown in consumer activity. However, year-on-year, Q4 sales volumes rose 1.9% compared to the same period in 2023.

China's Q4 GDP growth surpasses expectations, full-year growth hits 5% target

China’s economy ended 2024 on a strong note, with GDP expanding by 5.4% yoy in Q4, beating market expectations of 5.0%. This marked a significant acceleration from 4.6% in Q3, 4.7% in Q2, and 5.3% in Q1. The robust Q4 performance pushed full-year GDP growth to 5.0%, aligning with the government’s target of “around 5%.”

December's economic indicators also showed positive momentum. Industrial production surged 6.2% yoy, exceeding the forecast of 5.4%. Retail sales grew by 3.7% yoy, marginally beating expectations of 3.5%. However, fixed asset investment lagged, rising only 3.2% year-to-date, just below the 3.3% forecast.

Despite the upbeat data, concerns remain. Statistics Bureau spokesperson Fu Linghui acknowledged lingering weakness in consumer spending and cautioned that in 2025, the “unfavorable impact of external factors may deepen.”

BNZ PMI at 45.9: NZ manufacturing completes 2024 fully in contraction

New Zealand's BNZ Performance of Manufacturing Index rose marginally in December, increasing from 45.2 to 45.9. While this marks a slight improvement, the sector remains in a prolonged contraction, far below the long-term average of 52.5 since the survey's inception. December also marked the 22nd consecutive month of contraction, a record-breaking trend for the PMI.

Catherine Beard, Director of Advocacy at BusinessNZ, noted that 2024 was unprecedented, as it was the first year in the survey’s history with all 12 months in contraction. By comparison, the next closest period was 2008 during the Global Financial Crisis, which saw nine months of contraction.

Breaking down the December data, production dropped further, slipping from 42.3 to 41.9. Employment showed modest improvement, rising from 46.9 to 47.6, while new orders also edged up from 44.5 to 46.5. However, finished stocks fell significantly, declining from 49.2 to 45.9, and deliveries dipped slightly below the neutral 50 mark, moving from 50.0 to 49.8.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.4336; (P) 1.4370; (R1) 1.4427; More...

Immediate focus is now on 1.4466 resistance with current strong rally ins USD/CAD. Decisive break there will resume larger up trend to 1.4667/89 long term resistance zone. On the downside, break of 1.4279 support will bring deeper correction. But downside should be contained by 55 D EMA (now at 1.4187) to bring rebound.

In the bigger picture, up trend from 1.2005 (2021) is in progress for retesting 1.4667/89 key resistance zone (2020/2015 highs). Medium term outlook will remain bullish as long as 1.3976 resistance turned holds (2022 high), even in case of deep pullback.

German ECB Governing Council member Joachim Nagel in an interview with Platow Brief, highlighted persistent services inflation and a "high level of uncertainty," referencing concerns about global trade dynamics as Donald Trump prepares to return to the White House next week.

"We should therefore not rush into anything on the path to monetary policy normalization," Nagel stated.

Meanwhile, he defended the ECB’s discussions of a more aggressive 50-basis-point rate cut during its December meeting, noting that such debates are a normal part of policy deliberations.

ECB Executive Board member Frank Elderson emphasized the delicate balance the central bank must strike in setting interest rates during an interview with Het Financieele Dagblad.

He warned, "If we lower the interest rate too quickly, dialling down services inflation sufficiently could become complicated." At the same time, he acknowledged the risks of maintaining rates too high for too long, which could lead to undershooting ECB's inflation target.

"The markets don’t think we’ve finished easing now that we’re at 3% and I don’t think we have, either," he added. "Setting interest rates is ultimately a question of how fast and how much."

• Weak UK retail sales and GDP data has put pressure on the British pound.
• Rumors suggest the Bank of Japan (BoJ) may hike rates next week, which could impact the Yen and GBP/JPY.
• On shorter timeframes (daily and hourly), there’s potential for a bounce and retest of broken trendlines, with resistance levels around 191.50 and 193.00.

The British pound remains under pressure following a surprisingly weak retail sales report this morning. This follows up from a disappointing GDP report for November which fell short of market expectations.

UK retail sales unexpectedly dropped by 0.3% in December 2024, after a small 0.1% rise in November that was revised down. This was worse than the forecasted 0.4% increase. Over the whole of 2024, retail sales grew by 0.7%, recovering from a 2.9% drop in 2023 and a 4.1% fall in 2022.

The data weighed on the pound this morning with GBP/JPY falling some 60-70 pips post data release. However the pair has since recovered the majority of the drop as buying pressure returned.

BOJ To Hike Rates Next Week?

News filtered through via Nikkei this morning that the majority of BoJ board members are set to approve a rate hike next week. Now rhetoric from the BoJ has been notoriously unreliable for the longest time, with the Central Bank using rhetoric and chatter to aid the Yen at times. Could this be another false dawn?

Looking at recent data and comments from BoJ policymakers, it does appear that this might have some substance. Markets are pricing in around an 80% probability of a 25 bps hike next week. As for how this impacts the Yen and GBP/JPY in particular is going to be intriguing.

BoJ Rate Probabilities

Source: LSEG (click to enlarge)

The way GBP/JPY has reacted this morning leaves me to believe that we could be in for a bounce higher ahead of the BoJ meeting next week. The downside is still favored but a short-term pullback may present potential shorts with a better risk to reward opportunity.

Technical Analysis – GBP/JPY

From a technical standpoint, GBP/JPY on a weekly timeframe failed to print a higher high in December which preceded the selloff we have seen since.

GBP/JPY is threatening a break of the ascending trendline on a weekly timeframe with a close below leaving the door open for a deeper correction toward the 100-day MA at 186.239 and potentially the 185.00 handle.

GBP/USD Weekly Chart, January 17, 2025

Source: TradingView.com (click to enlarge)

Dropping down to a daily timeframe and the trendline from the weekly chart has been broken with a daily candle close below yesterday. 

There is a possibility of a bounce and retest of the trendline before bearish continuation. Given the rumors about a BoJ rate hike next week, a pullback in the early part of the week toward the 191.50 or 193.00 handle before sellers’ return could materialize. 

The RSI period 14 is hovering just above oversold territory though and thus a continuation of the selloff for current price levels cannot be ruled out either. 

GBP/JPY Daily Chart, January 17, 2025

Source: TradingView.com (click to enlarge)

Dropping down further to a one-hour timeframe and a one-hour candle close above 190.150 could lead to a rally and retest of the trendline.

On the H1 timeframe the 100-day MA also rests near the trendline at 191.318 and may prove a hurdle too strong to crack.  The positive here is that the RSI on the H1 timeframe has broken above the neutral 50 handle, suggesting a shift in momentum from bearish to bullish.

GBP/JPY One-Hour (H1) Chart, January 17, 2025

Source: TradingView.com (click to enlarge)

Support

• 189.349
• 187.628
• 185.000

Resistance

• 190.148
• 191.500
• 193.000

The Australian dollar has edged lower on Friday. In the European session, AUD/USD is trading at 0.6198, down 0.22% at the time of writing.

Will strong China numbers boost the Aussie?

There was good news out of China on Friday, highlighted by GDP which was stronger than expected. The economy expanded by 5.4% y/y in the fourth quarter, up from 4.6% in Q3 and above the market estimate of 5.0%. This was the strongest pace of growth since Q2 2023. Industrial production jumped 6.2% in December, up from 5.4% in November and above the forecast of 5.4%. Finally, retail sales climbed 3.7% in December, compared to 3.0% a month earlier and blowing past the forecast of 3.0%.

The solid numbers out of China are a result of the government’s aggressive stimulus measures to kick-start the economy and no less important, boost business and consumer confidence. One strong month does not mean that China’s economic problems are over but the positive data is clearly a step in the right direction.

China’s exports rose in December jumped 10.7% which was higher than expected. Much of the gain was due to manufacturers rushing to fill orders ahead of Donald Trump taking office next week. Trump has threatened to slap China with tariffs and demonstrated in his first presidential term that he was willing to engage in a nasty trade war with China.

The improvement in China’s economy is good news for Australia, as China is its largest trading partner. China’s bumpy recovery since the Covid pandemic has led to lower demand for imports and Australia’s crucial export sector has felt the pinch. If China has turned the corner, it will be good news for Australian exporters and should provide a boost to the ailing Australian dollar, which has plunged 10.5% against the US dollar since October 1.

AUD/USD Technical

• 0.6217 is a weak line of resistance, followed by resistance at 0.6243
• 0.6188 and 0.6162 are providing support

Market picture

The cryptocurrency market increased by 2.7% in the past 24 hours, reaching $3.6 trillion. It is returning to levels seen on January 7th and has been maintaining steady growth since the beginning of the week. Successful consolidation at these levels could pave the way to historical highs observed in December, effectively ending the period of corrective pullback and consolidation.

Crypto market sentiment remains in the ‘Greed’ territory, with values recording 75 for the second consecutive day. These figures indicate significant buyer interest but are not yet indicative of an overbought market.

Bitcoin’s price has exceeded $102K, entering the range it occupied ten days ago. Similar to the broader market, BTC is on the brink of reaching the December highs. Additionally, overcoming downward momentum intraday on Thursday has demonstrated buyer strength. If risk appetite in equities persists, an advance into the $108K-$110K range could materialize within a few days. Continued upward movement might trigger FOMO, potentially driving the price to $130K by the end of January.

News background

According to Bloomberg analyst Eric Balchunas, a Litecoin-based exchange-traded fund is anticipated to be the next spot cryptocurrency ETF in the U.S., which recently led to a 30% increase in LTC prices. There are currently five applications for Solana-based ETFs and two applications for XRP-based funds pending with the SEC.

Investment firm VanEck has applied to the SEC to launch an exchange-traded fund named Onchain Economy ETF. The fund will target companies involved in digital transformation and/or digital asset-based instruments.

Caution prevails in the BTC options market, as bets on increased volatility intensify with the approach of Donald Trump’s inauguration as U.S. President on January 20th, The Block reports.

New York-based Burwick Law has announced plans to sue the Pump.fun platform on behalf of meme-coin investors who have incurred substantial losses.

Scam Sniffer warns that Telegram malware scams targeting crypto investors have now outpaced traditional phishing attacks. Since November, the number of fraudulent incidents on Telegram has surged 20-fold.