Sample Category Title

Summary

• Canada's economy appears to have slowed noticeably in late 2024, and prospects are mixed as 2025 begins. The outlook for the household sector is somewhat resilient given firming growth in real incomes, and with interest costs set to decline further in the months ahead. In contrast, sentiment in the corporate sector remains downbeat, while declining profitability could also act as a headwind to business investment.
• Adding to this mixed outlook are increased uncertainties related to U.S. tariff policy and local politics. Our working assumption is that many U.S. imports from Canada may face a tariff of around 5% from the middle of this year. Prime Minister Trudeau's recent resignation should result in a period of uncertainty and transition, even if it eventually leads to a more stable government. These tariff and political uncertainties should offer further headwinds to exports and investment spending.
• Considering the mixed outlook and prevailing uncertainties, we forecast only a modest pickup in Canadian GDP growth to 1.7% in 2025 from an estimated 1.3% in 2024, with the risks tilted toward an even slower recovery.
• Combined with sub-trend growth, contained overall inflation should allow the Bank of Canada to keep lowering policy interest rates at the next several meetings. Domestically oriented inflation is starting to slow more noticeably and, while wages are still elevated relative to productivity, labor cost pressures are also easing.
• We expect the Bank of Canada to cut rates by 25 bps in January, March, April and June, taking the policy rate to 2.25%, which would be at the lower end of the perceived neutral policy rate range. Sluggish Canadian growth, lower Canadian interest rates, and cautious Federal Reserve easing is also likely in our view to keep the Canadian dollar broadly on the defensive over the medium term.

Canada's Mixed Outlook Means Slow Economic Recovery

During the latter half of 2024 and leading into 2025, Canada's economic performance remained respectable, though decidedly mixed across sectors. This mixed performance was clearly reflected in the Q3 GDP outcome, which saw the overall economy grow by 1.0% quarter-over-quarter annualized, although final domestic demand did grow at a stronger 2.4% pace. However, even within the domestic economy there is a clear dichotomy, with the household sector relatively sturdy while the business outlook is somewhat clouded.

Looking first at the household sector, Q3 real consumer spending advanced at a 3.5% pace, while other consumer fundamentals also appeared to be supportive of continued spending, at least in the immediate quarters ahead. Real household disposable income rose 4.8% year-over-year in Q3, the strongest advance since a pandemic-related spike. The household saving rate rose further in Q3 to 7.1% of disposable income, which should offer something of a buffer against a spending downturn. Finally, while household debt servicing costs are still elevated, they have started to trend in a more favorable direction following a series of policy interest rate cuts from the Bank of Canada (BoC). Interest costs as a proportion of disposable income declined in the most recent quarter, while the overall debt service ratio (principal and interest) has fallen for the last three quarters in a row.

Recent monthly indicators also point to reasonably solid trends in household related activity. From a broader perspective employment trends remain quite solid—including a November employment gain of 50,500—although on the flip-side, the unemployment rate has risen and wage growth has started to slow. Real retail sales were unchanged in October but, following a large September increase, that still leaves the level of October sales 1.1% above its Q3 average. Housing activity also appears to be stabilizing, with housing starts jumping in November and housing permits falling modestly in October; new home prices have also stopped declining. Given the early signs of stabilization and amid a backdrop of falling interest rates, our outlook is for a moderate rebound in housing activity in 2025.

In contrast to the reasonably steady outlook for the household sector, the outlook for the corporate sector remains clouded. Business sentiment remains downbeat, as reflected in the BoC's Q3 Business Outlook Indicator, which at -2.31 remained in negative territory for the seventh quarter in a row. Canada's December services PMI fell to 48.2, slipping below the breakeven 50 level for the first time in three months, another sign of subdued sentiment. Declining corporate profits could also continue to act as a restraint on business fixed investment, which shrank by 3.6% quarter-over-quarter annualized in Q3. To the extent that an uncertain business environment leads to a slowing in employment growth, that could also act as another headwind to overall economic activity.

Tariff and Political Uncertainties Increasing

This rather mixed outlook takes shape, in our view, prior to even considering key risks to the Canadian economy, the most prominent of which is the threat of tariffs from the United States. During the U.S. election campaign, President-elect Trump proposed a 60% tariff on all imported goods from China, as well as an across-the-board 10% tariff on goods imported from all other countries. Separately and more recently, Trump floated a 25% tariff on imports from Canada and Mexico, citing concerns around the flow of illegal drugs and undocumented immigration into the United States. While we don't think all of these tariffs will go into effect, we doubt Canada will fully avoid tariffs either. For now, our working assumption is that around half of Trump's initially proposed tariffs will go into effect around the middle of 2025, which would equate to approximately a 5% tariff on imports from Canada from the middle of the year.

To some extent, the shifting composition of the Canadian economy since the turn of the century could mitigate the negative impact on Canadian growth. The goods sector currently accounts for 25% of the economy, down from around 32% in 2000. Over the same period, the service sector's share of the economy has risen to around 75%, from 67%.Even with this shift, however, Canada's exposure to the U.S. economy is still sizable, with around 76% of total merchandise exports destined for the United States. And perhaps except for energy—which accounts for around a quarter of Canada's merchandise exports—most other Canadian export categories appear to be candidates for the imposition of tariffs. Should tariffs go into effect as we expect, the negative impact on exports and business investment would act as a potential further headwind to economic growth.

Finally, the Canadian political backdrop has also become more unsettled. In recent days, Prime Minister Justin Trudeau announced his resignation as leader of the Liberal Party, a development precipitated by events including the resignation of previous finance minister Chrystia Freeland. In this more unsettled environment, New Democratic Party leader Jagmeet Singh said his party would now support a vote of no-confidence in the government. Combined with similar support from the other main opposition parties, the Conservative Party and Bloc Quebecois, that would be enough for a no-confidence motion to succeed. Trudeau will remain in charge until a new Liberal Party leader (who will become Prime Minister) is selected, which will probably occur some time in March; however, an election is likely to take place shortly after. The main opposition party, the Conservative Party led by Pierre Poilievre, currently holds a huge lead in political opinion polls, which would also very likely translate into a majority government. Ultimately, recent developments could lead to a more stable government, and the Canadian dollar's reaction to the Trudeau resignation announcement was initially positive. That said, it's not clear to us that a new leader (or party) will be more effective in dealing with the tariff threat from the United States, and there will by necessity be a period of uncertainty during a transition to a new government. Overall, taking into account mixed economic trends, as well as tariff and political-related uncertainties, we see only a very modest rebound in Canada's economy this year. After estimated GDP growth of 1.3% in 2024, we expect GDP growth of just 1.7% in both 2025 and 2026, and moreover, we view risks as tilted to an even slower rebound in activity.

Contained Inflation Means Continued Bank of Canada Easing

Combined with our forecast for sub-trend economic growth, we believe contained overall inflation trends will allow the Bank of Canada to keep lowering policy interest rates at the next several meetings. With that said, we believe more steady 25 bps increments rather than the 50 bps moves seen at recent meetings are more likely. To be sure, Canadian inflation has ticked slightly higher in recent months. As of November, the headline CPI was running at 1.9% year-over-year, close to the central bank's 2% inflation target, while the average core CPI was running at 2.7%, moderately above the inflation target. Within the details, however, there were some favorable dynamics. As examples, November shelter inflation slowed to 4.6%, and broader services inflation also eased to 3.5%. Other indicators also point to a further moderation of domestically-oriented inflation pressures in the months ahead. In the latest labor market report for November, hourly wages for permanent employees slowed more than forecast to 3.9% year-over-year. And while not as current, the details from Canada's quarterly productivity and cost measures also point some moderation of labor cost pressures. For the latest data for Q3-2024, compensation per hour rose 3.2% year-over-year while unit labor costs rose 3.3% year-over-year. Overall, while wage growth is still somewhat elevated relative to productivity, it is clearly moderating, a slowing trend that should be reinforced by to ongoing rise in the unemployment rate and loosening of the labor market.

Taken together, we believe sub-trend economic growth, along with a moderation in domestic inflation and wage trends, will provide the Bank of Canada with the motivation—and the comfort—to continue easing monetary policy in the months ahead. With the current policy rate of 3.25% now at the upper end of the 2.25% to 3.25% range viewed as “neutral” by central bank policymakers, monetary policy is no longer seen as being in clearly restrictive territory. As a result, we expect the BoC to revert to 25 bps rate cuts at the meetings ahead, following 50 bps reductions at the October and December announcements. Still, given sub-trend growth and well-behaved inflation we anticipate the policy rate being reduced to the lower end of that neutral range. Accordingly, we expect the Bank of Canada to lower its policy rate by 25 bps at its January, March, April and June meetings, which would see the policy rate reach 2.25% by the middle of this year. That forecast is slightly lower than the policy rate trough we previously forecast (2.50%) and also well below our forecast trough for the fed funds rate, to a range of 3.50%-3.75%. Sluggish Canadian growth, lower Canadian interest rates, and cautious Federal Reserve easing should in our view keep the Canadian dollar broadly on the defensive over time. We remain comfortable with our forecast for the USD/CAD exchange rate to reach CAD1.5000 by early 2026.

In this technical article we’re going to take a quick look at the Elliott Wave charts of Dollar Index DXY , published in members area of the website. As our members know, Dollar is still trading within the cycle from the September’s low. Recently, we saw a 3-wave pullback, followed by a solid rally as expected. In the further text, we are going to explain the wave count.

DXY H1 New York 01.06.2025

The current view suggests that the Dollar Index completed a 3-wave pullback from the peak, ending at the 107.751 low and labeled as wave ((ii)) blue. A sharp rally followed from this low, appearing impulsive. We have labeled this short-term cycle as wave i red, indicating the start of a new bullish cycle. A 3-wave pullback in wave ii red is anticipated before the rally resumes. We expect the Dollar Index to continue finding intraday sellers in 3, 7, and 11 swings

DXY H1 New York Update 01.07.2025

We saw a 3-wave pullback in ii red, followed by a move up. The key level is 107.751. While the price stays above it, we expect more rally in the Dollar Index, ideally towards new highs. A break above the previous peak ((i)) black will confirm that wave ((iii)) is in progress.

DXY H1 New York Update 01.08.2025

The 107.751 low held as expected, and the price moved higher. We got a decent rally in Dollar index. The price is now approaching the previous peak, and we are looking for a break above wave ((i)) black to confirm further strength.

Markets

With or without data, global bond markets stay under pressure. In particular for the long end of the curve, comments often mentioned ‘The highest level since….’. The UK was again hit the hardest, with yields rising between 12 bps (10-y) and 6.5 bps (2-y). A high financing need as the government wants to roll out its growth supportive agenda and inflation holding too high for the BoE comfortably start a genuine easing cycle, dents investors’ appetite to pick-up gilts even at current ‘historically high’ returns. Yesterday, the UK 30-y forced a break higher touching the highest level since 1998. Today, the 10-y (tentatively?) develops a similar pattern reaching levels not seen since July 2008 (4.80% area). German November retail sales (-0.6% M/M) and even more factory orders (-5.4% vs -0.2% expected) again disappointed as did EMU economic confidence. Even so, it also didn’t help European bonds. German yields add between 5.0 bps (30-y) and 1.2 bps (2-y). The 7 bps rise in the 10-y yield was partially due to a benchmark change. Even, the 10-y German yield easily cleared the 2.5% resistance (November top). US curve steepening also continues, admittedly at a slower pace (30-y +4.0 bps, 2-y minus 0.5 bp). Eco data were mixed. ADP private job growth was slightly softer than expected (122k from 146k) but weekly jobless claims stay low (201k from 211k) and suggest ongoing labour market resilience. US bond markets got some relief from comments by influential Fed governor Waller. He expects inflation to slow further allowing the Fed to reduce rates further as 2025 proceeds. He also downplayed the idea that higher import tariffs will profoundly change the picture going forward. Still, the US 10-y is closing in on the 4.73% level (April 2024 top), the last technical hurdle before the 5.02% cycle top (Oct 2023). Investors later today for sure will scrutinize the internal debate within the Fed in the December meeting minutes. The $22 bln sale of 30-y US government month also will be more than closely watched with little room for disappointment. The ongoing rise in yields initially also triggered further equity sales before investors took some comfort for the Waller comments (S&P 500 little changed, Eurostoxx 50 -0.6%).

Rising (relative) interest rates support doesn’t help the likes of the euro or sterling. In current high alert modus, higher yields are seen as risk premia and allow the dollar to attracted safe haven flows. DXY rebounded from the 108.7 area to currently trade near 109.11. After briefly regaining 1.04 yesterday, EUR/USD again trades near 1.03. Despite (or is it because) higher yields, sterling also underperforms the single currency (EUR/GBP 0.834 from 0.829).

News & Views

Swedish inflation undershot expectations for December. Headline prices (using a fixed mortgage rate) rose by 0.3% to 1.5%, marking a faster deceleration from November’s 1.8% than the 1.7% expected. The core gauge (excluding energy) also eased a bit more than expected, from 2.4% to 2.1% y/y on a 0.4% monthly pace. Today’s numbers put little in the way for the central bank to further cut the policy rate (2.5%) during the January 29 meeting. The Riksbank at the December one flagged it would do so “in the first half of 2025”. It tweaked guidance somewhat to hint that this might be the final one this cycle, citing the lagged effects of monetary policy on the economy and inflation. The updated forecasts told a similar story with a 2.25% policy rate penciled in over the horizon through 2027. Money markets never really bought into the story though and in the meantime have priced in at least two more 25 bps cuts by May this year. Given the already more aggressive positioning compared to Riksbank guidance, markets for now do not push it further just yet. This also meant the SEK barely budged on the CPI miss. EUR/SEK moves around 11.5.

The ECB in an Economic Bulletin article published today offered (part of) the explanation why the consumption-led rebound it has been predicting for some time now is not yet materializing. It said that euro zone households have been saving a large portion of their income to rebuild wealth after being eroded by inflation the last couple of years. Real net wealth has declined the past two years, the ECB said. Latest data available showed families saving 15.7% of their disposable income (Q2 2024) compared to 12-13% prior to the pandemic. The result are ever-growing piles of savings. The central bank nevertheless continues to expect consumption to eventually relive , with a “likely downtick in the saving rate together with continued strong growth in real labour income” to help momentum.

• The British pound is under pressure due to Donald Trump’s potential tariff policies, causing volatility in GBP/USD and global markets.
• GBP/USD is approaching its 2024 yearly low, with potential for further downside if Trump’s tariff rhetoric continues and the US dollar strengthens.
• GBP/JPY’s price action is uncertain due to conflicting signals from the Bank of Japan’s monetary policy.
• GBP/AUD is in a defined bearish trend, with key support and resistance levels identified.

The British pound remains under pressure as the dollar continues to advance. This comes after the Bank of England kept rates steady with a cautious approach in December, while the Federal Reserve gave a more aggressive outlook for 2025.

It has been a somewhat topsy-turvy start to 2025 as markets continue to wait with bated breath for the inauguration of incoming US President Doonald Trump. At the moment his comments are stirring up market volatility as rumors continue to swirl around his potential approach toward tariffs.

This morning CNN reported that Trump considered declaring a national emergency to start a new tariff program. This pushed the US Dollar higher, while stocks lost some gains and commodity prices dropped. The sensitivity on display at present is a sign of the growing uncertainty of Trump’s proposals and their potential implications.

GBP Fundamental Overview

The UK economy is expected to remain resilient in 2025 following a surprise performance in 2024. There remain inflation concerns, however the rise of the US dollar has made life difficult for GBP/USD. However, this could leave the GBP poised for gains against emerging market currencies as well as commodity linked currencies such as the Australian Dollar.

In November, UK inflation was 2.6% compared to the same time last year, increasing for the second month in a row and staying above the Bank of England’s 2% target. This is due to stubborn wage growth and rising prices in the service sector.

Source: LSEG (click to enlarge)

The job market is starting to cool down, but unemployment is still low at 4.2%, and wages are growing at 5.2%. Some slowdown in the job market is expected after the Labour government’s first Budget.

The GBP seemed poised to benefit from less rate cuts in 2025, but the election of Donald Trump has led to a similar scenario in the US. This has left cable vulnerable to further downside in the weeks ahead.

Technical Analysis

GBP/USD

From a technical standpoint, GBP/USD on a daily timeframe has just printed a fresh low and is now within a whisker of the 2024 yearly low at 1.22987.

This comes following a two day selloff largely inspired by comments from incoming US President Donald Trump. The comments were around potential tariffs and reignited US Dollar strength which dragged cable lower.

There were signs from a technical aspect as well, with GBP/USD failing to break above the previous swing high as well as the descending trendline.

The 2024 year low beckons, will GBP/USD find support or will the US dollar continue to advance and drag cable toward support at 1.22198?

A lot will depend on US data in the coming days as well as Donald Trump’s rhetoric around tariff plans etc.

If GBP/USD is to find support at 1.22987, the swing low of January 3 around the 1.2375 may be the first hurdle before the 1.2500 handle comes back into focus.

GBP/USD Daily Chart, January 8, 2024

Source: TradingView.com (click to enlarge)

Support

• 1.2298
• 1.2219
• 1.2000

Resistance

• 1.2375
• 1.2500
• 1.2582

GBP/JPY

GBP/JPY is one pair that looked set to move higher after the BoJ decided not to increase rates in December.

However, where in the past the BoJ used intervention talk as a way to strengthen the Yen, at present it appears the normalization of monetary policy is being used to try and create a similar impact.

The results have led to mixed price action for GBP/JPY making the pairs next move that much harder to predict.

As things stand, GBP/JPY is currently testing the 200-day MA around the 195.33 handle with a break lower facing the 100-day MA at 193.71. Both of these support levels may prove hard to crack.

A move higher from current prices for GBP/JPY needs to break above the 198.00 if the pair is to have any chance at reclaiming the 200.00 level.

For now, keep an eye out for comments regarding BoJ monetary policy. These comments have the potential to drive the narrative in the days to come.

GBP/JPY Daily Chart, January 8, 2024

Source: TradingView.com (click to enlarge)

Support

• 195.33 (200-day MA)
• 193.71
• 190.00

Resistance

• 196.57
• 198.00
• 200.00

GBP/AUD

From a technical standpoint, GBP/AUD is now firmly in a bearish trend having topped out on December 19. A retest and lower high on December 27 preceded the selloff we have seen since then.

A brief pullback toward resistance above the 2.000 handle at 2.006 to print a lower high before the selloff continued.

Immediate support now rests at around the 1.9850 handle before the 1.9700 level comes into focus.

If a bounce occurs off support at the 1.9850 area, resistance at 2.000 and 2006 will be key. A break of these levels could open up a push toward the December highs.

GBP/AUD Daily Chart, January 8, 2024

Source: TradingView.com (click to enlarge)

Support

• 1.9850
• 1.9700
• 1.9500

Resistance

• 2.0000
• 2.0061
• 2.0247

Fed Governor Christopher Waller reaffirmed his support for continued rate cuts in 2025, while emphasizing that the pace will hinge on inflation progress and labor market stability.

In a speech today today, Waller noted that the median expectation from the latest Summary of Economic Projections suggests two 25-basis-point cuts this year, but highlighted the "range of views is quite large" within the FOMC, from no cuts to as many as five. But his "bottom-line message" is that "more cuts will be appropriate".

Waller described the US economy as being on “solid footing,” with a labor market near the maximum-employment objective. "I have seen nothing in the data or forecasts" that suggests the labor market will dramatically weaken over coming months," he added.

The governor pointed to steady progress on inflation but acknowledged upside risks, including geopolitical conflicts and new tariff proposals. “Tariff proposals raise the possibility that a new source of upward pressure on inflation could emerge,” he said. However, he downplayed the likelihood of tariffs significantly altering monetary policy, assuming their effects on prices are neither substantial nor persistent.

Full speech of Fed's Waller here.

Daily Pivots: (S1) 0.8280; (P) 0.8293; (R1) 0.8300; More...

EUR/GBP's break of 0.8326 resistance confirms short term bottoming at 0.8221, just ahead of 0.8201 key support. Intraday bias is back on the upside for 0.8446 key resistance. Strong resistance might be seen there to limit upside, at least on first attempt. But for now, further rally will remain in favor as long as 0.8282 support holds, in case of retreat.

In the bigger picture, focus remains on whether 0.8201 key support (2022 low) is strong enough to complete the whole down trend from 0.9267 (2022 high). In any case, medium term outlook will be neutral at best until decisive break of 0.8624 key resistance. Risk will stay on the downside even in case of strong rebound.

Daily Pivots: (S1) 1.0309; (P) 1.0371; (R1) 1.0403; More...

EUR/USD is staying above 1.0223 support despite today's deep decline. Intraday bias remains neutral for the moment. Outlook also stays bearish with 1.0457 resistance intact. Firm break of 1.0223 will resume the fall from 1.1213. However, sustained break of 1.0457 will confirm short term bottoming, and turn bias to the upside for 55 D EMA (now at 1.0551).

In the bigger picture, fall from 1.1274 (2023 high) should either be the second leg of the corrective pattern from 0.9534 (2022 low), or another down leg of the long term down trend. In both cases, sustained break of 61.8 retracement of 0.9534 to 1.1274 at 1.0199 will pave the way back to 0.9534. For now, outlook will stay bearish as long as 1.0629 resistance holds, even in case of strong rebound.

Daily Pivots: (S1) 0.9047; (P) 0.9073; (R1) 0.9122; More…

Range trading continues in USD/CHF and intraday bias remains neutral. More consolidations could be seen below 0.9136 resistance. But further rally is expected as long as 0.8956 resistance turned support holds. Above 0.9136 will resume the rally from 0.8374 to 0.9223 key resistance next. However, firm break of 0.8956 will turn bias back to the downside for 55 D EMA (now at 0.8879).

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with rise from 0.8374 as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes. However, decisive break of 0.9223 will be an important sign of bullish trend reversal.

Daily Pivots: (S1) 157.49; (P) 157.96; (R1) 158.54; More...

Intraday bias in USD/JPY stays mildly on the upside for the moment. Rise from 139.57 is still in progress for 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25. Firm break there will e target 161.94 high. However, break of 156.01 support will indicate short term topping, likely with bearish divergence condition. Intraday bias will then be back on the downside for 55 D EMA (now at 153.82) 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) 1.2445; (P) 1.2510; (R1) 1.2544; More...

GBP/USD's fall from 1.3433 resumed by breaking through 1.2352 today and intraday bias is back on the downside. Deeper decline would be seen to 1.2256/98 cluster support zone. Strong support could be seen there to bring sustainable rebound. But break of 1.2575 resistance is needed to signal short term bottoming. Otherwise, risk will stay on the downside. Decisive break of 1.2256/98 will carry larger bearish implications.

In the bigger picture, price actions from 1.3433 medium term are seen as correcting whole up trend from 1.0351 (2022 low). Deeper decline could be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. But strong support is expected there to bring rebound to extend the corrective pattern. However, firm break of 1.2256 will argue that the trend has reversed and target 61.8% retracement at 1.1528.