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Bear steepening of yield curves is the main – and only -expression of the new step-up in trade threats. US President Trump is preparing universal (except for Australia) 25% tariffs on steel and aluminum imports by March 12. EC President von der Leyen already responded saying that “unjustified tariffs on the EU will not go unanswered”. They earmarked a list of €4.8bn of US imports with trade ministers tomorrow meeting to discuss potential next steps. Von der Leyen will tomorrow also meet US vice-president Vance in Paris to discuss the issue. EU swap rates add 3.8 bps (2-yr) to 6.8 bps (30-yr) today with US yields adding 1.5 bps (2-yr) to 4.6 bps (30-yr). Markets clearly fear the inflationary impact which might mean restrictive monetary policies for longer. The trade narrative had little impact on EUR/USD (1.0320) with European stock markets currently even looking at 0.5% gains after an hesitant start. The eco calendar was empty apart from a larger-than-expected setback in NFIB small business optimism for the month of January (102.8 from a 6-yr high of 105.1 vs 104.7 expected). Details showed a strong rise in the uncertainty indicator suggesting investments could slow. The title of Cleveland Fed Hammock’s speech – “Show me the low inflation” – spoke for itself while markets counted down to US Fed Chair Powell’s testimony before Congress. The Fed chair reiterated that there’s no hurry to adjust policy rates. Conditions in the labour market are broadly balanced with the Fed being attentive to risks on both side of its mandate. The comments broadly reflected the mood set out at the January FOMC meeting, with markets shrugging them off.

Bank of England Mann elaborated further on her call to cut the central bank’s policy rate by 50 bps instead of 25 bps last week. The move came as a surprise as Mann dissented back in November in favour of stable rates instead of a 25 bps rate cut. Mann thinks that the downturn in the jobs market will make the inflation hump this year short-lived. She wanted to send a strong signal about the BoE’s intentions, but that doesn’t mean that she sees a need for fresh cuts in the immediate future: “a larger move is a superior communication device” but interest rates are still expected to settle at a higher level as structural impediments keep inflation at 2%. UK money markets only attach a 25% probability to a follow-up move in March which we don’t think will happen. Sterling is slightly stronger against the euro (EUR/GBP 0.8325) but the intraday move isn’t related to the BoE comments.

News & Views

Hungarian prices in January rose a consensus-beating 1.5% m/m. The 5.5% y/y reading was the highest in over a year. They also represented a significant quickening from December’s 0.5% and 4.6% thanks to food (1.9% m/m), services prices (2.2%), energy (1.7%) as well as alcoholic beverages and tobacco (1.5%), the Hungarian Central Statistical Office said. The flavour of the core gauges constructed by the central bank (MNB) were similar with all three of them varying between 5.4% and 5.6%, up from the 4.7%-5.4% range in December. The MNB targets an inflation rate of 3% and allows a 1 ppt deviation on either side. It held within the upper bound of the tolerance range for most of 2024 before breaking out again since December. The Hungarian forint has had a good run over the last couple of weeks and is extending gains today to EUR/HUF 403.8. But regardless of the decent HUF performance, which is a key variable watched by the MNB, today’s numbers clearly question the remaining (if any) room to cut rates further from the current 6.5%. Hungarian swap rates surge up to 20 bps at the front end of the curve. FRA pricing no longer suggest any rate cut over the next 12 months.

Poland’s Climate Minister Hennig-Kloska said the government may need to extend the power price cap again after it expires in Q3 of this year. Electricity prices are currently around PLN 600/MWh and Hennig-Kloska said that the motions to be prepared in April by utility companies for the new tariffs probably won’t go as low as the current price cap of PLN 500/MWh. “Intervention” of freezing prices will thus still be needed, she said. The price cap is one of the key reasons why the Polish central bank (NBP) is refraining from cutting rates, citing the upward impact on inflation when the cap gets lifted eventually. By extending the cap, inflation remains (artificially) lower but from the central bank’s point of view it’s probably just kicking the can further down the road. The Polish zloty remains very well bid, banking on the hawkish monetary policy stance. EUR/PLN is testing the 2025 low around 4.175, in turn the strongest PLN level since 2018.

Fed Chair Jerome Powell reiterated in the Semiannual Monetary Policy Report to Congress that Fed is not in a hurry to cut interest rates.

A prolonged policy hold remains on the table if inflation does not continue its downward trend. However, he also acknowledged that if the labor market weakens or disinflation accelerates, Fed could respond with further easing.

Powell noted that if inflation fails to make sustained progress toward the 2% target, Fed can "maintain policy restraint for longer." On the flip side, if the labor market weakens unexpectedly or inflation declines more rapidly than forecast, Fed "can ease policy accordingly."

Full opening remarks of Fed Powell here.

Cleveland Fed President Beth Hammack reinforced the case for a prolonged pause in rate cuts, emphasizing that it will likely be "appropriate to hold the funds rate steady for some time."

She highlighted the need for a patient approach, allowing Fed to assess the labor market, inflation trends, and overall economic performance under the current policy stance.

Hammack noted that inflation risks remain "skewed to the upside," with possibility of delaying the return to 2% target. The "recent history" of elevated inflation adds complexity to the outlook, raising concerns about entrenched pricing pressures.

She also pointed to "considerable uncertainty" surrounding government policies, particularly with regard to the "ultimate effects" of recent tariff measures.

The NFIB's Small Business Optimism Index fell 2.3 points to 102.8 in January, disappointing market expectations for a smaller decline to 104.7.

Seven out of ten subcomponents deteriorated on the month, with the remaining categories roughly unchanged. The largest declines came from the share of businesses planning to make capital expenditures (down 7 points to 20%), those planning to increase inventories (down 6 points to 0%), and those expecting the economy to improve (down 5 points to 47%).

The net share of businesses planning to increase employment fell 1 point to 18%. The share of firms with unfilled job openings was unchanged at 35%. Quality of labor concerns declined in January, with 18% of business owners identifying this as their top business problem. However, in addition to inflation, quality of labor concerns remained the top concern on the minds of small business owners.

The net share of firms currently increasing employee compensation rose 4 points to 33%, while the net share planning to do so over the next three months fell 4 points to 20% - the lowest level in five months. The share of businesses 'raising' average selling prices fell 2 points to 22% while the share of those 'planning’ to raise average selling prices also fell by 2 points to 26%.

Key Implications

Small business confidence retraced some of its post-election gains in January but remained roughly 10 points above its October level. Expectations for more accommodative fiscal and regulatory policy has bolstered optimism on the economy in the months ahead, but many of the subcomponents that track current and planned activity have seen little improvement over the past three months. Severe weather in January may have played a role in this trend, but an elevated degree of uncertainty has also likely weighed on small businesses.

Small businesses may be more optimistic than they were prior to the election, but they are also more uncertain. In January, the separate small business uncertainty index spiked back to a level it typically only hits during presidential elections. This encompasses the multitude of uncertainties currently prevailing in the market related to monetary, fiscal, and trade policy, which are all interacting simultaneously in firm expectations. With monetary policy on hold for the foreseeable future, fiscal policy grinding its way slowly through Congress, and trade policy front and center, it is likely that uncertainty will remain a constraint on business confidence over the coming months.

Daily Pivots: (S1) 151.29; (P) 151.91; (R1) 152.63; More...

Intraday bias in USD/JPY stays neutral for the moment. Attention stays on 38.2% retracement of 139.57 to 158.86 at 151.49. Strong bounce from there, followed by break of 153.70 support turned resistance, will retain near term bullishness, and turn bas back to the upside for retesting 158.86. However, sustained trading below 151.49 will suggest that whole rise from 139.57 has completed, and bring deeper fall to 61.8% retracement at 146.32 next.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). In case of another fall, strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.9098; (P) 0.9110; (R1) 0.9127; More…

USD/CHF's consolidation from 0.9200 is still in progress and intraday bias remains neutral. Outlook stays bullish with 0.8956/64 support zone intact. On the upside, firm break of 0.9200/9223 will resume the whole rally from 0.8374 and carry larger bullish implication. However, sustained break of 0.8964 will be a sign of reversal and turn bias back to the downside.

In the bigger picture, decisive break of 0.9223 resistance will argue that whole down trend from 1.0342 (2017 high) has completed with three waves down to 0.8332 (2023 low). Outlook will be turned bullish for 1.0146 resistance next. Nevertheless, rejection by 0.9223 will retain medium term bearishness for another decline through 0.8332 at a later stage.

Daily Pivots: (S1) 1.2341; (P) 1.2381; (R1) 1.2408; More...

Intraday bias in GBP/USD's remains neutral as corrective pattern from 1.2099 is still extending. Stronger recovery might be seen but upside should be limited by 38.2% retracement of 1.3433 to 1.2099 at 1.2609. On the downside, break of 1.2248 support will bring retest of 1.2099 low. Firm break there will resume whole fall from 1.3433. However, decisive break of 1.2609 will raise the chance of near term reversal, and target 61.8% retracement at 1.2923.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433 (2024 high), and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move. However, firm break of 1.2810 will dampen this bearish view and bring retest of 1.3433 high instead.

Daily Pivots: (S1) 1.0282; (P) 1.0310; (R1) 1.0334; More...

EUR/USD recovers mildly today but stays in the middle of the near term established range above 1.0176. Intraday bias remains neutral for the moment. Outlook will remain bearish as long as 38.2% retracement of 1.1213 to 1.0176 at 1.0572 holds. On the downside, break of 1.0176 will resume whole fall from 1.1213. However, decisive break of 1.0572 will raise the chance of reversal, and target 61.8% retracement at 1.0817.

In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.

Trading is relatively subdued today across global markets as investors assess the fallout from the US steel and aluminum tariffs announced by President Donald Trump. Major European equity indexes are treading water, while US futures are slightly in the red. Treasury yields are recovering, though it remains too early to confirm a reversal of the recent downtrend. Meanwhile, Gold is having a notable pullback after an initial rejection at the key 3000 psychological level, suggesting profit-taking among traders.

European Commission President Ursula von der Leyen responded to the US move, stating that the EU will not let the "unjustified tariffs" go unanswered and pledged "firm and proportionate countermeasures" to protect European interests. However, no specific retaliatory measures have been outlined yet. Canada’s Prime Minister Justin Trudeau also criticized the tariffs as "unacceptable," reinforcing that "Canadians will stand up strongly and firmly if we need to." Markets remain cautious, awaiting concrete details on countermeasures from key US trade partners.

At a global level, IMF Managing Director Kristalina Georgieva addressed the uncertainty surrounding the tariff situation at the World Government Summit in Dubai, stating that it remains an "evolving story" and that it is "too early to say" what the full economic impact might be. This reinforces the broader market sentiment that investors are hesitant to make directional bets until more clarity emerges on trade retaliation and its economic implications.

In the forex market, Dollar has turned mixed, losing some momentum against Euro and Sterling while firming up slightly against Yen and Swiss Franc. Market focus is now shifting to Fed Chair Jerome Powell's Congressional testimony, with investors looking for signals on how long Fed’s current policy pause might last. Powell is also expected to be questioned on the impact of tariffs. Though it is unlikely he will provide any clear forward guidance on both fronts.

GBP/CHF could see increased volatility this week as the UK prepares to release Q4 GDP data and Switzerland reports January CPI figures. The cross has been struggling in range trading since last September. Today's bounce suggests that rise from 1.1086 is ready to resume through 1.1336 towards 1.1393. Strong resistance could be seen there to limit upside to start another falling leg. Meanwhile, break of 1.1243 should bring deeper fall through 1.1189 towards 1.1086.

In Europe, at the time of writing, FTSE is flat. DAX is up 0.27%. CAC is up 0.16%. UK 10-year yield is up 0.0317 at 4.493. Germany 10-year yield is up 0.051 at 2.416. Earlier in Asia, Japan was on holiday. Hong Kong HSI fell -1.06%. China Shanghai SSE fell -0.12%. Singapore Strait Times fell -0.37%.

US NFIB small business optimism drops as uncertainty rises, hiring challenges persist

NFIB Small Business Optimism Index declined to 102.8 in January, missing market expectations of 104.6 and falling from December’s reading of 105.1.

The decline reflects growing concerns among small business owners, as seven out of the 10 components of the index deteriorated, while only one improved. Additionally, the Uncertainty Index surged 14 points to 100, marking the third-highest reading in its history after two months of easing uncertainty.

NFIB Chief Economist Bill Dunkelberg highlighted while there is still "optimism regarding future business conditions," uncertainty is climbing. One major concern remains the persistent "hiring challenges," as businesses struggle to find qualified workers to fill vacancies. Capital investment plans are also being reconsidered.

Australia's Westpac consumer sentiment ticks up, RBA to start cutting this month

Australia's Westpac Consumer Sentiment Index rose slightly by 0.1% mom to 92.2 in February. While consumer mood improved significantly in the second half of 2024, the past three months have shown stagnation.

Westpac noted that financial pressures on households persist and a more uncertain global economic climate has also played a role in dampening optimism.

RBA is likely to begin policy easing at its next meeting on February 17–18. Westpac highlighted that recent economic data on core inflation, wage growth, and household consumption indicate that inflation is "returning to target faster" than previously expected.

These factors provide RBA with the confidence to initiate a 25bps rate cut this month, marking the first step in what is expected to be a "moderate" easing cycle through 2025.

Australian NAB business confidence rebounds to 4, but conditions remain weak

Australia's NAB Business Confidence index made a strong recovery in January, rising from -2 to 4 and returning to positive territory. However, despite this uptick in sentiment, underlying business conditions deteriorated.

Business Conditions index dropped from 6 to 3, marking a notable slowdown. Within this, trading conditions slipped from 10 to 6, while profitability conditions turned negative, falling from 4 to -2. On a more positive note, employment conditions edged up slightly from 4 to 5.

Cost pressures remained a key concern for businesses. Purchase cost growth eased to 1.1% on a quarterly equivalent basis, down from 1.4%. Labor cost growth picked up slightly to 1.8%. Meanwhile, final product price growth held steady at 0.8%, while retail price inflation inched up to 0.9%. Businesses are struggling to fully pass on rising costs to consumers.

NAB Chief Economist Alan Oster noted that while confidence improved, it is uncertain whether this momentum will be sustained. Elevated cost pressures, particularly on wages and input costs, continue to weigh on overall business conditions.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0282; (P) 1.0310; (R1) 1.0334; More...

EUR/USD recovers mildly today but stays in the middle of the near term established range above 1.0176. Intraday bias remains neutral for the moment. Outlook will remain bearish as long as 38.2% retracement of 1.1213 to 1.0176 at 1.0572 holds. On the downside, break of 1.0176 will resume whole fall from 1.1213. However, decisive break of 1.0572 will raise the chance of reversal, and target 61.8% retracement at 1.0817.

In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.