The forex markets was subdued in Asian session today. Dollar strength faded quickly after initial boost from stronger-than-expected US inflation data. While the greenback retains most of its gains against Yen, it has started to weaken against other major currencies. The reluctance of Dollar to sustain its rally—despite reduced odds of a Fed rate cut in the first half of 2025 and ongoing tariff threats—suggests that another down leg may be on the horizon.
With US inflation data out of the way, market focus now shifts to the UK, where Q4 GDP figures are set for release. The economy is expected to have contracted -0.1% qoq, with a modest 0.1% mom expansion in December. Think tank NIESR remains cautiously optimistic, predicting subdued growth in the first half of the year before an acceleration in the second half. It expects GDP growth of 1.5% for 2025, supported by higher government spending and business investment.
For the week so far, Euro leads as the top-performing currency, followed by Sterling and Aussie. Meanwhile, Yen remains the weakest, followed by Swiss franc and Kiwi. Dollar and Loonie positioned in the middle.
Technically, Gold’s strong rebound ahead of 2852.31 support suggests that traders are not giving up on 3000 psychological level yet. Decisive break of 3000 and 61.8% projection of 1810.26 to 2789.92 from 2584.24 at 3189.66 before topping. Nevertheless, firm break of 2852.31 will bring deeper pullback to 2789.92 resistance turned support and possibly below to consolidate recent gains.
In Asia, at the time of writing, Nikkei is up 1.46%. Hong Kong HSI is up 1.52%. China Shanghai SSE is down -0.12%. Singapore Strait Times is down -0.05%. Japan 10-year JGB yield is up 0.0034 at 1.350. Overnight, DOW fell -0.50%. S&P 500 fell -0.27%. NASDAQ rose 0.03%. 10-year yield rose 0.100 to 4.637.
Looking ahead, UK GDP is the main focus in European session. Germany CPI final, Swiss CPI and Eurozone industrial production will be released too. Later in the day, US PPI and jobless claims will be be featured.
Fed’s Powell: New CPI data confirms “not there” yet on inflation
Fed Chair Jerome Powell acknowledged that the latest inflation data released yesterday confirms the US is making progress but is still “not there on inflation.”
Following January’s stronger-than-expected CPI report, Powell said in the Congressional testimony that Fed will “keep policy restrictive for now” to bring price pressures down.
Powell also underlined that the “economy is strong, the labor market is solid” allowing the Fed to keep a tight policy stance and wait for inflation to ease further.
He also emphasized that one month of higher readings should not be interpreted as a complete reversal of the disinflation trend, especially given that Fed’s preferred inflation measure, the Personal Consumption Expenditures index, typically runs below CPI.
Bostic: Fed needs more clarity before cutting rates
Atlanta Fed President Raphael Bostic signaled uncertainty over the timing of rate cuts, citing ongoing concerns about inflation and policy shifts under the Trump administration. Speaking at an event overnight, Bostic emphasized the need for “more clarity” before making any definitive moves on monetary policy.
He acknowledged the difficulty in assessing the current economic conditions, stating, “My view is until we have more clarity, it’s going to be impossible to make a judgment about where our policy should go and how fast and at what pace, and so we’re just going to have to get more information before we’re going to be able to move.”
He also provided his estimate for the neutral rate, which he sees in a range of 3%-3.5%. Currently, Fed’s target range stands significantly higher at 4.25%-4.5%. Bostic’s initial projection was to see rates move about halfway to neutral by year-end. but the timeline remains highly contingent on economic developments and inflation trends.
Nagel advocates gradual rate cuts as ECB nears neutral
German ECB Governing Council member Joachim Nagel emphasized emphasized that ECB should avoid being on “autopilot” when determining the timing of interest rate cuts.
Speaking at the London School of Economics, he stressed that as ECB approaches the neutral rate, a “gradual approach” becomes more appropriate. Given the current uncertainty, he argued, “there is no reason to act hastily.”
Nagel remains confident that inflation will return to 2% target by mid-year, saying, “We are not at our target, but I’m really very convinced that we will come to our target by the midst of this year.” He also dismissed concerns of an inflation undershoot.
Bundesbank staff estimates place the neutral interest rate within a range of 1.8% to 2.5%, slightly below ECB’s current deposit rate of 2.75%.
However, Nagel warned against relying too heavily on neutral rate estimates, calling it “risky” to base monetary policy decisions on uncertain theoretical benchmarks. Instead, he emphasized that the ECB relies on a variety of financial, real-economic, and other indicators to guide its policy stance.
RBNZ survey shows rate cut expectations firm up
The latest RBNZ Survey of Expectations showed a mixed shift in inflation forecasts, with short-term price pressures edging higher but long-term expectations trending lower. The survey, nonetheless, reinforces anticipation of further rate cuts.
One-year-ahead inflation expectation rose from 2.05% to 2.15%, marking a slight uptick. However, two-year-ahead inflation expectations dipped from 2.12% to 2.06%, while five-year and ten-year expectations both declined by 11-12 basis points to 2.13% and 2.07%, respectively.
RBNZ’s Official Cash Rate currently stands at 4.25% following 50bps reduction in last November. Survey respondents broadly expect another 50-bps cut to 3.75% by the end of Q1. The one-year-ahead OCR expectation also moved lower, falling 10bps to 3.23%, reinforcing the view that RBNZ will continue easing policy at a measured pace.
GBP/USD Daily Outlook
Daily Pivots: (S1) 1.2387; (P) 1.2435; (R1) 1.2493; More…
Intraday bias in GBP/USD stays neutral and outlook is unchanged. Corrective rebound from 1.2099 could still extend higher. But upside should be limited by 38.2% retracement of 1.3433 to 1.2099 at 1.2609. On the downside, below 1.2331 minor support will turn bias to the downside for 1.2248 support. Firm break there will argue that the correction has completed and bring retest of 1.2099 low. 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.
