January 2025 Market Roundup

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Monthly Market Update: January 2025

Currency Movements:

US Dollar (USD):

USD maintained its dominance throughout January, supported by a mix of strong economic data and persistent expectations that the Federal Reserve would maintain higher interest rates for longer. While softer US PCE inflation data at the end of the month suggested a potential shift in Fed policy, the broader trend favoured USD strength.

British Pound (GBP):

GBP struggled through most of January, weighed down by growing expectations that the Bank of England (BoE) would implement rate cuts in the coming months. Weak UK retail sales, disappointing GDP figures, and dovish rhetoric from BoE officials added further pressure on GBP.

Euro (EUR):

EUR remained under pressure as the European Central Bank (ECB) delivered a widely expected 25 basis point rate cut. ECB President Christine Lagarde’s comments provided no clear guidance on future rate moves, keeping EUR on the back foot.

Japanese Yen (JPY):

JPY saw periods of strength, particularly after the Bank of Japan (BoJ) hinted at the possibility of a rate hike. However, JPY struggled to maintain momentum due to overall risk appetite and the resilience of the USD.

Australian Dollar (AUD) and Canadian Dollar (CAD):

both faced downward pressure due to expectations of dovish central bank policies. The Reserve Bank of Australia (RBA) is widely expected to cut rates in the coming months, while the Bank of Canada (BoC) already implemented a 25bp rate cut, adding to CAD weakness.

Events Driving the Market:

  1. US Federal Reserve Decision
    The Fed held interest rates steady at 4.25%-4.5% and signalled a cautious approach towards future cuts. While inflation data at the end of the month hinted at potential easing, Fed Chair Jerome Powell’s comments reinforced that the central bank is in no rush to lower rates. The USD remained firm throughout January.
  2. Bank of England Rate Cut Expectations
    Speculation surrounding BoE rate cuts intensified after weak UK economic data. A disappointing retail sales report and softer inflation reinforced market expectations that the BoE could begin easing policy as early as February. These expectations kept GBP under pressure for most of the month.
  3. European Central Bank Rate Cut
    The ECB cut rates by 25bps, as expected. However, President Lagarde provided little forward guidance, leading to increased uncertainty over the pace of future cuts. Weak Eurozone GDP data further weighed on the EUR, which struggled to gain ground against its major peers.
  4. US Tariff Concerns
    Markets were rattled by comments from US President Donald Trump, who reiterated plans for aggressive tariffs on multiple trading partners, including Canada and Mexico. These developments contributed to CAD weakness and broader uncertainty in global trade.
  5. Bank of Canada Rate Cut
    The BoC cut interest rates by 25bps, citing concerns over economic growth. The move was widely anticipated, but Governor Tiff Macklem’s comments hinted at the possibility of additional rate cuts, keeping CAD under pressure.
  6. Reserve Bank of Australia Rate Outlook
    AUD struggled as expectations for RBA rate cuts grew. Softer Australian inflation data reinforced these expectations, with market participants now pricing in a potential cut in the next RBA meeting.

Market Outlook:

As we move into February, the focus remains on central bank policy direction. While the Fed remains cautious, inflation data will be key in determining when rate cuts could begin. The BoE and ECB’s paths remain unclear, though further easing is expected. GBP and EUR may face continued headwinds as markets adjust expectations. Meanwhile, geopolitical concerns, particularly around US tariff policies, could drive further volatility in global markets. AUD and CAD are likely to remain under pressure amid expectations of further rate cuts. Clients should keep a close watch on key economic data releases and central bank commentary for further cues on currency movements.