Fed Holds Firm, Tariffs Take Center Stage.
- Fed Stays Cautious: No major policy shifts expected at today’s FOMC meeting; rate cuts unlikely before June as job market remains resilient.
- Tech Risk Over Fed Rhetoric: A sharp selloff in tech stocks poses a bigger risk of market repricing than any dovish signals from Powell.
- EUR/USD Pressure: The euro remains weak, with US tariff threats maintaining a 2% risk premium—more downside risk toward 1.040 than a rebound above 1.050.
- GBP Gains on USD Pullback: Sterling edges higher near 1.2450 as investors unwind risk-off trades linked to China’s AI advancements.
- Tariffs in Focus: Trump’s tariff plans on Canada, Mexico, China, and key industries add uncertainty, with markets awaiting Fed commentary on potential inflation impacts.
USD: No Signs of a Dovish Fed Pivot
Today’s FOMC meeting isn’t expected to shake up the markets. As we noted in our preview, the Fed needs to see clear signs of economic weakness and lower inflation before cutting rates further. While job growth and wages are gradually slowing, it’s not enough to justify easing just yet. Market pricing suggests rate cuts won’t materialize until June.
The bigger risk of a dovish market shift comes from a sharp selloff in tech stocks rather than any shift in Fed rhetoric. Despite softer December inflation data, the resilience of the labor market should keep Fed Chair Jerome Powell cautious, reinforcing the current market outlook of 50 basis points of cuts by year-end.
Tech volatility and the Fed’s political independence—especially amid renewed calls from President Trump for lower rates—may surface in Powell’s press conference. However, this week’s market swings likely aren’t significant enough for Powell to signal concern. Expect a firm reaffirmation of the Fed’s independence from political influence.
If US tech stocks remain stable and the Fed stays cautious on easing, the dollar should hold firm, supported by growing concerns over new universal tariffs that justify short-term USD strength.
EUR: 1.040 Looks More Likely Than 1.050
The euro remains at the mercy of US developments, from tech sector turbulence to trade threats. We don’t expect either a cautious Fed today or a dovish-leaning ECB tomorrow to spark a meaningful EUR/USD rebound.
With Trump’s tariff rhetoric heating up, we estimate a 2% risk premium on EUR/USD. Confirmation that the US Treasury is actively preparing new tariff measures should keep this premium intact, limiting any upside for the euro.
We don’t anticipate major EUR/USD moves by the end of the week, but the risks lean toward a dip below 1.040 rather than a climb above 1.050.
GBP: Sterling Finds Support as Dollar Softens
The pound has edged higher, hovering near 1.2450 against the dollar in the European session. This comes as investors unwind some risk-off trades tied to fears that China’s DeepSeek AI model could challenge top US tech firms like OpenAI and Meta, narrowing China’s technological gap.
Meanwhile, the US Dollar Index (DXY) has dipped to around 107.75 as markets await the Fed’s policy decision at 19:00 GMT. Traders widely expect the Fed to hold rates steady at 4.25%-4.50%, marking a pause after 100 basis points of cuts over the last three meetings.
Beyond rate guidance, investors will be closely watching the Fed’s take on President Trump’s tariff plans and their potential impact on monetary policy and inflation. The White House reaffirmed that 25% tariffs on Canada and Mexico remain set for February 1, while Trump is still considering a 10% tariff on China. Additionally, he signaled plans to impose tariffs on pharmaceuticals, advanced chips, and steel to boost domestic manufacturing.
With trade tensions escalating, the Fed’s stance on tariffs could add another layer of volatility to FX markets in the coming days.