Week of FEBRUARY 10

Last week, the BOE went ahead with a dovish rate cut and inflation in Europe aligned with expectations as markets continued to focus on the impact of tariffs.

The upcoming week will centre on US data, with Fed Chair Jerome Powell delivering his semi-annual testimony before Congress, while the UK will update its GDP growth.

Week in Review

Markets were unsettled at the beginning of the week due to the planned tariffs by the Trump Administration on Canada and Mexico, which were ultimately postponed at the eleventh hour following concessions on border security. However, the White House imposed tariffs on China, which were met with retaliatory tariffs, deepening the trade rift between the two largest economies in the world. US treasury yields drifted to a one-month low after a short January ISM services print and relief over the postponed tariffs.

Across the Atlantic, the BOE cut its rates by 25 basis points as expected, but the market was surprised by dovish developments, such as an 8-2 vote split, with the dissenters calling for a 50 basis point cut, as well as slower GDP growth forecasts. Conversely, the bank expected inflation to be higher than previously forecast for this year and next.

In neighbouring Europe, the area's inflation rose slightly on the headline, as expected, with the core unchanged at 2.7%. ECB Vice President Luis de Guindos reiterated that services inflation remains a concern.

Meanwhile, New Zealand's Q3 unemployment reached its highest level since the pandemic, prompting the market to price in a 50 basis point cut when the RBNZ convenes next.

Markets also firmed expectations of another hike from the BOJ in July following comments from central bank voter Naoki Tamura (a noted hawk), who reiterated that the neutral rate for BOJ should be at least 1%.

In geopolitics, French PM Francois Bayrou survived a no-confidence vote after he approved the 2025 fiscal budget.

As expected, a call between President Trump and Chinese President Xi Jinping was cancelled following the tit-for-tat tariff imposition near the start of the week.

Reports circulated that Trump would unveil a peace plan to resolve the Ukraine conflict at the Munich security conference on February 14-16.

There were also rumours that UK PM Keir Starmer was considering reshuffling his Cabinet and potentially replacing Chancellor Rachel Reeves.

Biggest Market Movers

• Gold rose over 3% after scoring consecutive record highs as concerns about tariffs pushing inflation higher stirred appetite for safe havens.
• Crude prices tumbled over 5% due to concerns that the trade war could slow oil demand in the near term.
• The US dollar trended lower through the week after whipsawing around the threat of tariffs on Mexico and Canada being postponed, as investors began to view tariffs as a negotiation tool.
• The DAX reached new record highs amid strong earnings and talk of reaching a peace deal on Ukraine.

Top Events in the Week Ahead

The upcoming week offers a slightly lighter calendar, giving markets time to concentrate more on earnings and geopolitics. The focus will likely revolve around the US, with investors having an opportunity to reevaluate Fed expectations.

Fed Chair, CPI in Focus

On Tuesday and Wednesday, Chair Powell will testify before Congress, allowing participants to update their stance on future rate adjustments. On Wednesday, inflation is expected to remain unchanged at 2.9% for the headline figure but improve slightly to 3.1% from 3.2% for the core measure. Retail sales are also expected to show continued strength for the US consumer, increasing at 0.3% month-on-month, albeit slightly slower than the 0.4% in December. With EURUSD stumbling at 1.04, US optimism could see the pair reverse towards 1.03 and 1.02. On the flip side, breaking the round resistance may open the door to 1.05.

UK Economic Growth Stagnation

On Thursday, the UK is slated to release a trove of economic data, with a focus on the preliminary Q4 GDP growth rate, which is expected to show continued stagnation. The monthly rate is also expected to stay unchanged, with forecasts showing a slight expansion to 0.1%. This could be seen as supporting the BOE's projections for slower growth and raise further challenges for the Chancellor and sterling. Failing to get past 1.25 could see the pair revert back to 1.2286, exposing 1.22, while a breakthrough may extend gains towards 1.2550 and 1.26.

Other Events, Earnings

Monday will see the release of China's M2 money supply data. Tuesday will feature the Westpac consumer confidence survey in Australia and the NAB business confidence index. On Wednesday, the BOC will release the minutes of its latest meeting. For Thursday, the Euro Area industrial production figures are expected.

The earnings season is past its peak, with most S&P 500 companies reporting by the end of the week. Several major companies, including McDonald's, Vertex, BP, Coca-Cola, Shopify, Gilead, Cisco Systems, Applied Materials, Barclays, Palo Alto, Deere, NatWest, and Moderna, are scheduled to report their earnings in the coming days.