Outlook for the Week of February 3 – 7

Key Points To Watch Out For:

• The dollar continues to be driven by headlines about tariffs
• Non-farm payrolls will reconfigure Federal Reserve forecasts
• The Bank of England will cut rates by 25 basis points; future guidance will be the focus of attention
• The Canadian employment report will be critical for the Bank of Canada’s next decision

At the Expense of Tariffs

The US dollar recovered last week, confirming that the recent decline, triggered by speculation that Trump might adopt a more flexible stance on tariffs, was merely a corrective phase.

Tariffs remained the main driver, and last Wednesday’s Federal Reserve decision added further fuel to the rally. After Colombia yielded to Trump’s threats, investor concerns grew again, with many believing the US president might intensify his rhetoric to achieve his trade objectives. Trump himself reinforced this sentiment, rejecting reports that Treasury Secretary Scott Bessent was pushing for an initial 2.5% tariff, gradually rising to 20%, instead stating that tariffs would be “much higher.”

Following the imposition of 25% tariffs on Canadian and Mexican imports on February 1, the Federal Reserve announced on Wednesday that interest rates would remain unchanged. During the post-meeting press conference, Fed Chairman Jerome Powell acknowledged progress in reducing inflation but emphasized that “non-market” prices remain high, signaling no urgency to adjust policy further. Investors will seek more clarity on the economic outlook and government policy before making their next moves.

From an initial expectation of 50 basis points in rate cuts this year, federal funds futures now indicate 45 basis points, with the next quarter-point cut nearly fully priced in for June.

Non-Farm Payrolls in Focus

With these developments, the focus this week will be on the January non-farm payrolls (NFP) report. Powell emphasized that a weaker labor market is not necessary to achieve the Fed’s inflation target, as the disinflationary trend remains intact. However, he did not specify what would happen if the labor market unexpectedly tightens.

In December, the economy added around 256,000 jobs, with average hourly earnings declining slightly but still holding at a robust 4.0% year-on-year. Another strong labor market report could intensify concerns about a potential inflation resurgence, especially if Trump escalates trade tensions on February 1. Market participants may start questioning whether two rate cuts are necessary this year, potentially extending the US dollar’s recent recovery.

The manufacturing and non-manufacturing PMIs on Monday, February 3, and Wednesday, February 5, along with the ADP private employment report on Wednesday, will be closely monitored ahead of the NFP release on Friday, February 7.

Will the BoE Decide on an Interest Rate Cut?

Following policy meetings from the Bank of Japan, Federal Reserve, European Central Bank, and Bank of Canada, it will be the Bank of England’s (BoE) turn to make its first rate decision of the year. Given concerns over the sustainability of the UK government’s fiscal plans, which led to bond and currency weakness over fears of a repeat of the Truss-era budget crisis, investors see a rate cut at this meeting as ideal.

Considering December’s cooler-than-expected CPI figures and sluggish UK economic growth, markets currently price in a 90% probability of a quarter-point rate cut, with two more expected by the end of the year.

However, both headline and core inflation remain above the BoE’s 2% target, with the latter at 3.2% year-on-year. Moreover, while bond yields have retraced their gains, the pound has only partially recovered its losses and remains the worst-performing major currency in 2025, posing upside risks to UK inflation.

If the BoE proceeds with the expected rate cut, it may adopt a more hawkish tone by revising inflation forecasts higher, particularly as rental inflation remains stagnant at 7.6% year-on-year and service inflation stays above 4.0%. Policymakers might stress a data-dependent approach, avoiding commitments to further cuts, which could disappoint those expecting additional easing this year and provide support for the pound.

Will the BoC Respond to Employment Data?

Coinciding with the US employment data, Canada will release its January employment report on Friday. The Bank of Canada (BoC) cut rates by 25 basis points last week and lowered its growth forecasts, citing concerns over US tariffs.

However, the BoC also acknowledged that tariffs could sustain inflationary pressures, leading markets to price in a nearly 50% chance that policymakers will pause at their next meeting in March.

This places the BoC in a delicate position, and the upcoming employment report could be the deciding factor. A strong report may tilt the balance toward holding rates steady, while weaker data could push the BoC toward another cut.

Conclusion

In the eurozone, the ECB’s decision to cut rates last week reinforced the view that disinflation remains on track, though economic headwinds persist. The central bank refrained from committing to a specific rate path, with President Lagarde emphasizing that rates remain restrictive and that no discussions have taken place regarding an end to the easing cycle.

Markets quickly priced in an 85% chance of another quarter-point cut in March, and if Monday’s preliminary inflation data shows further cooling, expectations for additional easing could rise, weighing on the euro. Eurozone retail sales will also be a key focus this week.

Elsewhere, on Tuesday during the Asian session, New Zealand’s fourth-quarter employment report could determine whether the Reserve Bank of New Zealand (RBNZ) opts for a 25 or 50 basis point cut. Meanwhile, Japan’s December wage data, released on Wednesday, could shape expectations for the Bank of Japan’s next rate hike.

In corporate earnings, the focus remains on the tech sector, with Alphabet and AMD set to report on Tuesday, February 4, followed by Amazon on Thursday, February 6.