Outlook for the Week of January 06 – 10

Key Points to Watch Out For:

• Dollar movements ahead of Friday’s Non-Farm Payrolls (NFP) report
• Eurozone year-on-year CPI figures are anticipated
• Canadian employment data may influence Bank of Canada (BoC) rate-cut bets for January
• Australian CPI and Japan’s wage data are due for confirmation

Will U.S. Data Provide More Momentum for the Dollar?

The U.S. dollar started the year with a slight pullback, but it quickly resumed its dominant uptrend. The Federal Reserve’s hawkish stance—lowering its 2025 rate cut forecasts to only two quarter-point reductions—has widened yield differentials between the U.S. and other major economies. Meanwhile, other central banks are leaning towards more accommodative monetary policies as 2024 concludes.

This trend was amplified by Donald Trump’s election as U.S. president, sparking concerns that his tariff policies and tax cuts may reignite inflationary pressures. Strong economic data and persistently high inflation levels, even before the implementation of Trump’s policies, further confirm the need for caution in rate adjustments.

Investors will closely monitor this week’s developments, particularly the official December employment report. The November report revealed a robust rebound, with 227,000 jobs added after October’s dismal 12,000 figure—the weakest since December 2020. If December employment data confirms that October’s weakness was temporary (caused by strikes and hurricanes), it could bolster sentiment that even two quarter-point rate cuts in 2025 may be excessive, keeping the dollar on an upward trajectory.

The stock market, however, faces a dilemma. It may either extend its decline due to fewer anticipated rate cuts or rally on signs of solid economic performance. Long-term equity investors, less rate-sensitive than currency traders, may still find optimism in a resilient labor market and a lack of imminent rate hikes.

Key U.S. data points this week include the ADP private-sector employment report on Wednesday, January 8, and initial jobless claims on Thursday, January 9. Additionally, the ISM Non-Manufacturing PMI for December, released on Monday, January 6, will shed light on the broader U.S. economic performance, given that services account for over 80% of GDP.

On Wednesday, the minutes of the Federal Reserve’s December meeting will also be released. However, since this meeting was accompanied by updated economic projections, the minutes may garner less attention than usual as the new dot plot already outlined policymakers’ expectations.

Will Eurozone CPI Data Push EUR/USD Closer to Parity?

In the Eurozone, attention will center on the preliminary December CPI data, scheduled for Tuesday, January 7. At its December meeting, the European Central Bank (ECB) reduced interest rates by 25 basis points and hinted at more rate cuts ahead by removing the reference to keeping rates “sufficiently restrictive.”

Last week, ECB President Christine Lagarde reiterated that if incoming data supports the ECB’s base case, further rate cuts are likely. Lagarde clarified, “The picture is a little clearer for those who wondered what last week’s change in language meant.”

Even the typically hawkish Isabel Schnabel remarked, “Considering the risks and uncertainties we still face, lowering policy rates gradually toward a neutral level is the most appropriate course of action.”

The ECB estimates the neutral rate to be between 1.75% and 2.5%, suggesting that additional rate cuts are necessary before speculation arises about whether the Bank has reached neutrality.

Market participants now expect 110 basis points of ECB rate cuts by December, underscoring a clear divergence in policy expectations between the ECB and the Federal Reserve. If the upcoming CPI data shows further cooling of inflation, it could solidify expectations of ECB rate cuts, pressuring the euro further downward.

Preliminary German CPI figures, due Monday, January 6, could also heighten volatility. The trajectory of inflation in Europe’s largest economy may influence speculation on Tuesday’s broader Eurozone data.

Overall, EUR/USD sentiment remains bearish due to diverging monetary policy paths between the ECB and the Fed, compounded by political crises in Germany and France and uncertainty over Trump’s tariff policies targeting European goods.

Conclusion

While the U.S. employment report is released, Canada will simultaneously publish its employment data. During its last decision of 2024, the BoC cut interest rates by another 50 basis points—the second consecutive double-cut. However, Governor Macklem emphasized a data-dependent approach rather than committing to a predetermined easing path.

Weak November CPI data and disappointing October retail sales have led markets to price in a 75% chance of another 25 basis point cut at the January 29 meeting, with total cuts projected at 65 basis points by the end of 2025. With November unemployment rising to 6.8% from 6.5%, further labor market weakness could increase the likelihood of additional rate cuts, putting further pressure on the Canadian dollar.

Elsewhere, Australia will release November monthly CPI data on Wednesday, January 8, while Japan will report spring wage data on Thursday, January 9, during the Bank of Japan’s press conference. These releases could significantly influence market bets on whether the BOJ will hike rates in January, with the odds of a rate cut or pause currently evenly split.