ACM Update 27-01-25
President Trump spent his first week back in the White House carrying out a host of executive orders and laying out his initial policies. His actions heavily influenced the US Dollar, as a seemingly softening stance on tariffs saw the currency weaken.
In the UK, Government borrowing, wage growth and unemployment all rose, whilst consumer confidence went the other way. Starmer and Reeves remain on the back foot.
In the coming days, the Federal Reserve & European Central Bank are both sitting down for their first policy meetings of 2025. A hold in the US and a cut in Europe look like concrete outcomes.
Unsurprisingly, the beginning of Trump 2.0 was a major driver of markets last week, as the incoming President outlined his initial orders. Having boosted the Dollar since winning the election back in November, the Republican seemingly softened his stance on tariffs, leading to the USD weakening off somewhat during the week.
Tariffs have been a major inflationary concern over recent months, and with inflation driving interest rates, this had pointed towards the likelihood of borrowing costs remaining higher for longer in the US. But the immediate Trump suggestions of wanting to discuss tariffs with China and other major economies, saw the likelihood of this subsiding.
Trump himself meanwhile is looking likely to have an economic head-to-head with the Federal Reserve during his second term. The new President is already calling for the Fed to cut interest rates this week, breaking the long-standing position of the committee being independent of politics. Such a move would no doubt help his popularity with everyday Americans. If Trump doesn’t proceed with his proposed tariffs though, this is likely to allow a reduction in interest rates sooner, easing pressure on inflation.
One of Trump’s initial directives has in fact been for every US federal department to focus on bringing down the cost of living. This requests the lowering of costs in housing, healthcare, groceries and fuel, amongst others. How he plans to do this is another matter but again it would be a helping hand in US interest rates coming down, increasing disposable income and thus his overall economy boosting plan.
Aside from Trump’s own headlines, US economic data releases were few and far between. Manufacturing and Services sector PMI numbers were mixed, with the former just displaying expansion in the sector. But Services (which makes up the larger economic share) was down considerably on both the previous month and the forecast figure. This could well be linked to post-election nervousness.
With Trump 2.0 week one as the main focus last week, his policies were somewhat Dollar negative initially, us the currency lost almost three per cent during the week versus GBP. This took the pair back to where it was three weeks before. We now look ahead to this week’s Federal Reserve interest rate announcement.
The recovery last week can be seen in the chart below:
On the UK side, we saw plenty of data releases last week. None of them could be described as pretty….. The unemployment rate rose to 4.4% in November, back to the joint highest in over three years. This was viewed by many as a precursor to what is coming in April, with employers getting ready for layoffs and a pause in hiring ahead of the Reeves-Starmer national insurance hikes to come.
In the same data release, average earnings increased at their fastest rate in more than three years, when adjusted for inflation. This was driven by strong wage growth in the private sector, but signals to the Bank of England that they are not completely out of the woods yet on inflation. With pay packets increasing, this is likely to have an upward impact on the cost of living again in the UK, at a time when interest rates are projected to come down next week.
Despite the renewed gulf between inflation and pay, it is still widely expected that Andrew Bailey and Co will move to cut interest rates next week (Thursday 6th). The UK economy is at a virtual standstill, likely needing a kickstart from lower interest rates to avoid flatlining again in Q1.
Rachel Reeves was also forced to put on a brave face on Wednesday morning, when the latest Government borrowing figures were released. The deficit between spending and tax revenue, was £17.8bn in December, thus producing the largest December gap for four years, at a time when the new Government can ill-afford it. Reeves was present at the World Economic Forum in Davos, where she was “optimistic” about UK prospects, despite the figures.
Amidst all of the above UK news, it was unsurprising that UK consumer confidence figures also displayed a downturn. On a scale where above zero indicates optimism, a monthly reading of -22 was the lowest since the end of 2023. Manufacturing and Services PMI numbers were admittedly, a fraction better than projected.
All in all, the UK economy needs something to get it back on track. It may well be that Andrew Bailey and his Bank of England colleagues are forced into a rate cut in ten days’ time, despite not being quite satisfied with where inflation is currently.
Being so close to another European Central Bank interest rate announcement, Eurozone data releases were on the thin side too. Christine Lagarde was busy at the WEF in Davos, holding a number of seminars and wide-ranging TV interviews.
The ECB President remains wary of the Trump threat, but stated she is confident of no tariffs being imposed on Europe. This in turn meant she declared the ECB “not overly concerned about export of inflation to Europe” but is aware of the impact a strong Dollar may have on the bloc.
Lagarde called for the unification of European capital markets, and for the new US President to “respect the rules” regarding tariffs and trade. Watch this space.
Of the data, German data seems to have picked up in the latest round of figures, and this was also reflected in the PMI numbers. Overall European numbers were also better. Eurozone focus now shifts to the ECB this Thursday lunchtime.
Movements on GBP-EUR last week can be seen in the chart below, with sterling regaining some lost ground in the back part of the week.
The week ahead:
Monday – Australian Bank Holiday, ECB Lagarde speech (08:10 UK time)
Tuesday – BoE Quarterly Bulleting (12:00), US Consumer Confidence (15:00)
Wednesday – Australian CPI Inflation (00:30), BoE Bailey speech (14:15), Bank of Canada rate announcement (14:45) & Press Conference (15:30), Federal Reserve rate announcement (19:00) & Press Conference (19:30)
Thursday – Spanish CPI (08:00), UK Mortgage Approvals (09:30), ECB rate announcement (13:15) & Prese Conference (13:45)
Friday – German CPI inflation (07:00), US Core PCE Price Index (13:30)
Into the first flurry of interest rate announcements of 2025 we go then. If anything, this was already kicked off last week by the Bank of Japan who took their headline rate to the highest in 17 years, at “around 0.5%”. The move was to combat an inflationary jump in December which was the fastest increase for the metric in 16 months.
The Bank of Japan made reference to Trump’s tariff threats, and it will be interesting to see what the other major central banks say on the topic over the coming two weeks. That period contains rate announcements from the Bank of Canada, Federal Reserve, European Central Bank and the Bank of England. Some have been threatened with tariffs, whilst the Fed will be cautious about what impact such moves would have at home.
Despite “guidance” from their new President, the Federal Reserve seem highly likely to keep interest rates on hold in their Wednesday evening (UK time) announcement. The policy and tariff impacts remain too uncertain currently for a cut.
For the ECB on Thursday though, inflation no longer seems to be a worry and growth is front and centre of the agenda. We expect to see an 0.25% interest rate cut on Thursday lunchtime, from a total of four which markets currently project for 2025. The four cuts would take rates down to a level which markets suggest as “neutral”, neither stimulating nor restricting the economy. Growth remains the focus.
For the UK, a quieter week of data ahead of us. Aside from mortgage approvals on Thursday, the likelihood is that focus will shift to the following week’s Bank of England meeting. Governor Andrew Bailey will be in the hot seat on Wednesday lunchtime, as he comments on the latest Financial Stability Report in front of the Treasury Select Committee. We may well see some hints on the next move for monetary policy.
Recent market events have shown how quickly the picture can change. The USD looked to be all one-way traffic, but a slight change in Trump stance has seen at least some of those gains wiped out. The Dollar still sits around 4% better off versus the Euro than it was at the time of Trump’s election victory in November.
Volatility remains high, so protecting your exposure against market movements is important. For those keen to lock in current levels, forward contracts remain useful to guarantee your budgeting. Any clients looking to target a more optimistic level, limit orders are the way to go. For more information on any of our offerings, reach out to the team.
Have a great week.
