Outlook for the Week of February 17 – 21

Key Points to Watch Out For:

• After Powell’s data and the CPI, dollar traders are focusing on the Federal Reserve minutes.
• The RBA is expected to cut rates by 25 basis points and provide future guidance.
• The RBNZ may opt for a third successive rate cut of 50 basis points.
• CPI data from the UK, Canada, and Japan are also in focus.

Could the Minutes Confirm the Fed’s Commitment to a Hardline Policy?

The US dollar started last week on strong footing after Trump announced 25 percent tariffs on imported steel and aluminum, emphasizing his intention to impose reciprocal tariffs on all countries that place tariffs on the United States. Then, while testifying before Congress, Federal Reserve Chairman Jerome Powell reiterated that the central bank is in no hurry to lower interest rates further. On Wednesday last week, US CPI data showed that inflation was more persistent than expected in January, providing additional support for the dollar.

Despite a retreat in the dollar on Thursday and Friday, these developments, combined with a solid non-farm payrolls report for January, led investors to price in only 30 basis points of rate cuts for this year, considerably less than the Fed’s own projection of 50 basis points. In other words, traders are currently expecting only a quarter-point cut by December.

With this in mind, investors will closely watch the minutes of the last FOMC decision, set for release on Wednesday, February 19. Although the major events affecting the dollar occurred after that meeting, traders will analyze the minutes for any signs that policymakers may reconsider their stance if inflationary risks increase. A hawkish tone could support the US dollar, push Treasury yields higher, and weigh on equities due to concerns over prolonged high borrowing costs.

A set of strong S&P leading PMIs for February, due on Friday, February 21, could further reinforce this outlook.

The RBA Begins Its Easing Cycle

On Tuesday, February 18, the Reserve Bank of Australia will announce its first monetary policy decision of the year. In its last meeting of 2024, the RBA decided to keep its cash rate target unchanged at 4.35 percent, citing stable long-term inflation expectations and growing confidence that inflation was moving toward its target.

However, this was before Trump imposed tariffs on China, Australia’s main trading partner, as well as global tariffs on steel and aluminum. Since iron ore is Australia’s largest export and a key material in steel production, concerns about the impact of tariffs on the Australian economy have increased. The latest CPI data for the fourth quarter showed additional signs of deceleration, leading investors to price in nearly 75 basis points of rate cuts by 2025, with expectations that the first cut will happen at this meeting.

Traders currently assign an 80 percent probability to a rate cut at this meeting, meaning the Australian dollar is unlikely to react significantly if the RBA follows through. However, market participants will focus on the bank’s forward guidance. If policymakers signal a more aggressive easing cycle than expected, the Australian dollar could weaken further. Conversely, if the RBA remains data-dependent and avoids providing clear guidance, the Australian dollar could find some support.

RBNZ: Cut 25 or 50 Basis Points?

On Wednesday, February 19, the focus will shift to the Reserve Bank of New Zealand. Unlike the RBA, the RBNZ has already cut interest rates three times, with the last two reductions being 50 basis points each.

Since the last meeting on November 27, data has shown that New Zealand entered a deep recession in the third quarter, contracting 1.0 percent quarter-on-quarter after a 1.1 percent contraction in the second quarter. Meanwhile, annual CPI inflation for the fourth quarter remained at 2.2 percent, close to the midpoint of the RBNZ’s 1-3 percent target range. The unemployment rate rose from 4.8 percent to 5.1 percent, while the labor cost index slowed from 3.4 percent to 2.9 percent year-on-year.

These factors have increased market expectations for further easing. Investors currently anticipate 110 basis points of rate cuts in 2025 but are split on whether the RBNZ will opt for another 50 basis point cut or slow the pace to 25 basis points at this meeting. A larger cut and signals of more easing ahead could put pressure on the New Zealand dollar, which may continue underperforming even relative to the Australian dollar.

UK Data Will Set the Tone for Bank of England Policy Estimates

In the UK, the December employment report will be released on Tuesday, February 18, followed by the January CPI data on Wednesday, February 19. Additional reports, including January retail sales and February preliminary PMIs, are scheduled for Friday, February 21.

During its first decision of the year, the Bank of England cut interest rates by 25 basis points, as widely expected, while lowering growth projections and raising inflation forecasts.

The direction of these revisions was largely anticipated, but the unanimous vote for the rate cut came as a surprise. Even more unexpected was the shift in stance by superhawk Catherine Mann, who, after advocating for steady rates in November, voted for a 50 basis point cut this time.

According to UK overnight index swap rates, investors are now pricing in 55 basis points of additional cuts in 2025. However, if upcoming CPI data reinforces the BoE’s concerns about persistent inflation, traders may reduce their rate cut expectations. Given last week’s better-than-expected fourth-quarter GDP data, stronger PMI readings could further support the British pound’s ongoing recovery.

Conclusion

Alongside the US and UK PMIs, Friday’s economic calendar also includes preliminary eurozone PMI data. While the ECB is expected to cut interest rates by 80 basis points in 2025, the euro has been the best-performing currency over the past week, possibly driven by speculation of a de-escalation in the war in Ukraine. Strong PMI readings could provide further support for the euro.

The Canadian dollar remained resilient against the US dollar last week despite Trump’s tariffs on steel and aluminum. Notably, 80 percent of US aluminum imports come from Canada.

After a stronger-than-expected January jobs report, traders currently see a 55 percent chance that the Bank of Canada will hold rates steady at its next meeting on March 12. However, upcoming Canadian CPI data on Tuesday, February 18, could influence expectations. Inflation in Canada has already fallen below 2 percent, and another month of declining price pressures may lead investors to increase their bets on a rate cut in March, which could weaken the Canadian dollar. Canada’s December retail sales data will be released on Friday, February 21.

Meanwhile, Japan’s national CPI figures, scheduled for Friday, February 21, will be of particular interest to yen traders, as market participants have recently moved forward their expectations for the Bank of Japan’s next rate hike.