Tariffs, rate decisions, and inflation: Your week ahead brief

The week that was

Well, what a week it has been. And that is putting it mildly.

Thanks to US President Donald Trump’s 10% tariff threats against European allies over his Greenland ambitions – sparking the prospect of a fresh trade war – investors rushed for cover and triggered a familiar ‘Sell America’ trade last week. Stock benchmarks, Bonds, and the USD sold off in tandem – a trifecta of misery reminiscent of last year's 'Liberation Day' tariff debacle.

However, just as quickly as storm clouds gathered, they cleared. TACOs were back on the menu, with the President pulling back on the proposed European levies and stating that he will not take Greenland by force. Frankly, I did not expect such a rapid pullback on the tariff threats.

Trump’s speech at the World Economic Forum in Davos, Switzerland, had something for everyone. This consisted of at least 30 minutes of him talking about how great he is to insulting French President Emmanuel Macron’s sunglasses, and ultimately the tariff pullback and his comments regarding his desire to acquire Greenland without the use of military force. Expectedly, this provided a relief rally for risk assets.

The week that is

Fortunately, for those of us nursing their geopolitical-induced headaches, this week offers a chance to refocus on central bank decisions, inflation figures, and corporate earnings.

Coordinated effort between the US and Japan?

Before I get to that, intervention vibes out of the BoJ are making the airwaves. Despite Friday’s USD/JPY selloff – down 1.7% – this was not an intervention as it was just too small. There have been talks of ‘Fed rate checks’. To be clear, this does not involve buying or selling – it is essentially the Fed contacting dealers to obtain prices they would quote for large orders.

To sum it up, it was this news that sent the USD south, as investors digest a more coordinated approach between the US and Japan, which could lead to larger moves lower. Therefore, keep a close eye on this market!

Fed to hit the pause button, but for how long?

Back to the week ahead, Wednesday will be the highlight of the week for the macro space, delivering updates from the Fed and the BoC – both of which are forecast to remain on hold – and the widely anticipated Australian Q4 25 CPI inflation print.

The Fed is widely expected to remain on hold at 3.50% - 3.75%, following three consecutive rate cuts at the tail end of last year. A hold decision should raise few eyebrows, as the data between the last meeting and this week does not warrant a move. What investors will be watching closely, however, is the Fed’s communication: any suggestion about the pace of easing and, essentially, what is next.

The press conference could be interesting to watch, particularly following the recent release of Fed Chair Jerome Powell’s video. The revelation that he faces legal threats from the Trump administration, which Powell called a ‘pretext’ for rate cuts, has nudged Fed independence back into the limelight. With Powell's term as chair ending in May and Trump mulling nominees, the political backdrop has never been murkier. So, if Powell starts to push back against the Fed, it could open the door to further downside in the USD. However, if he supports easing, this could provide some relief for the buck.  

Heading into the event, markets are pricing in little-to-no chance of a reduction this week or at March’s meeting. Ultimately, markets are looking to either June or July for a 25-bp rate reduction.

For me, the economy is not in bad shape, and we have not seen anything to suggest a move. Growth remains robust, inflation is above target – price pressures are still north of the Fed’s 2.0% inflation target as we saw with the latest inflation prints – and unemployment ticked lower.

I believe the Fed needs two things to happen before they resume easing: continued disinflation and further deterioration in the labour market.

BoC unlikely to move the market’s needle

As I noted, the BoC will claim some of the spotlight on Wednesday; however, analysts expect the central bank to hold steady at 2.25%. This follows a cumulative 100 bps of cuts in 2025, from 3.25% to 2.25%. Markets are not expecting anything from the central bank this year, but there is a slight tilt towards a possible hike at the tail end of the year (+10 bps implied).

Looking at the numbers ahead of the event, you can see inflation is heading in the right direction, with core measures recently decelerating, the labour market remains resilient, with growth looking ok. However, the Business Outlook Survey paints a gloomier picture, with firms exposed to trade increasingly pessimistic ahead of USMCA renegotiations, which could open the door for more uncertainty between the US and Canada.  

Unless there are talks of further tightening this year at this week’s meeting, which could be positive for the CAD, I do not see an edge here. So, assuming I am right, this meeting may be a case of kicking the can down the road.

Aussie inflation is one to watch

I will also be closely monitoring the Aussie CPI inflation figures this week on Wednesday, which is released prior to the Fed and BoC updates. In addition to the monthly data, we will also get the quarterly prints for Q4, as noted above, which are important for the RBA, therefore this report may be particularly market moving.

As shown in the LSEG economic calendar below, analysts are largely expecting Q4 numbers to come in higher than the previous quarter.

Solid inflation data this week would likely be enough for the markets to fully price in three hikes this year – as of writing, markets are pricing in about 70 bps of hikes. Whether the markets have got a little bit ahead of themselves here is too early to tell, because while inflation has increased, growth is looking relatively resilient, and unemployment is lower.

Regarding this week’s data, assuming a better-than-expected print – particularly the trimmed mean core measures – that equals or exceeds the market’s maximum estimate, we can expect the AUD to be bid versus G10 currencies as traders increase rate-hike bets and potentially bring February’s meeting to the table. However, what would catch the market off guard, and perhaps provide more bang for your buck, is a solid miss. I think the unwinding in long positions alone would offer an opportunity to trade out of the event.

Magnificent Seven earnings on the radar

In the equities space, a number of Magnificent Seven Q4 earnings land this week, including Tesla (TSLA), Microsoft (MSFT), and Meta Platforms (META) reporting after the market close on Wednesday, with Apple (AAPL) on Thursday also after market.

The theme is whether companies are gaining tangible benefits from AI-related investments. Doubts about returns on data centre spending weighed on tech stocks late last year, after that group had driven the bull market. Investors will be listening carefully for evidence that AI is transitioning from an infrastructure story to a profit generator.