Weekly focus – ECB holds rates steady amid inflation falling below target

Danske Research Team Danske Bank A/S

In the US, Trump's nomination of Kevin Warsh as the new Fed chair was received positively by markets, as the USD regained ground and precious metals turned lower this week. While Warsh has occasionally sided with Trump in calling for lower rates in the US, we still think his nomination should reduce concerns regarding the Fed's independence. This week also brought a string of labour market data that all surprised on the downside. The ADP data showed US employed increased by 22k private sector jobs in January (consensus: +48 k). The Challenger report showed more job cuts than expected in January and the JOLTs job opening came in at 6.5m in December (consensus 7.2m). Hence, the US ratio of job openings to unemployed fell to just 0.87 in December. Such cooling is usually a good predictor for weakening wage growth and may be a concern for the private consumption outlook and, all else equal, supports the case for earlier cuts from the Fed. On the other hand, the ISM manufacturing surprised significantly positively rising to 57.1 in January from 47.4 while the services index was as expected at 53.8 (cons: 53.5, prior 53.8). The jobs market report scheduled for Wednesday will thus be very important to follow.

In the euro area, inflation declined as expected to 1.7% y/y in January from 2.0% y/y while core inflation was slightly weaker than expected at 2.2% y/y (cons: 2.3% y/y). The decline in headline inflation was well expected due to a significant base effect on energy inflation, which was the main reason for the decline. Yet, a weaker-than-expected services inflation print of 0.15% m/m s.a. means that the January report provided a dovish signal for the ECB. Despite inflation falling below target the ECB decided to leave its key policy rates unchanged with the deposit facility rate at 2.00%, as widely expected by markets and consensus. Lagarde accentuated the positive factors of the economy such as low unemployment while downplaying the role of the inflation undershooting and strengthened euro. For further information, see ECB Review - Accentuate the positive, 5 February.

In the UK, the Bank of England kept the interest rate unchanged at 3.75% in an unexpectedly narrow vote split of 5-4, which was a dovish surprise. In their report, they concluded that the economic outlook for the UK involves less growth and inflation than previously anticipated. This also entails that we continue to aim for the next rate cut in April but also pencil in another cut in November. For details, see Bank of England Review, 5 February.

In China, the January PMIs were a mixed bag. The official NBS PMI manufacturing dropped 49.3 (consensus 50.1) from 50.1 whereas the private RatingDog PMI manufacturing increased to 50.3 (consensus 50.0) from 50.1. The details show the difference was due to export orders. However, the PMIs do not change the picture of a Chinese economy that continues to muddle through in a two-speed fashion with strong exports and tech developments amid weak domestic demand.

Next week focus turns to the US job market report, Q4 employment cost index, retail sales, and January CPI. We expect 60K new jobs and CPI at 2.4% y/y in January. In Asia, the Japanese election this Sunday is important for financial markets while China publishes home price data and CPI during the week. In Europe, we receive the first euro area employment data for 2025Q4 and UK GDP.

Download The Full Weekly Focus

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold hits daily highs around $4,900 ahead of US data

Gold is extending a decent intraday rebound, setting aside Thursday’s pullback and putting the $4,900 mark per troy ounce to the test at the end of the week. The move reflects a turn in risk sentiment, which is driving flows back towards traditional safe haven assets and giving the metal a helping hand.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.