Weekly focus – USD slide continues

The USD has continued to weaken this week with broad dollar trading at its weakest levels since 2022. This constitutes a continuous boost to the global economy, which is also linked to the surge we see in both oil and copper prices. While we think stronger global demand is the key explanation, the focus on Iran also adds a potential oil supply shock to the mix.

The FOMC kept rates on hold in an undramatic meeting. Fed chair Powell struck a balanced but positive tone as the Fed sees both reduced downside risks to the labour market and upside risks to inflation. He refrained from commenting on the recent USD weakness, and whether the move could fuel additional inflation. With a cooling labour market weighing on wage growth and the full tariff impact still ahead, we pencil in two rate cuts in March and June, ahead of investors, which are keener on July.

President Trump has pointed to Kevin Warsh as Powel's successor. Having served five years on the board during the GFC, he would be an uncontroversial choice, likely representing a balanced view on monetary policies, markets can relate to.

Conference Board consumer confidence unexpectedly declined as the "jobs plentiful" index fell to its lowest level since early 2021. Inflation expectations declined and thus the souring mood looks more related to the real economy than tariff concerns. US data is quite mixed these days, though. The euro area finished off 2025 with a bit more speed than expected, with q/q growth at 0.3%. With both Spain and France highlighting private spending as a growth driver, this serves as a hawkish surprise. The unemployment rate also edged back to all-time lows at 6.2% in December.

It was also the week when the EU and the world's most populous country, India landed a trade agreement that has been 20 years in the making. It will remove tariffs on over 90% of the goods traded over a period of seven years. India makes up just 2.4% of total EU exports today, so we should not expect any big short-term impact on the economy but of course, the long-term potential is significant for the EU. Next week, we expect energy prices to drag euro area inflation significantly below the inflation target in January. This supports the potential for a gradual private spending pick-up. The ECB should look through this, though, as core inflation will remain above 2%.

Both the ECB and the Bank of England (BoE) will meet to discuss monetary policy. Neither should be very eventful. We do not expect any new policy signals from president Lagarde. Data highlights how the ECB remains "in a good place". After the rate cut in December, the BoE is waiting for further disinflationary signs before we expect the final rate cut in April. We do however expect a 25bp rate hike in Australia.

We will also look out for a flood of labour market releases from the US. The most important of them being the January jobs report where we expect 60K new jobs. We also expect a downward annual benchmark revision of 1.1 million jobs. In China, we will look for PMI releases. The manufacturing PMI rebounded above the 50-threshold in December, and we expect it to be broadly flat in January held up by robust exports.

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