The European session will once aga just a couple of non market moving releases. The focus today is on the BoC and FOMC policy decisions.
14:45 GMT/09:45 ET - Bank of Canada Policy Decision
The BoC is expected to cut interest rates by 25 bps and bringing the policy rate to 3.00%. As a reminder, the BoC cut interest rates by 50 bps at the last policy meeting but dropped the line saying “if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further", which suggests that we reached the peak in "dovishness" and the central bank will now switch to 25 bps cuts and will slow the pace of easing.
The recent Canadian Employment report was much stronger than expected, while the CPI report came mostly in line with forecasts showing once again that the central bank got inflation back under control.
The CAD hasn’t responded much to economic data recently as the focus switched to Trump’s tariffs threats and the negative economic impact they could have on Canada. Trump said that he intends to impose 25% tariffs on imports from Canada as soon as February 1st.
19:00 GMT/14:00 ET - FOMC Policy Decision
The Fed is expected to keep interest rates unchanged at 4.25-4.50%. As a reminder, the central bank cut interest rates by 25 bps at the last meeting in December raising growth and inflation projections and lowering the expected rate cuts in 2025 from 100 bps to 50 bps (in line with market’s pricing at that time).
The central bank will likely stress the need to wait a bit more for the next rate cut to get more economic data and more clarity on Trump’s policies. As Fed’s Waller recently mentioned, the pace of rate cuts will depend on inflation progress. He didn’t even rule out completely a March cut which was taken as a dovish surprise by the market.
The recent US inflation data came in softer than expected and marked the peak in the inflation hysteria and the repricing in rate cuts expectations. Before the data, the market was even pricing in the chances on no rate cut in 2025.
That was the signal that the pricing was getting too much aggressive and in fact we just needed a couple of benign inflation reports to get it back to price in almost two rate cuts by the end of the year (which would be in line with the latest Fed’s projections).
Overall, this decision is unlikely to influence markets expectations too much as the Fed will likely offer limited forward guidanceas and the data in Q1 is what really matters. Despite the expected cautiousness, a bit more positive talk on inflation could see the US Dollar weakening further (as long as Trump doesn’t spoil the party).
