USD Ascends: Fed's Hawkishness Fuels Dollar Dominance in Early 2025
What to buy and what to sell...
Sunday, January 5th, 2025, Week 2
Welcome to your comprehensive weekly report on currency strengths to help you prepare for the week ahead.
The Forex market is currently highly volatile due to central bank policies and geopolitical events. The US dollar has strengthened against other major currencies, driven by the US Federal Reserve's hawkish stance despite a recent rate cut. This divergence in monetary policies presents trading opportunities. Key events to watch this week include the release of the Fed's minutes and the US Non-Farm Payrolls report, which could significantly impact market sentiment and currency valuations. The incoming Trump administration's trade policies and the Bank of Japan's potential policy shift also add uncertainty to the market.
The Eurozone faces political turmoil and a dovish European Central Bank, contributing to a bearish outlook for the Euro. Commodity currencies like the AUD and CAD are also sensitive to potential changes in US trade policies. The Yen is showing strength due to expectations of a rate hike by the Bank of Japan. Be aware of these risks and opportunities as you navigate the Forex market this week.
Currency Strengths
USD (Very Strong - Very Bullish): The Fed's hawkish stance, despite the December rate cut, coupled with robust economic data, underpins the dollar's strength. The potential for fiscal stimulus under the incoming Trump administration adds further support. (Rating: No change since the previous report).
JPY (Strong - Bullish): Expectations of a BOJ policy shift towards normalization, fueled by persistent inflation and a moderately recovering economy, are driving the Yen higher. (Rating: Strengthened from moderately strong since the previous report).
CHF (Strong - Moderately Bullish): The Swiss Franc retains its safe-haven appeal despite the SNB's recent rate cut, benefiting from global uncertainties. (Rating: Weakened from very strong since the previous report).
CAD (Moderately Weak - Bearish): The Canadian Dollar is weighed down by the BoC's dovish stance, concerns about slowing economic growth, and uncertainties surrounding potential US trade policies. (Rating: Weakened from neutral since the previous report).
AUD (Weak - Bearish): The Australian Dollar faces headwinds from a cautious RBA, weak domestic data, and concerns about the Chinese economy, a key trading partner. (Rating: Weakened from moderately weak since the previous report).
EUR (Weak - Bearish): The Euro remains under pressure due to the ECB's dovish stance, political uncertainty in Germany and France, and a broadly stronger USD. (Rating: No change since the previous report).
GBP (Weak - Bearish): The British Pound is weighed down by the BoE's cautious approach, sluggish economic growth, and persistent inflation. (Rating: No change since the previous report).
NZD (Very Weak - Very Bearish): The New Zealand Dollar is struggling amid a confirmed technical recession, aggressive RBNZ easing, and external headwinds. (Rating: No change since the previous report).
USD: Very Strong - Very Bullish
The US, under President Biden, is the world's largest economy with a $29.167 trillion GDP. The Federal Reserve, led by Chair Jerome Powell, targets maximum employment and price stability. The current federal funds rate is 4.25-4.50%.
Fundamental Strength: Very Strong
The USD's strength is underpinned by a hawkish Fed, signaling fewer rate cuts in 2025 than previously anticipated, and a resilient US economy. Despite a 25 bps rate cut in December to 4.50%, the Fed revised its economic projections upwards, showing confidence in sustained growth. Strong job growth, with 227,000 jobs added in November, and robust retail sales, up 0.7% in November, support this outlook. The potential for fiscal stimulus and tariffs under the incoming Trump administration adds another layer of support, although it introduces uncertainty. The divergence in monetary policy between the Fed and other major central banks, which are easing more aggressively, further strengthens the USD's position.
Sentiment: Very Bullish
Sentiment towards the USD is very bullish, driven by the Fed's hawkish stance and strong economic data. The Dollar Index hit a 25-month high above 108, reflecting this positive sentiment. While the recent easing in core PCE inflation provided some relief, the overall outlook remains optimistic. The market is closely watching for any further signals from the Fed regarding monetary policy and the evolving economic data.
Dominant Theme: The Fed's hawkish policy pivot, signaling fewer rate cuts in 2025, is the dominant theme driving USD strength. This contrasts with the easing biases of other major central banks, creating a significant divergence that supports the dollar.
Emerging Theme: The potential impact of the incoming Trump administration's trade and fiscal policies is an emerging theme. While still uncertain, these policies could further strengthen the USD through safe-haven flows and expectations of higher inflation and stronger economic growth.
Forecasts:
DXY Index: Trading Economics forecasts 109.45 by the end of Q1 2025 and 112.50 in 12 months. Given the Fed's hawkish stance and the potential for fiscal stimulus, these forecasts seem achievable.
S&P 500: Trading Economics forecasts 5772.34 by the end of Q1 2025 and 5419.83 in 12 months. The Q1 forecast appears realistic given the current momentum, but the 12-month forecast might be slightly optimistic depending on the Fed's actions and global economic conditions.
10-Year Yield: Trading Economics forecasts 4.50% by the end of Q1 2025 and 4.27% in 12 months. These forecasts align with the Fed's current stance and the expectation of a gradual normalization of monetary policy.
Upcoming Economic Indicators:
07-Jan-2025: US ISM Services PMI DEC (Forecast: 54, Previous: 52.1). A strong reading could further boost the USD by indicating continued expansion in the services sector.
07-Jan-2025: US JOLTs Job Openings NOV (Forecast: 7.69M, Previous: 7.744M). A higher-than-expected figure could reinforce the view of a tight labor market, supporting the Fed's hawkish stance.
08-Jan-2025: US FOMC Minutes. The minutes will provide insights into the Fed's December meeting discussions and could influence market expectations regarding future policy moves.
10-Jan-2025: US Non-Farm Payrolls DEC (Forecast: 200K, Previous: 227K). Another strong jobs report could further strengthen the USD by supporting the case for a more gradual easing of monetary policy.
10-Jan-2025: US Unemployment Rate DEC (Forecast: 4.30%, Previous: 4.20%). A stable or lower unemployment rate would reinforce the view of a healthy labor market.
10-Jan-2025: US Michigan Consumer Sentiment Prel JAN (Forecast: 75, Previous: 74). An improvement in consumer sentiment could boost the USD by suggesting continued strength in consumer spending.
Trading Thesis: The USD remains a strong buy candidate based on the Fed's hawkish policy divergence, robust economic data, and the potential for fiscal stimulus. The currency's strength is supported by a resilient economy and a tight labor market, making it an attractive asset for traders.
CAD: Moderately Weak - Bearish
Canada, a constitutional monarchy under King Charles III, is led by Prime Minister Justin Trudeau. The Bank of Canada (BoC), headed by Governor Tiff Macklem, targets a 2% inflation rate. The current bank rate is 3.25% following recent cuts.
Fundamental Strength: Moderately Weak
The CAD faces headwinds from a dovish BoC, which has cut rates by a cumulative 175 bps from the cycle's peak, and a slowing economy, with Q3 2024 GDP growth at just 1% annualized. The BoC's cautious approach to further cuts, due to uncertainties surrounding potential US trade policies, adds to the CAD's weakness. The unexpected resignation of Finance Minister Freeland further complicates the outlook. While consumer spending has shown some resilience, the overall economic picture remains concerning, with a potential contraction in November.
Sentiment: Bearish
Sentiment towards the CAD is bearish, driven by the BoC's dovish stance, weak economic data, and a strengthening USD. The currency weakened past 1.44 per USD, approaching its lowest level since March 2020. The recent rise in the unemployment rate to 6.8% in November and the decline in consumer confidence have further contributed to the negative sentiment.
Dominant Theme: The BoC's easing cycle and the uncertain impact of potential US trade policies under the incoming Trump administration are the dominant themes weighing on the CAD.
Emerging Theme: The market is increasingly pricing in the possibility of further BoC rate cuts, adding to the downward pressure on the currency.
Forecasts:
USD/CAD: Trading Economics forecasts 1.45 by the end of Q1 2025 and 1.48 in 12 months. These forecasts seem realistic given the current economic and political climate.
TSX: Trading Economics forecasts 24312.51 by the end of Q1 2025 and 23108.26 in 12 months. The Q1 forecast appears achievable, but the 12-month forecast might be optimistic given the economic headwinds.
10-Year Yield: Trading Economics forecasts 3.16% by the end of Q1 2025 and 2.96% in 12 months. These forecasts align with the BoC's current stance and the expectation of a gradual easing cycle.
Upcoming Economic Indicators:
07-Jan-2025: CA Balance of Trade NOV. A wider-than-expected trade deficit could further weaken the CAD.
07-Jan-2025: CA Ivey PMI s.a DEC. A reading below 50 would indicate contraction in the manufacturing sector and could add to the bearish sentiment.
Trading Thesis: The CAD remains a sell candidate due to the BoC's dovish stance, weak economic data, and political uncertainty. The potential for further rate cuts and the uncertain impact of US trade policies will likely continue to weigh on the currency.
GBP: Weak - Bearish
The UK, a constitutional monarchy under King Charles III, is led by Prime Minister Keir Starmer. The Bank of England (BoE), under Governor Andrew Bailey, maintains a 4.75% bank rate, aiming to balance growth and inflation.
Fundamental Strength: Weak
The GBP faces significant headwinds from a cautious BoE, sluggish economic growth, and persistent inflation. The BoE's decision to hold rates in December, despite a split vote, reflects its uncertainty about the economic outlook. GDP growth stagnated in Q3 2024, and a contraction of 0.1% month-over-month was reported in October. The decline in the BRC Retail Sales Monitor for November also indicates weak consumer spending. The recent uptick in inflation to 2.6% in November adds to the BoE's challenges, limiting its ability to cut rates aggressively.
Sentiment: Bearish
Sentiment towards the GBP is bearish, driven by the BoE's cautious stance, weak economic data, and a broadly stronger USD. The currency has weakened to $1.256, and the market is pricing in the possibility of further rate cuts in 2025. The recent decline in consumer confidence and the contraction in manufacturing and services PMI add to the negative sentiment.
Dominant Theme: The BoE's policy uncertainty amid weak economic data and persistent inflation is the dominant theme driving GBP weakness.
Emerging Theme: The potential impact of the new Labour government's policies, including increased defense spending and a tougher stance on China, is an emerging theme, although its immediate impact on the GBP is unclear.
Forecasts:
GBP/USD: Trading Economics forecasts 1.24 by the end of Q1 2025 and 1.20 in 12 months. These forecasts seem realistic given the current economic and political climate.
FTSE 100: Trading Economics forecasts 8047.98 by the end of Q1 2025 and 7684.28 in 12 months. The Q1 forecast appears achievable, but the 12-month forecast might be optimistic given the economic headwinds.
10-Year Gilt: Trading Economics forecasts 4.49% by the end of Q1 2025 and 4.27% in 12 months. These forecasts align with the BoE's current stance and the expectation of a gradual easing cycle.
Upcoming Economic Indicators:
No economic indicators scheduled for release in the next ten days.
Trading Thesis: The GBP remains a sell candidate due to the BoE's cautious stance, weak economic data, and persistent inflation. The potential for further rate cuts and the uncertain impact of the new government's policies will likely continue to weigh on the currency.
EUR: Weak - Bearish
The Euro Area, with a $19.403 trillion economy, operates under ECB President Christine Lagarde's monetary policy leadership. The December rate cut to 3.15% signals a continued easing bias.
Fundamental Strength: Weak
The EUR faces significant headwinds from the ECB's dovish monetary policy, slowing economic growth, and political uncertainty in key member states. The ECB cut its key interest rates by 25 basis points in December, and President Lagarde has signaled the likelihood of further rate cuts if upcoming economic data supports such a move. The recent contraction in manufacturing (HCOB Manufacturing PMI at 45.2 in December) and the mixed signals from the services sector add to the concerns. Political instability in Germany, with Chancellor Scholz losing a confidence vote, and the appointment of a new prime minister in France further contribute to the negative outlook.
Sentiment: Bearish
Sentiment towards the EUR is bearish, driven by the ECB's dovish stance, weak economic data, and political uncertainty. The EUR/USD has fallen to a four-week low of $1.03, and the market is pricing in further rate cuts in 2025. The recent decline in consumer confidence to an eight-month low in December adds to the negative sentiment.
Dominant Theme: The ECB's dovish monetary policy and the divergence with the Fed's more hawkish stance are the dominant themes driving EUR weakness.
Emerging Theme: Political instability in Germany and France is an emerging theme, adding to the uncertainty surrounding the Eurozone's economic and political outlook.
Forecasts:
EUR/USD: Trading Economics forecasts 1.03 by the end of Q1 2025 and 1.00 in 12 months. These forecasts seem realistic given the current economic and political climate.
EU50: Trading Economics forecasts 4788.27 by the end of Q1 2025 and 4479.33 in 12 months. The Q1 forecast appears achievable, but the 12-month forecast might be optimistic given the economic headwinds.
German 10-Year: Trading Economics forecasts 2.31% by the end of Q1 2025 and 2.14% in 12 months. These forecasts align with the ECB's current stance and the expectation of a gradual easing cycle.
Upcoming Economic Indicators:
07-Jan-2025: EA Inflation Rate YoY Flash DEC (Forecast: 2.40%, Previous: 2.20%). An uptick in inflation could slightly ease the bearish sentiment, but the overall trend remains weak.
07-Jan-2025: EA Unemployment Rate NOV (Previous: 6.30%). A stable or lower unemployment rate could provide some support to the EUR.
07-Jan-2025: EA Core Inflation Rate YoY Flash DEC (Forecast: 2.70%, Previous: 2.70%). Steady core inflation might not significantly impact the EUR, as the market is focused on the ECB's broader policy direction.
07-Jan-2025: EA Inflation Rate MoM Flash DEC (Forecast: 0.20%, Previous: -0.30%). A positive monthly inflation figure could provide a temporary boost to the EUR.
08-Jan-2025: EA Consumer Confidence Final DEC (Previous: -14.5). An improvement in consumer confidence could slightly improve sentiment towards the EUR.
08-Jan-2025: EA Economic Sentiment DEC. A positive reading could provide some support to the EUR.
09-Jan-2025: EA Retail Sales MoM NOV. A positive figure could indicate stronger consumer spending, potentially supporting the EUR.
09-Jan-2025: EA Retail Sales YoY NOV. Positive annual retail sales growth could boost confidence in the Eurozone economy.
Trading Thesis: The EUR remains a sell candidate due to the ECB's dovish stance, weak economic data, and political uncertainty in key member states. The divergence in monetary policy between the ECB and the Fed will likely continue to weigh on the currency.
CHF: Strong - Moderately Bullish
Switzerland, with a $942.265 billion economy, operates under a unique system of direct democracy. The Swiss National Bank (SNB), led by Chairman Martin Schlegel, maintains a 0.50% policy rate, following a surprise 50 bps cut in December.
Fundamental Strength: Strong
The CHF's strength is underpinned by its safe-haven status and the SNB's commitment to price stability. Despite the recent rate cut, the SNB's focus on maintaining inflation within its target range and its willingness to intervene in the foreign exchange market to prevent excessive appreciation support the CHF. The Swiss economy remains robust, with a projected GDP growth of around 1% in 2024. However, the SNB's easing stance and the potential for further rate cuts could limit the CHF's upside potential.
Sentiment: Moderately Bullish
Sentiment towards the CHF is moderately bullish, driven by its safe-haven appeal amid global economic uncertainties and geopolitical tensions. The recent decline in the Swiss investors' sentiment index suggests some concerns about the economic outlook, but this has been largely offset by the CHF's safe-haven status. The market is now assessing the SNB's future policy path, with a focus on whether the central bank will continue its easing cycle or pause to assess the impact of its recent actions.
Dominant Theme: The CHF's safe-haven status amid global uncertainties is the dominant theme supporting the currency.
Emerging Theme: The SNB's monetary policy stance and the potential for further easing is an emerging theme, creating some uncertainty about the CHF's future trajectory.
Forecasts:
USD/CHF: Trading Economics forecasts 0.92 by the end of Q1 2025 and 0.95 in 12 months. These forecasts seem achievable given the competing forces of safe-haven demand and SNB easing.
CH20: Trading Economics forecasts 11378.16 by the end of Q1 2025 and 10735.47 in 12 months. The Q1 forecast appears realistic, but the 12-month forecast might be slightly optimistic given the global economic uncertainties.
10-Year Yield: Trading Economics forecasts 0.23% by the end of Q1 2025 and 0.18% in 12 months. These forecasts align with the SNB's current stance and the expectation of a gradual easing cycle.
Upcoming Economic Indicators:
07-Jan-2025: CH Inflation Rate YoY DEC (Forecast: 1.00%, Previous: 0.70%). An uptick in inflation could support the CHF by suggesting less need for further SNB easing.
08-Jan-2025: CH Retail Sales YoY NOV (Previous: 0.10%). Positive retail sales growth could boost confidence in the Swiss economy.
10-Jan-2025: CH Unemployment Rate DEC (Previous: 2.60%). A stable or lower unemployment rate would reinforce the view of a healthy labor market.
Trading Thesis: The CHF is a hold candidate, as the competing forces of safe-haven demand and SNB easing create a balanced risk-reward scenario. While the currency's safe-haven status provides support, the SNB's dovish stance and potential for further rate cuts limit its upside potential.
JPY: Strong - Bullish
Japan, the world's fourth-largest economy with a $4.2 trillion GDP, is led by Prime Minister Shigeru Ishiba. The Bank of Japan (BOJ), under Governor Kazuo Ueda, maintains a 0.25% interest rate, with a focus on overcoming deflation and achieving a stable 2% inflation rate.
Fundamental Strength: Strong
The JPY's strength is driven by increasing expectations of a BOJ policy shift towards normalization. Inflation has remained above the BOJ's target, with the headline rate at 2.9% and core inflation at 2.7% in November. The BOJ's cautious stance in its December meeting, maintaining rates while acknowledging the need to assess wage trends and global economic conditions, has fueled speculation about a potential rate hike in early 2025. The recent uptick in Tokyo's core CPI for December to 3% and stronger-than-expected retail sales growth of 2.8% in November further support the case for policy normalization.
Sentiment: Bullish
Sentiment towards the JPY is bullish, driven by the anticipation of a BOJ policy shift. The market is pricing in a potential rate hike, and the Yen has strengthened against the USD despite the BOJ's cautious stance. The upcoming release of the BOJ's Summary of Opinions and Governor Ueda's speech will be closely scrutinized for any clues about the bank's policy direction.
Dominant Theme: The anticipation of a BOJ policy shift towards normalization, fueled by persistent inflation and a moderately recovering economy, is the dominant theme driving JPY strength.
Emerging Theme: The potential impact of the incoming US administration's policies on the Japanese economy and the JPY is an emerging theme, creating some uncertainty.
Forecasts:
USD/JPY: Trading Economics forecasts 159.99 by the end of Q1 2025 and 168.19 in 12 months. These forecasts may be too high if the BOJ shifts policy earlier than expected.
Nikkei 225: Trading Economics forecasts 38167.11 by the end of Q1 2025 and 33419.66 in 12 months. The Q1 forecast appears achievable given the current momentum, but the 12-month forecast might be optimistic depending on the BOJ's actions and global economic conditions.
10-Year JGB: Trading Economics forecasts 1.05% by the end of Q1 2025 and 0.92% in 12 months. These forecasts seem realistic given the potential for a BOJ policy shift.
Upcoming Economic Indicators:
06-Jan-2025: JP Jibun Bank Services PMI Final DEC. A reading above 50 would indicate expansion in the services sector, potentially supporting the JPY.
08-Jan-2025: JP Consumer Confidence DEC. An improvement in consumer confidence could further boost the JPY.
10-Jan-2025: JP Household Spending MoM NOV. Positive spending data could indicate stronger domestic demand, supporting the JPY.
10-Jan-2025: JP Household Spending YoY NOV. Positive annual spending growth could boost confidence in the Japanese economy.
14-Jan-2025: JP Current Account NOV. A larger-than-expected current account surplus could support the JPY.
Trading Thesis: The JPY is a buy candidate based on the increasing likelihood of a BOJ policy shift towards normalization. The persistent inflation, stronger-than-expected economic data, and the anticipation of a potential rate hike are driving the bullish sentiment.
AUD: Weak - Bearish
Australia, a constitutional monarchy under King Charles III, is led by Prime Minister Anthony Albanese. The Reserve Bank of Australia (RBA), headed by Governor Michele Bullock, maintains a 4.35% cash rate, aiming to balance inflation and economic growth.
Fundamental Strength: Weak
The AUD faces headwinds from a cautious RBA, slowing economic growth, and concerns about China's economy, a key trading partner. The RBA's decision to hold rates in December, coupled with its assessment of easing inflation risks, suggests a potential for future rate cuts. The weaker-than-expected Q3 GDP growth of 0.3% and the decline in consumer confidence in December add to the AUD's challenges. While the recent easing of trade restrictions by China on Australian coal imports is a positive development, the overall outlook for commodity prices remains uncertain.
Sentiment: Bearish
Sentiment towards the AUD is bearish, driven by expectations of potential RBA rate cuts, weak domestic data, and concerns about global growth, particularly in China. The AUD/USD has been trading near multi-year lows, reflecting this negative sentiment. The recent decline in iron ore and coal prices has also put downward pressure on the AUD.
Dominant Theme: The RBA's cautious monetary policy stance and concerns about slowing global growth, particularly in China, are the dominant themes weighing on the AUD.
Emerging Theme: The potential for increased fiscal stimulus in China, as indicated by reports of a target record budget deficit, is an emerging theme that could provide some support to the AUD. However, this is currently overshadowed by domestic economic concerns.
Forecasts:
AUD/USD: Trading Economics forecasts 0.61 by the end of Q1 2025 and 0.59 in 12 months. These forecasts seem realistic given the current economic and political climate.
ASX 200: Trading Economics forecasts 8005.71 by the end of Q1 2025 and 7562.67 in 12 months. The Q1 forecast appears achievable, but the 12-month forecast might be optimistic given the economic headwinds.
10-Year Yield: Trading Economics forecasts 4.34% by the end of Q1 2025 and 4.11% in 12 months. These forecasts align with the RBA's current stance and the expectation of a gradual easing cycle.
Upcoming Economic Indicators:
09-Jan-2025: AU Balance of Trade NOV. A larger-than-expected trade surplus could provide some support to the AUD.
14-Jan-2025: AU Westpac Consumer Confidence Change JAN. An improvement in consumer confidence could boost the AUD.
14-Jan-2025: AU Westpac Consumer Confidence Index JAN. A higher index reading would indicate stronger consumer sentiment.
16-Jan-2025: AU Unemployment Rate DEC. A stable or lower unemployment rate would reinforce the view of a relatively tight labor market.
Trading Thesis: The AUD is a sell candidate due to the RBA's cautious stance, weak domestic data, and concerns about China's economy. The potential for further rate cuts and the uncertain outlook for commodity prices will likely continue to weigh on the currency.
NZD: Very Weak - Very Bearish
New Zealand, a unitary parliamentary democracy under King Charles III, is led by Prime Minister Christopher Luxon. The Reserve Bank of New Zealand (RBNZ), headed by Governor Adrian Orr, has cut the Official Cash Rate (OCR) to 4.25% in response to a technical recession.
Fundamental Strength: Very Weak
The NZD is under significant pressure due to the confirmed technical recession, with the economy contracting by 1.0% in Q3 2024 following a revised 1.1% fall in Q2. The RBNZ's aggressive easing, with a cumulative 125 basis points cut this year, reflects the severity of the economic challenges. The new government's fiscal policies, including tax cuts and infrastructure spending, aim to stimulate growth, but their immediate impact is uncertain. The RBNZ's focus on inflation control, with the removal of its dual mandate, adds another layer of complexity.
Sentiment: Very Bearish
Sentiment towards the NZD is very bearish, driven by the recession, the RBNZ's dovish stance, and a strong US dollar. The NZD/USD has fallen to around $0.561, near its two-year low, and is heading for its fourth consecutive weekly decline. The recent uptick in food inflation and the slight improvement in consumer confidence have not been sufficient to counter the negative sentiment.
Dominant Theme: The confirmed technical recession and the RBNZ's aggressive easing are the dominant themes driving NZD weakness.
Emerging Theme: The potential impact of the new government's fiscal policies is an emerging theme, but its effects are yet to be fully realized.
Forecasts:
NZD/USD: Trading Economics forecasts 0.55 by the end of Q1 2025 and 0.53 in 12 months. These forecasts seem realistic given the current economic and political climate.
NZX 50: Trading Economics forecasts 12877.37 by the end of Q1 2025 and 12202.17 in 12 months. The Q1 forecast appears achievable, but the 12-month forecast might be optimistic given the economic headwinds.
10-Year Yield: Trading Economics forecasts 4.37% by the end of Q1 2025 and 4.19% in 12 months. These forecasts align with the RBNZ's current stance and the expectation of a gradual easing cycle.
Upcoming Economic Indicators:
No economic indicators scheduled for release in the next ten days.
Trading Thesis: The NZD is a strong sell candidate due to the confirmed recession, the RBNZ's aggressive easing, and the uncertain global economic environment. The currency is likely to remain under pressure in the coming weeks, with its rating reflecting these significant challenges.
Navigating Divergent Paths: Central Bank Policies and Geopolitical Risks
The Forex market in early 2025 is characterised by a clear divergence in central bank policies and a complex geopolitical landscape. The US dollar reigns supreme, bolstered by a hawkish Fed and a resilient economy. This strength is further amplified by the contrasting easing biases of other major central banks, creating a significant divergence that favours the greenback. Traders should consider the USD a strong buy candidate.
In contrast, the Euro and British Pound are struggling. The Eurozone faces political uncertainties in Germany and France, coupled with the ECB's commitment to further easing. Similarly, the UK's sluggish growth and the BoE's cautious approach weigh on the Pound. Both currencies are clear sell candidates.
The Japanese Yen presents a compelling case for a buy, driven by increasing expectations of a BOJ policy shift towards normalisation. Persistent inflation and a moderately recovering economy have turned market sentiment bullish.
The Swiss Franc offers a mixed picture. Its safe-haven status provides support, but the SNB's dovish stance creates a counterbalance. This makes the CHF a hold for now, with a moderately bullish outlook.
Commodity currencies like the Australian Dollar and Canadian Dollar are under pressure. The AUD is grappling with a cautious RBA, weak domestic data, and concerns about China's economy, making it a sell candidate. The CAD faces similar challenges, compounded by political uncertainty and the potential impact of US trade policies, also making it a sell.
The New Zealand Dollar is in the most precarious position, confirming a technical recession and facing aggressive easing from the RBNZ. It's a strong sell, with a very weak fundamental rating and very bearish sentiment.
Key Takeaways for Forex Traders:
USD Dominance: The Fed's hawkish stance and the strong US economy make the USD the strongest currency.
JPY Strength: The potential for a BOJ policy shift creates a bullish outlook for the JPY.
European Weakness: The EUR and GBP are weighed down by dovish central banks and economic challenges.
Commodity Currency Concerns: The AUD and CAD face headwinds from domestic and global factors.
NZD Recession: The NZD is the weakest currency, driven by a confirmed recession and aggressive RBNZ easing.
Geopolitical Risks: The potential impact of the incoming Trump administration's trade policies and ongoing global tensions add another layer of complexity.
Sources
Bloomberg, Reuters, Trading Economics, ForexLive, Federal Reserve, ECB, BOJ, BOE, RBA, RBNZ, SNB, BOC, US Bureau of Labor Statistics, Eurostat, Statistics Canada, Australian Bureau of Statistics, Statistics New Zealand, Swiss Federal Statistical Office, Office for National Statistics, Cabinet Office Japan, Ministry of Internal Affairs and Communications, Ministry of Finance Japan, Swiss National Bank, Bank of Canada, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New Zealand.