It is premature to conclude that the greenback’s uptrend has ended. Last week, the DXY Index 1.7% decline was the fastest weekly drop since November 2023. The DXY must still break sustainably below the 107-neckline level to affirm a reversal of the Trump Trade rally in 4Q24 back into its previous two-year range.
The overarching theme for the USD continues to revolve around US President Donald Trump’s approach to tariffs. Tariffs heighten global uncertainties and boost the USD’s haven appeal. Tariffs are considered an inflationary risk for the US and a growth threat for the rest of the world. Until his cabinet nominees are confirmed, Trump has kept the tariff threat alive by setting a February 1 deadline to impose tariffs on Canada, Mexico, and China. The countdown will likely dampen the Lunar New Year holiday mood during this shortened trading week in Asia.
Last week, Trump exerted pressure on the Federal Reserve to lower interest rates. However, the Fed will demonstrate its independence by leaving the Fed Funds Rate unchanged at 4.25-4.50% during the FOMC meeting on January 28-29. Friday’s US PCE inflation should vindicate the Fed’s cautious approach to rate cuts by rising to 0.3% MoM (2.5% YoY) in December from 0.1% MoM (2.4% YoY) in November. However, markets will be alert to Trump’s attempts to influence the Fed in future FOMC meetings.
EUR/CHF has gained upside momentum after its 1.2% rally (fastest in eight months) to 0.95 last week. The Swiss National Bank is resolute about countering the CHF’s haven status from global uncertainties with interventions and negative interest rates. The OIS market has priced in two rate cuts this year, in March and December, bringing the SNB policy rate to 0%. However, EUR/CHF could correct to 0.9450 into this Thursday’s European Central Bank meeting, where we expect it to keep the door open for more rate cuts after lowering the deposit facility rate by 25 bps to 2.75%. The ECB’s confidence in Eurozone inflation meeting the 2% target in 2025 supports our forecast for the policy rate to decline to 2% by mid-year.
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