FOMC, ECB Rate Decisions Loom Amid Tariff Threats

Talking Points

• FOMC Rate Decision: Market expectations for a rate cut are low due to concerns about slower disinflation and tariff impacts. Traders will watch for Jerome Powell’s comments on tariffs and inflation.
• ECB Rate Decision: A rate cut is widely expected, with concerns about potential US tariffs on the EU weighing on the Euro.
• Tariff Threats and Market Uncertainty: Markets are volatile due to uncertainty surrounding potential US tariffs on Canada, Mexico, China, and the EU.
• EUR/USD Technical Analysis: The Euro is finding support after a recent decline, but faces resistance at higher levels.
• USD/JPY Technical Analysis: The US dollar has been volatile against the Yen, with a potential double top formation on the weekly chart.

This week, we have three of the world’s most significant central bank’s interest rate and monetary policy decisions: the Federal Reserve, the European Central Bank, and the Bank of Canada. The central bank’s decisions follow President Trump’s executive orders and additional tariff threats to Canada, Mexico, China, and other countries.

FOMC Rate Decision and Market Expectations Amid Tariff Concerns

The Federal Open Market Committee (FOMC) interest rate decision is the FED’s first meeting in 2025 and the third after Trump’s election victory. The latest FOMC minutes showed that policymakers were concerned about a slower disinflation process than previously anticipated and about the impact of tariffs on inflation. According to the CME FedWatch tool and Bloomberg’s analyst surveys, the expectations for a 25 basis point cut for the January 29th FOMC meeting currently stands at 0.5%, compared to 70% just before the elections.

(Chart). The surveys also reflected that traders share the FED’s official view of two x 25 bps interest rate cuts in 2025. Before the US elections, the surveys showed that participants looked at 3 – 4 interest rate cuts of 25 bps each in 2025 by the FOMC. Traders will pay attention to Jerome Powell’s comments on how tariffs may impact inflation and how the FED would react.

ECB Rate Decision and Tariff Concerns Weigh on Euro

This week, markets are looking forward to the European Central Bank’s interest rate and monetary policy decision, scheduled for January 30th, 2025. According to Bloomberg analysts’ surveys, 97.2% of participants expect the ECB to cut interest rates by 25 basis points. The surveys also suggest that participants anticipate somewhere between 3 – 4, 25 bps cut in 2025. The EU inflation rate (Eurozone HICP) Y/Y remained at nearly 2.4% throughout 2024 but dropped to 1.72% in September. However, it rose to its 2024 average of 2.7% and has remained there since then.

Last week, President Trump vowed to impose tariffs on the EU; Trump said, “We have a $350 Billion deficit with the European Union, the EU, and other countries also had troubling trade surpluses with the United States”. “The European Union is very bad to us; they are going to be in for tariffs. It’s the only way you’re going to be in for tariffs.” On Wednesday of last week, ECB president Christine Lagard said, “Europe must be prepared and anticipate the potential trade tariffs of newly inaugurated US President Donald Trump.” Lagarde also said she “Expects Trump’s tariffs to be more selective and focused.”

Following Trump’s EU tariff comments, the EUR/USD exchange rate retreated below the resistance level of 1.0445 to 1.0390; however, it remained at this level as traders continued to digest the tariff’s impact on the exchange rate. The divergence between the EU and US plans for interest rate cuts in 2025 may add more pressure on the Euro; however, this remains subject to further details on how the tariff plans develop and its details.

Tariff Threats and Market Uncertainty

Markets remain on high alert, and volatility is higher than usual as traders react to mixed messages about tariffs. During his election campaign, President Trump proposed a 25% tariff on Canada and Mexico, the USA’s largest trading partners, and a 10% tariff on China and the EU. So far, no formal tariff decisions have been made. The president mentioned multiple times that the primary purpose of tariffs is for the US to have fairer trade agreements with its partners, additional border security, and to block the flow of the Fentanyl drug from China.

Although Trump didn’t impose tariffs on day one as promised during the election campaign on Monday, hours after the inauguration speech, Trump renewed his tariff threats to Canada, Mexico, and China. Market reaction was short-lived as traders continued to wait for more details on how the Trump administration would impose tariffs and which products could be affected. Canada and Mexico have reassured the Trump administration that they will work harder to ensure the US borders are secure per Trump’s request; however, the two nations and China have prepared a list of American goods on which they may impose retaliatory tariffs.

Tariffs are considered an additional cost, impacting goods and services prices and leading to higher inflation. The first mention of tariffs pushed the US dollar higher against most major currencies. EUR/USD dropped to the 1.0180 range, almost to parity. USD/CAD rose above 1.4500, breaking out and closing above critical resistance levels, which held firm in 2015 and again in 2020. However, the price moves didn’t last long as markets continued to wait for more details. EUR/USD rose back above 1.0420, and USD/CAD fell to 1.4360.

Tariffs remain a concern for FX traders as comments continue to impact exchange rates. On Monday, the dollar rose against all its peers. The Japanese Yen, the Euro, and the Canadian Dollar instantly weakened versus the dollar after comments from US President Donald Trump and Treasury Secretary Scott Bessent highlighted concerns about tariffs..

EUR/USD Technical Analysis

EUR/USD Weekly Chart

• The overall long-term chart context reflects a “Rising Wedge” formation for the downtrend, which began mid-2021 (Descending channel marked by red Lines to the left of the chart); price action attempted to break below the lower pattern border several times. The wedge pattern changed to a sideways price action, marked with black lines on the chart.
• The price continued its decline during December 2024, reaching new lows of 1.0230, where support was found, taking the price back up above the monthly PP of 1.0442. Price rose to R1 of 1.0541; however, following Trump’s administration’s renewed tariffs concerns, the price fell back to 1.0442.
• Multiple resistance levels lie above price action near monthly R1 of 1.0541 and a confluence of resistance at 1.0633 (Marked by a black circle), represented by the intersection of an intermediate declining trendline extending from July 2023 (Dotted red line), the SMA21 and the annual PP of 1.0633
• The Stochastic Indicator aligns with price action and has crossed above the %D line. The positive divergence previously seen has materialized; however, the indicator slightly reversed from its neutral level.

EUR/USD Daily Chart

• The overall context: Price action has been trading sideways within a wide horizontal range channel that goes back to January 2023, marked by green lines on the daily chart. The channel lies within the wide range of 1.0400 – 1.1200. The price retreated to the horizontal channel support (Green line – the lower channel borderline), broke, and remained below it for more than 3 weeks. Following multiple failed attempts and the previously discussed inverted triple bottom, price action was able to break back above the broken level (Circle), where it is currently finding support. The price also broke above the descending channel’s upper border, marked by the chart’s red lines. (Resistance turned Support).
• Price action broke above the SMA21, SMA9, and EMA9, the monthly PP of 1.0442, and the weekly PP of 1.0427. The three averages and the PPs intersect with the horizontal channel support (green line) and the declining channel lower borders (red line), representing a critical confluence of support below price action near the range of 1.0350 -1.0440.
• RSI is in line with price action, with a double top formation; however, it has remained above and supported by its MA so far.

USD/JPY Technical Analysis

USD/JPY Weekly Chart

• The overall context of the chart reflects that Price action has been trading in an uptrend since early 2022, when the FED began raising interest rates. The uptrends are marked on the chart, trendlines 1 and 2. Following the US elections, the US dollar rose against the Yen; however, in the following weeks, it failed against the JPY as it was met by resistance at the historical monthly R1 standard calculations of 158.37 and trendline 1 (Blue line). Price action has been volatile around the breakout level. The decline was erased in the following weeks as the price rose, reaching the extension for trendline 1 in mid-December, the 158.37 area, where resistance was found for the past few weeks.
• The weekly chart shows a double top formation (Red curves—baseline marked by ascending red line). The baseline intersects with the monthly PP of 154.64.
• Price action is currently trading above its fast-moving averages, EMA9 and SMA9, the intermediate moving average, SMA20, and its monthly pivot point of 154.64.
• Fast RSI7 aligns with price action, currently at its neutral level and reflecting a slight negative divergence, adding more weight to the double top formation. (marked by the dotted red lines)
• Stochastic is in line with price; the %K line crossed below the %D line, and both are below the overbought levels.

USD/JPY Daily Chart

• The recent price action on the daily chart reflects that the price was moving in an intermediate uptrend since mid-September of 2024, interrupted during the last few days of November 2024, as price action broke and closed below the uptrend. (Dashed black line).
• An exhaustion gap in late October 2024 has been filled, with price action breaking and closing below it. The support level represented by the gap formation has turned into a resistance level near 152.60. Following the decline in early December of 2024, price action found support above an intermediate trendline (Dashed red line) and rose back to the dashed black line, where it found resistance, which was followed by multiple daily spinning tops candles and a failure back down to its monthly PP of 154.64.
• Price action broke and closed below its weekly PP of 155.84, its fast and intermediate moving averages, EMA9, MA9, and MA21. The three averages and the weekly PP represent a confluence of resistance above the price.
• A second set of multiple spinning top candles formation for the past few days, highlighted in grey.
• Fast RSI5 aligns with price action, reflecting a potential positive divergence. The MACD line is below its signal line but remains close to it.

In conclusion, this week’s central bank decisions and ongoing tariff threats have created a volatile and uncertain market environment. While the FOMC is expected to hold rates steady, the ECB is likely to cut rates amid concerns about US tariffs on the EU. The overall market sentiment remains cautious as investors await further clarity on the trade situation. The technical outlook for EUR/USD and USD/JPY suggests continued volatility, with potential support and resistance levels identified. Traders should closely monitor central bank announcements and news related to tariffs to navigate these uncertain times.

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