Cooling Inflation, Tariff Risks, and Record Trade Surpluses

January 20, 2025 — FXRK Weekly Market Recap

FXRK
5 min readJan 21, 2025

Welcome to this week’s market recap, brought to you by FXRK. As we navigate the ever-shifting trading landscape, let’s dive into the key events that shaped global markets over the past week. This extended analysis provides a comprehensive overview to ensure you’re fully prepared for the week ahead.

United States: Cooling Inflation Brings Market Relief

The week started with significant concerns surrounding the U.S. labor market. A strong employment report earlier in the month raised fears that persistent inflation would push the Federal Reserve to delay any rate cuts. However, midweek brought a glimmer of hope as December’s Consumer Price Index (CPI) showed a year-over-year increase of 2.9%, slightly below expectations.

More notably, core inflation, which excludes volatile food and energy prices, dropped to 3.2%, defying projections of a flat reading. This cooling inflation trend buoyed equity markets, driving Treasury yields lower and weakening the U.S. dollar. Market participants now anticipate the Federal Reserve might reduce rates as early as July, a notable shift from earlier bets on September.

However, uncertainty looms as former President Donald Trump’s impending policy on tariffs garners attention. Proposals include a blanket 10% levy on all imports and a 60% tax on goods from China, potentially raising average tariffs to levels not seen since 1935. Such policies risk exacerbating inflationary pressures and igniting a global trade war, with countries like Canada and Mexico signaling potential retaliatory measures.

The U.S. labor market remains resilient, but this strength complicates the Fed’s approach to monetary policy. With inflation showing signs of moderation but still above target levels, traders are closely monitoring Federal Open Market Committee (FOMC) signals for guidance on future policy decisions. Equity markets, particularly tech-heavy indices, have responded positively, but sectors reliant on global trade remain cautious given the uncertainty around tariffs.

Additionally, investors are keeping an eye on corporate earnings reports and forward guidance from major companies. This earnings season has so far provided mixed signals, with sectors like technology and healthcare outperforming while consumer staples and industrials face headwinds.

United Kingdom: Unexpected Easing of Inflation

The UK experienced an unexpected deceleration in inflation for the first time in three months. December’s CPI rose by 2.5%, down from November’s 2.6%, while core inflation eased from 3.5% to 3.2%. Service-sector inflation, a critical measure for the Bank of England (BoE), also declined significantly, offering much-needed relief for policymakers.

While these figures suggest a promising path for potential rate cuts by the BoE, economic growth remains lackluster. Data revealed a 0.1% GDP increase in November, falling short of the anticipated 0.2%. With the UK teetering on the edge of stagnation, sustained monetary easing may be the necessary catalyst for revival. Traders are closely watching for any signals from the BoE that could impact forex and bond markets.

Beyond the inflation data, the UK’s economic outlook is clouded by uncertainty in consumer confidence and retail activity. Recent surveys indicate a cautious approach by consumers amid rising energy prices and geopolitical tensions in Europe. The housing market also faces challenges, with slower price growth and reduced transaction volumes signaling broader economic headwinds.

Export-driven sectors in the UK are also struggling with reduced demand from key trading partners. With Brexit-related adjustments still playing a role, businesses are navigating increased administrative costs and supply chain disruptions. The BoE’s decisions in the coming months will play a critical role in shaping the economic recovery.

China: Trade Surplus Hits Record Levels

China’s economy painted a mixed picture this week. The country’s trade surplus reached an all-time high of $992 billion in 2024, fueled by record exports and subdued imports. Weak domestic demand and declining commodity prices played a pivotal role in dampening import volumes, while manufacturing output surged to meet external demand.

Despite this, challenges persist. Accusations of overproduction and dumping from global trade partners are mounting, and proposed tariffs from the U.S. could slash China’s economic growth by up to two percentage points, according to forecasts from Standard Chartered and Macquarie.

On the growth front, China’s economy expanded by 5.4% in Q4, surpassing expectations. For 2024, GDP grew by 5%, aligning with government targets but marking the slowest pace since 1990 (excluding pandemic-affected years). This balance between external trade success and internal economic struggles continues to define China’s narrative.

The broader Asian markets are feeling the ripple effects of China’s performance. Key trading partners like Japan and South Korea are grappling with reduced demand for exports, particularly in technology and automotive sectors. However, increased investment in renewable energy and infrastructure across the region could provide long-term stability.

China’s policymakers are now focusing on boosting domestic demand through stimulus measures, including tax cuts and infrastructure spending. However, concerns about the country’s mounting debt levels and a sluggish property market remain significant obstacles.

Key Events for the Upcoming Week

Mark your calendars for these critical events:

  • Monday: China’s announcement of one-year and five-year loan prime rates.
  • Tuesday: UK labor market report for November and Eurozone economic sentiment for January.
  • Wednesday: Earnings reports from Procter & Gamble, Johnson & Johnson, and GE Vernova.
  • Thursday: Japan’s December trade balance and Eurozone consumer confidence figures.
  • Friday: Japanese inflation, Bank of Japan’s interest rate announcement, global PMIs, and U.S. consumer sentiment for January.

In addition to these events, traders should keep an eye on potential developments regarding U.S.-China trade negotiations and their impact on global commodity markets. With crude oil and natural gas prices fluctuating, energy stocks could see heightened volatility.

Cryptocurrency markets are also expected to experience volatility as regulatory announcements from major economies loom. Traders should closely monitor Bitcoin and Ethereum as potential catalysts emerge.

Insights

As markets respond to evolving inflation dynamics, trade policies, and central bank actions, opportunities and risks abound. FXRK remains committed to empowering traders with cutting-edge tools, competitive spreads, and a supportive community to navigate these volatile times.

For those trading forex, it’s essential to focus on currency pairs influenced by central bank decisions, such as GBP/USD and USD/JPY. Meanwhile, commodity traders may find opportunities in gold and crude oil, given the current geopolitical landscape.

Stay informed and seize the moment. Here’s to another week of calculated trades and informed decisions.

Disclaimer

The information and data published in this report were prepared by the market research department of FXRK. Publications and reports of our research department are provided for informational purposes only. Market data and figures are indicative, and FXRK does not trade any financial instrument or offer investment recommendations and decisions of any type. The information and analysis contained in this report have been prepared from sources that our research department believes to be objective, transparent, and robust.

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FXRK
FXRK

Written by FXRK

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