Tariffs, Congressional testimony and inflation data are all top of the agenda for financial markets this week. President Trump’s announcement of 25% tariffs on all steel and aluminium imports into the US (in addition to reciprocal tariff application) is keeping investors on ‘trade war’ alert. And while markets are now starting to get used to the US President’s negotiating style of going big with his opening gambits as it relates to trade and foreign policy, the fact remains Trump has injected a large dose of unpredictability to financial market dynamics, and this makes trading with any sort of conviction a much sterner test in 2025.
As we await more specifics from Trump’s tariff plans and any counter measures or exemptions from or for US trading partners, Jerome Powell has begun his semi-annual testimony before Congress. There were reassurances from the Fed Chairman with regards to the economic state of play (with Powell mentioning the strong overall economy and labour market), though if traders were looking for clues or intent about when another rate cut may occur, these were noticeably absent – by design. With the international tariff outlook still looking clouded and therefore any resulting economic fallout difficult to predict, it’s easy to see why Powell didn’t fancy boxing himself in regarding the path of Fed policy in 2025.
Trump’s tariff proclamations may have been creating angst for financial markets but in the case of gold the uncertain economic outlook has been serving the precious metal well. Gold has reached new all-time highs this week north of the $2900 level. Both inflation-hedge and safe-haven flows have been headed the way of gold this week with traders left unsure as to how long the international trade dramas will last for. Gold has slightly eased back from its record highs to trade just shy of the $2900 level during early Asian trading hours on Wednesday. However, any prolonging or indeed ratcheting-up of international tariff measures could expedite gold’s journey towards the $3k level. Key levels to watch this week include support at $2870 and $2836, while on the top side resistance awaits at $2928 and $2948.
The US Dollar Index (DXY) is hovering around the 108 level, with US currency having a tough time particularly against the Japanese yen lately. A Bank of Japan (BOJ) rate hike in January combined with hawkish commentary from BOJ officials has contributed to the USDJPY rate depreciating 3.5% so far this year. Currently, markets are expecting perhaps only one or two rate cut from the FOMC this year, while from the BOJ we could see two further rate hikes this year, which could further narrow the spread between US and Japanese bond yields. This US-Japanese yield spread is something to keep an eye on in coming months as it could hold the key to which side of the 150 level the USDJPY rate will be trading at.
Ahead this week, US CPI and PPI readings will be headline events. Stocks, USD cross-rates and gold will all react to the latest US inflation readings, as these will shape market expectations for US interest rate policy in 2025. So, I expect we could see some increased volatility in markets around the times of the CPI release, particularly if the core inflation data deviates significantly from the 0.3% month-on-month rise expected.
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