Foreign Exchange Commentary

Summary

• U.S. total unemployment claims rose to 1.9 million, the highest level since November 2021, with initial claims increasing to 223K, suggesting a weakening labor market despite a relatively stable number of new applications.
• The EUR strengthen to near 1.05 due to positive PMI data.
• The ECB is expected to lower rates by 25 bps next week, with the market expecting further cuts in 2025.
• The Bank of Japan hike rates to the highest level since 2008.
• The Mexican peso recovered to 20.4 supported by hawkish comments by the Mexican central bank, based on an elevated core inflation level.

United States

Presidential Inauguration and the US Dollar:
President Donald Trump took office for his second term on Monday. His recent policy announcements have influenced global markets. President Trump advocated lower oil prices and interest rates which contributed to a decline in oil prices and fluctuations in currency markets.

The U.S. dollar weakened across the board due to the lack of concrete tariff policies from President Trump, who expressed a preference for negotiating a trade deal with China rather than imposing tariffs. Analysts believe that tariffs will primarily be used as a negotiation tool, reducing their potential negative impact.

U.S. Unemployment Landscape:
The latest U.S. Department of Labor report published on Wednesday revealed a somewhat complex employment picture. Continuing unemployment claims reached 1.9 million for the week ending January 11 – the highest since November 2021. While initial jobless claims increased moderately to 223,000, with the four-week moving average rising to 213,500. New applications remain near pre-pandemic levels, but the uptick in recurring claims signals a weaker labor market.

Seasonal factors and natural disasters like California’s wildfires appear to have contributed to the fluctuations. Despite these disruptions, jobless claims remain relatively stable. However  potential policy shifts, including changes in federal employment and capital expenditure strategies, could influence future unemployment trends.

Global Central Bank Actions

Bank of Japan (BoJ): Following months of anticipation, the Bank of Japan raised interest rates by 25 basis points to 0.50%, the highest level since 2008. The USD/JPY pair initially dropped 0.8%, but the yen's overall performance remained flat as markets had largely priced in the hike. Governor Kazuo Ueda signaled that future rate hikes will be contingent on economic conditions, potentially maintaining stable import prices.

European Central Bank (ECB): The European Central Bank is anticipated to implement another 25 bps rate cut next week, with markets expecting further monetary policy adjustments in the coming months.

Price action

Euro: The euro currency strengthened to its highest level in over a month, nearing $1.05 on the spot interbank market, driven by a weaker U.S. dollar after President Trump softened his stance on tariffs and called for immediate interest rate cuts. Positive PMI data from the Euro-zone and Germany signaled a recovery in private sector activity and an easing manufacturing contraction.

British Pound: The British pound rallied against the U.S. dollar, poised to end the week higher after three consecutive weeks of losses. Sterling rose 0.6% to $1.2344 on the spot interbank market, with a weekly gain of 2.1%.

The Mexican Peso: On the spot interbank market, the Mexican peso strengthened to 20.4 per USD from a recent three-year low. Inflation data supported a hawkish stance from Mexico’s central bank Banxico, with headline inflation falling to 3.69% – the lowest in four years. Core inflation remained sticky at 3.72%, reflecting ongoing price challenges. Optimism about potential moderation in Trump’s administration regarding tariffs and Mexico's robust economic fundamentals weighed on market sentiment.

World Economic Forum Annual Meeting in Davos

The World Economic Forum's Annual Meeting took place in Davos, Switzerland, from January 20 to 24, 2025. The event gathered nearly 3,000 leaders from over 130 countries to discuss global economic trends, technological advancements, and policy initiatives.

Key discussions included JPMorgan’s CEO Jamie Dimon who addressed concerns regarding U.S. tariff policies, suggesting that their economic impact may be less severe than anticipated. International Monetary Fund (IMF) Chief Kristalina Georgieva highlighted the potential of artificial intelligence to boost global growth, while also noting disparities in countries' readiness to adopt AI technologies.