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Tertia Jacobs

Tertia Jacobs

Tertia Jacobs | Treasury Economist

MPC Preview January 2025 – Keeping an eye on the "known unknowns"

  • The baton is passed briefly from Trump’s signing of executive orders and tariff priorities to Central Banks in the coming week: A significant theme influencing the EUR/USD outlook is the emerging divergence in monetary policy and growth trajectories between the two countries' economies. Monetary policy meetings in the week ahead include Chile and Hungary (28th), Brazil, Canada, Sweden and the FOMC (29th,), the ECB and South Africa (30th) and Colombia and Dominican Republic (31st).
  • Risk-on prevails sentiment as the Trump administration appears to refrain from taking swift action on imposing tariffs across the board. Non-USD currencies rally with a strong performance from the beta ZAR, which returned to mid-December levels (R18.35/$).  
  • The new administration’s tariff agenda is slowly unfolding, and country-specific announcements could be staggered. Canada and Mexico are first on the agenda on February 1, and China is faced with a review of the implementation of Phase 1 tariffs in 2018 to be reported on April 1.
  • Stats SA published revised CPI basket weights (28th), and January's print, to be published in February, will be rebased from 2024 to 100 in 2019.

The drivers of the EURUSD are likely to be (1) the divergence in interest rates and economic performance and (2) tariff announcements that may affect different regions at varying times. These dynamics indicate that the USD index could remain on the front foot in H1 25. As the year progresses, a rebound in the European economy compared to the US economy’s growth pace – moderating to 1.5% to 2.0% or being sustained at 2.5% to 3.0% - and the inflation trajectory in H2 25, will unfold. Our UK team forecast the EUR/USD at 1.04 by year-end. 

 

MPC Preview – The known unknowns: A hawkish cut? 

Since initiating policy normalisation in September, the MPC has consistently indicated that decisions regarding the repo rate will remain data dependent. Rate cuts implemented are likely to be in increments of 25 bps, notwithstanding elevated inflation-adjusted interest rates, reflecting the proximity of the neutral rate to the current policy rate with an estimated gap of 50bps. The projected policy rate had been raised to 7.40% for the end of 2025 and 7.27% for 2026. 

Market dynamics: Risk off/risk on and sensitivity to Trump statements/comments

Market volatility has increased since November 2024 and is particularly evident in the rand, which is behaving true to its high beta currency nature.

Risk-off sentiment: The catalysts for market movements in December and early January included a further increase in US Treasury yields and a repricing of Federal Reserve rate cut expectations due to concerns over higher inflation and fiscal risks, subsequently raising the term premium, and a sharp appreciation in the USD index.

Risk on sentiment: From mid-January, the primary driver of risk sentiment, Trump’s policy iterations and refraining from immediately implementing some campaign promises, especially related to tariffs, enabled the rand to rally to R18.35/$, returning to mid-December levels, as the market was very long $/ZAR. During his inauguration speech, the President signed approximately 200 executive orders, memorandums, and proclamations covering various areas, including immigration, defence, energy, and geopolitics. Notably, he announced the US withdrawal from the World Health Organization (WHO) and the Paris Climate Accord (PCA). Additionally, a milder core CPI print (3.2% from 33%) and a moderation in core inflation, excluding housing services, helped market sentiment. Consequently, the DXY index depreciated by 2.2% from its intra-month lows and returned to mid-December levels, Brent spot is 4.7% stronger from a high of $82/bbl to $78/bbl, and UST yields retreated by 17 bps, with the 10-year UST yielding 10.63%. The dynamics behind the Brent oil price are the extended sanctions on Russian oil in the last few days of Biden, whereas Trump has pushed for more shale drilling in the US, as well as the ceasefire in Gaza.

Volatility risk and unpredictability: There has yet to be follow-through on proposed tariff increases, aside from indications that tariffs of up to 25% on Mexico and Canada could be imposed in early February. The stance towards Europe appears more open to negotiation if the EU increases purchases of American oil (and agricultural products?). Regarding China, a review of the implementation of Phase 1 tariffs from his first term is expected, with a report due on April 1st, while expressing a preference not to impose additional tariffs on China. The key takeaway is that the outlook remains unpredictable, with Trump's comments significantly influencing market movements. In this environment, characterised by numerous "known unknowns," the MPC's interest rate debate could turn more intense in the next two meetings.

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