In a week marked by cautious optimism and strategic financial maneuvers, the Federal Reserve, European Central Bank (ECB), and economic indicators from major economies have set the stage for potential shifts in global markets. After implementing a 100 basis point rate cut, the Federal Reserve has signaled a need for more concrete evidence of economic weakness and subdued inflation to justify any further loosening of policy. Concurrently, the GBP/USD pair extended its weekly uptrend, reaching a two-week high near 1.2450 on Friday, bolstered by preliminary January PMI data from the UK that surpassed expectations.
As the ECB prepares for its meeting next week, market expectations lean towards another 0.25 percentage point rate cut, with more likely to follow. Inflationary pressures show moderate resurgence, as businesses indicate the transfer of higher costs to consumers according to the PMI data. Despite this, the services sector remains a vital growth engine, even as the business activity PMI experienced a slight decline from 51.6 to 51.4.
The broader economy appears to persist in a state of stagnation, with export orders continuing to decline. This decline is compounded by looming US tariffs on the eurozone manufacturing sector, casting a shadow over future prospects. Meanwhile, in currency markets, EUR/USD gained bullish momentum, rising toward 1.0500 during the European session on Friday.
President Trump's policies of low taxation and minimal regulation are anticipated to positively impact growth. In Germany and across the Eurozone, upbeat PMI data revealed an expansion in private sector business activity in January. The composite PMI incremented from 49.6 to 50.2, signifying a stagnant economy with a still-contracting manufacturing sector, although the output index increased from 44.3 to 46.8, indicating reduced contraction.
The ECB seems content with prioritizing weak growth concerns over inflationary pressures. As businesses continue to adjust pricing strategies in response to rising costs, the economic landscape remains complex and dynamic. The forthcoming ECB meeting is expected to provide further clarity on policy direction as stakeholders await additional signals of economic health.