Central Banks Set for Action Amid Trade Tensions and Economic Data

As the first central bank meetings of 2025 unfold, the Fed, ECB, and BoC will likely make headlines with their respective policy decisions. With Trump’s tariff threats in focus, the Fed is expected to hold rates steady, while the ECB and BoC are anticipated to deliver further cuts.

Fed Pauses Amid Political Uncertainty

The Federal Reserve will be at the center of attention next week, as its policy decision on Wednesday is expected to maintain the current rates. While inflation remains stubbornly high, the Fed’s cautious stance reflects the broader economic strength in the US, alongside concerns about the impact of Trump’s new tariff policies. Although the Fed has left the door open to rate hikes, it’s more likely that it will hold off unless inflation accelerates significantly.

The release of important economic data, including GDP growth on Thursday and the PCE inflation index on Friday, will likely shape expectations for the Fed’s future direction. Strong GDP or inflation readings could delay any anticipated rate cuts and provide further support for the dollar.

BoC and ECB to Stick to Their Easing Paths

On Wednesday, the Bank of Canada is expected to announce another rate cut as inflation remains low and economic growth weakens. However, the looming political uncertainty and potential tariffs under the Trump administration could limit the effectiveness of any rate changes.

In Europe, the ECB is expected to continue its gradual rate-cutting approach, with a likely 25-basis-point reduction at Thursday’s meeting. However, ongoing concerns about growth in the Eurozone and rising inflation could limit the ECB’s ability to act more aggressively.

Data and Risks to Watch

China’s January manufacturing PMI on Monday and Australia’s CPI on Wednesday will also be key indicators to watch. A strong Chinese PMI could lift risk sentiment and provide some relief to the Australian dollar, while a weak CPI report from Australia could fuel expectations of an interest rate cut by the Reserve Bank of Australia.