Currency Market Digest: 18th February 2025

What happened last week?

The UK economy grew 0.1% in Q4 2024, defying expectations of contraction but still showing weak momentum. Growth was driven by services and construction, while business investment fell. The pound strengthened after the data release. Chancellor Rachel Reeves prioritizes economic growth but faces fiscal challenges, as the Office for Budget Responsibility (OBR) is expected to cut forecasts in March. The economy expanded 0.9% in 2024, below the OBR’s earlier predictions and far behind the US. Economists warn of continued stagnation in early 2025, with weak investment and cautious consumer spending limiting growth. Reeves remains committed to economic reform.

The UK may impose tariffs on US goods if excluded from a US steel tariff exemption. Business Secretary Jonathan Reynolds seeks a deal, highlighting UK steel’s strategic value. Ahead of Keir Starmer’s US visit, Labour pledges £2.5bn for steel industry support, focusing on costs, trade practices, and sustainability.

The EU plans to temporarily ease fiscal rules to allow increased defence spending amid US pressure for Europe to invest more in security. European Commission president Ursula von der Leyen announced plans to activate the "escape clause," allowing controlled and conditional exemptions for defence investments. The move could face opposition from EU nations wary of Brussels’ influence on military budgets. The US, under President Trump, has pushed European allies to raise defence spending beyond NATO’s 2% GDP target. The European Commission will outline the new fiscal approach next month, with Italy welcoming the decision as a policy victory.

The EU plans to block imports of food produced with banned pesticides, echoing Trump’s “reciprocal” trade policy. The proposal, set for review next week, could target US crops like soybeans. Health Commissioner Olivér Várhelyi insists imported food must meet EU safety standards. The move may strain trade relations, though officials stress compliance with WTO rules. A report highlights hazardous pesticides in imports, with tea and coffee among the worst affected. Future trade deals will also enforce stricter animal welfare standards. The EU hopes these measures will protect farmers and increase public support for trade agreements.

US inflation rose to 3% in January, exceeding forecasts and prompting caution from the Federal Reserve on rate cuts. Egg prices surged 15.2% in a month, contributing to the increase. Investors now expect just one rate cut in 2025. Fed Chair Jay Powell emphasized the need for a restrictive policy, resisting pressure from President Trump, who urged immediate cuts. Market reactions included higher Treasury yields and a dip in the S&P 500. Economists fear Trump’s tariffs and tax cuts could further fuel inflation, with the Fed waiting for more data before adjusting policy.

Federal Reserve Chair Jay Powell defended the central bank’s independence, emphasizing that monetary policy decisions must remain data-driven and free from political influence. He rejected President Trump’s calls for immediate rate cuts and warned against interference in the Fed’s decision-making. Powell stressed that maintaining independence would help control inflation effectively. He also cautioned against speculating on the economic impact of new policies, including tariffs and immigration measures, reaffirming the Fed’s patient approach to interest rate adjustments amid economic uncertainty.

Despite efforts to boost American manufacturing, a critical shortage of skilled workers threatens progress. In West Virginia, where labor force participation is the lowest in the U.S., employers in sectors like clean energy and advanced manufacturing struggle to fill jobs. The U.S. invests just $16 billion annually in worker training—one-fifth the OECD average—leaving many Americans unable to seize new economic opportunities. Without stronger workforce development, reshoring and tariffs may fail to create lasting job growth.

Mexico remains resilient despite Donald Trump’s tariff threats. As the U.S.’s largest trading partner, Mexico exported $500 billion in goods last year. While Trump seeks leverage, business leaders believe economic ties will prevail. Labor costs in Mexico are far lower than in the U.S., maintaining its competitive edge. Some fear Trump may use tariffs as political punishment, linking them to migration and security policies. However, executives argue that instead of targeting Mexico, the U.S. should focus on China as the real threat. Maintaining North American trade is crucial to keeping jobs from shifting to Asia.

Japan’s economy grew at an annualized rate of 2.8% in Q4 2024, surpassing expectations and marking three consecutive quarters of expansion. Quarter-on-quarter GDP rose 0.7%, driven by a 0.5% increase in corporate spending. The yen strengthened to ¥151.8 per US dollar. Despite high inflation, private consumption edged up 0.1%. The Bank of Japan raised interest rates to 0.5% in January, the highest in 17 years, with further hikes expected in 2025. Rising rice prices are contributing to inflation, with analysts predicting core inflation to reach 2.6% year-on-year in January. The government will release updated inflation data on Friday.

China is tightening control over its key technologies amid growing trade tensions with the U.S. and Europe. Beijing has restricted the export of advanced battery materials and lithium extraction processes, impacting global supply chains. Apple’s supplier, Foxconn, faces delays moving machinery and engineers to India. The move mirrors Western tech restrictions China has criticized. Chinese battery firms like CATL may need export licenses to expand abroad, while Korean companies risk losing access to cutting-edge lithium technologies. With China producing 99% of all LFP cathode materials, these controls could reshape global battery production and mineral extraction industries.

What to watch out for this week?

All times are GMT

• All day - US National Holiday
• All day - Canada National Holiday

• 03:30 - AUS RBA Interest Rate Decision
• Time unconfirmed - US President Trump speaks

• 01:00 - NZ RBZ Interest Rate Decision
• 07:00 - UK CPI Inflation (YoY) (Jan)
• 19:00 - US FOMC Meeting Minutes

• 13:30 - US Initial Jobless Claims
• 13:30 - US Philadelphia Fed Manufacturing Index (Feb)
• 17:00 - US Crude Oil Inventories

• 14:45 - US Manufacturing PMI (Feb)
• 14:45 - US Services PMI (Feb)
• 15:00 - US Existing Home Sales (Jan)