Market Analysis: Trade Optimism, Dollar Pressure, and Key Data Ahead
Article published on February 5th, 2025 8:40AM UK Time
Dollar Weakness Persists Amid Trade Developments
The US dollar continues to weaken, extending losses following the US-Mexico-Canada border deal announced on Monday. With that agreement in place, market attention has now shifted to China, where Beijing’s measured response to Trump’s tariffs has bolstered optimism that a trade deal could be reached before China’s retaliatory tariffs take effect on January 10.
US Labour Market: Cooling Signals Emerge
The latest JOLTS job openings report provided a less optimistic snapshot of the US labour market compared to December’s strong payroll data, so that puts the focus on today’s ADP and ISM print.
Upcoming US Data: ADP and ISM Services in Focus
Today’s key releases include:
- ADP Employment Report (January) – Expected at 150k, slightly stronger than December. While not a reliable predictor for nonfarm payrolls, this report can still move markets.
- ISM Services PMI – Forecast to tick up to 54.3 from 54, but greater scrutiny will be on the prices paid subindex, which spiked to 64 in December, raising inflation concerns.
The S&P Global Flash PMI for January had already flagged some cooling in service sector activity, dropping to 52.8 from 56.8. While new business inflows remain robust, a decline in export orders and adverse weather effects were noted as constraints on activity.
On inflation, service sector firms passed higher costs onto consumers, with selling price inflation hitting its highest level since September. If this trend persists, it could challenge market expectations of Fed rate cuts and potentially encourage a more hawkish policy stance.Despite the dovish BoE outlook, sterling has shown resilience, emerging as a safe haven among pro-cyclical currencies following the resolution of recent U.S. trade tensions. The UK’s limited exposure to U.S. tariffs—with exports to the U.S. accounting for less than 2% of GDP and to China less than 1%—has shielded the pound from trade-related volatility.
Additionally, recent diplomatic developments have lent support to sterling. U.S. President Donald Trump appears in no rush to impose tariffs on the UK, given the relatively balanced goods trade relationship. Furthermore, his recent call with UK Prime Minister Keir Starmer was reportedly amicable, reinforcing market confidence in stable UK-U.S. economic ties.The ECB remains confident that inflation will return to its 2% target in 2025, with wage pressures easing, a key factor in its inflation outlook. While domestic inflation remains elevated due to lingering sectoral price adjustments, the broader disinflation trend is intact. Rising government bond yields, largely driven by global spillovers from the U.S., are not expected to disrupt monetary policy transmission.
On growth, Lagarde dismissed concerns about stagnation, saying that policymakers did not even discuss it. She acknowledged that while the economy has yet to reach its full potential, there are early signs of recovery, with consumption expected to pick up as restrictive policies gradually ease.
Market Outlook: Dollar Downside Limited Despite Trade Optimism
Additionally, if today’s ISM Services data confirms persistent price pressures, it could reignite hawkish Fed bets, providing a potential floor for the greenback.
For now, markets remain driven by protectionism and rate expectations, with economic data playing an increasingly central role in determining the Fed’s next steps.