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‘Turnaround Tuesday’ sees stocks and the dollar rebound
Updated Updated Tue, 2025 January 28 10:30
* Dollar finds a bid on Trump tariff threats
* Nasdaq bounces back, Nvidia gains close 9% after DeepSeek volatility
* Gold claws back most of the week’s losses after Monday liquidity adjustment
* Fed expected to kick off extended policy pause, BoC to cut rates again
FX: USD made some gains following on from the doji candle that printed on Monday after the DeepSeek ructions. The dollar hadn’t benefitted from the safe haven bid due to markets more focused on increased dovish bets on the Fed and on the potential wealth effect on US consumers from the AI rout. That reversed with the stock bounce back and threats of universal tariffs starting at 2.5%, as favoured by Treasury Secretary Bessent, though Trump said he wanted much larger ones. The market is still very long USD.
EUR lagged as the tariff threat was seen as more serious due to the US Treasury’s active planning. 1.0448 is the key pivot level and whether the recent move higher is a false breakout of the bear channel or not. If tariffs do go ahead, then the ECB will have to do more of the heavy lifting ie more rate cuts.
GBP saw similar price action to the euro. The first Fib retracement level (23.6%) of the decline from the September high sits at 1.2610. There’s not too much data out of the Uk this week. BoE Governor Andrew Bailey testifies to the Treasury Select Committee on Financial Stability today. UK Chancellor Rachel Reeves will also try to shift the narrative back to the growth agenda in a speech at Oxford.
USD/JPY printed an inside day as the 10-year Treasury yield steadied and haven status was reduced. That has a high correlation to the major. The next major level below is at 153.40 – that is the Fib retracement (61.8%) marker of the summer drop. The 200-day SMA is 152.81.
AUD underperformed amid the renewed tariff chatter. Today’s inflation data will likely make or break the case for the RBA to deliver its first interest rate cut next month. The policy-relevant trimmed-mean CPI is seen rising 0.6% vs prior 0.8% to see the annual rate ease to 3.3% form 3.5%. On a six-month annualised basis, trimmed mean inflation on most forecasts was 2.5%, which is the midpoint of the RBA’s 2-3% inflation target. USD/CAD remained in its recent 1.43-1.45 range. The BoC is expected to cut rates again today which means guidance will be key.
US stocks: The benchmark S&P 500 closed in the green, up 0.92% at 6,067. The tech-heavy Nasdaq settled higher, up 1.59% at 21,463. The Dow Jones underperformed, finishing up 0.31% at 44,850. It was “Turnaround Tuesday”, an old trader’s phrase used to denote the frequency with which the second day of the week sees markets reverse the day’s previous move. Tech as a sector rebounded 3.6% while the outperformer from Monday, consumer staples lost 1.5%. Nvidia was up nearly 9% after its 17% plunge on Monday. The SOX semiconductor index added 1.1%. Microsoft is reportedly in discussions to acquire TikTok. We get Tesla, Microsoft, and Meta reporting their earnings after the US close.
Asian stocks: Futures are in the green. Stocks were mixed amid holiday-thinned conditions on Chinese New Year’s Eve and the recent US tech sell-off. The ASX 200 traded rangebound on return from the long weekend as gains in the consumer, healthcare and financial sectors offset the losses in real estate, utilities and tech. The Nikkei 225 sold off was better than the worst levels amid a weaker currency and softer Services PPI data. The Hang Seng was kept afloat but with upside capped amid the absence of the holidaying mainland.
Gold rebounded as profit taking and possible liquidity issues around the tech rout on Monday subsided. We note the 10-year US treasury yield is close to the neckline of a perfect head and shoulders reversal pattern.
Day Ahead – Fed and BoC Meetings
Analysts expect a 25bps cut at the Bank of Canada meeting, bringing the overnight rate to 3%. Consensus is for a shift from aggressive to more measured rate cuts, reflecting recent BoC guidance for a slower approach to easing. The bank is expected to maintain an easing bias in its guidance, keeping options open for further rate adjustments depending on economic data and external shock. Of course, that includes President Trump’s threatened tariffs in just a few days, beginning on Saturday February 1st. Market pricing sees just over 50 bps of cuts by the end of June, while pricing is out to almost 64 bps of policy easing by year end.
The Fed will keep rates unchanged at 4.25-4.50%. Recent resilient data has kept the “US Exceptionalism” theme very much alive, with GDP expected to be close to 3% for the third straight quarter, when it is released on Thursday. Sticky inflation has endured, but the sizzling recent NFP data likely keeps the all-important US consumer ticking along. This means Powell will highlight the ongoing strength of the economy and so a patient policy stance is warranted. The big unknown is the new administration and its potentially inflationary policies. That validates the extended pause by the Fed.
Chart of the Day – USD/CAD waiting for major catalyst
USD/CAD recently spiked higher above 1.45, a level not seen since March 2020. The loonie has suffered a more than an 8% decline in the last four months. Escalating trade tensions are a key reason, while the ongoing easing cycle by the Bank of Canada has added fuel to the upside in the major. Interestingly, the bank has not yet expressed much concern over the weakening CAD.
In the near-term the recent range continues between 1.43 and 1.45. A breakout, when it appears, will be big as prices have tracked sideways in relative range contraction for some time. We note that since 2016, USD/CAD has essentially been trading within a well-defined range, with peaks at 1.4700 and troughs at 1.2050. A breakout above 1.4700 would be significant, drawing more attention to rising import costs further burdening the Canadian consumer.
