Germany is particularly vulnerable to US trade tariffs, which could curb growth for years to come and hold back an economy already suffering through two straight years of contraction, Bundesbank President Joachim Nagel said on Monday.

Germany, Europe's largest economy, has been in a deep industrial recession, due in great part to subsidised Chinese output crowding out German products at a time when soaring energy costs at home are already weighing on competitiveness.

Modelling projections based on tariff threats from U.S. President Donald Trump, the Bundesbank concluded that Germany would suffer but the U.S. would also take a hit that would more than offset any positive impact of the trade barriers.

"Our strong export orientation makes us particularly vulnerable," Nagel said in a speech. "Economic output in 2027 would be almost 1.5 percentage points lower than forecast," he added.

The Bundesbank sees the German economy growing by 0.2% this year and 0.8% in 2026, suggesting that a 1.5% point hit over the next three years would result in more economic contraction.

"Contrary to what the (U.S.) government has announced, the consequences of the tariffs for the USA should therefore be negative," Nagel added. "The loss of purchasing power and increased costs for intermediate inputs would outweigh any competitive advantages for U.S. industry."

Fabio Panetta, Italy's central bank chief, has also concluded that the U.S. would take a large hit.

Speaking on the weekend, he said that if all tariffs hinted at by Trump before the election were implemented and they were followed by retaliatory measures, global GDP growth would fall by 1.5 percentage points with the U.S. economy suffering a 2 percentage point hit.

The big risk, Panetta argued, was that Chinese firms shut out of the U.S. would seek new markets and could squeeze out European producers.

One saw only a minor impact while another anticipated a large increase in price pressures because retaliatory tariffs would be passed onto consumers while a weak euro would weigh on import costs, Nagel added.

Source: Theedgemarkets

New Zealand’s unemployment rate has accelerated to 5.1% in Q4 2024, a whisker below its Covid peak of 5.2% while Australia’s unemployment rate remained stable at 4%.

A further steepening of yield spreads between Australian and New Zealand sovereign bonds may trigger further upside in the AUD/NZD cross rate.

Watch the 1.0980 key medium-term support on AUD/NZD.

This week, the Antipodean countries’ central banks will decide their respective monetary policy; Australia’s RBA on Tuesday, 18 February, and New Zealand’s RBNZ on the following day on 19 February.

The Aussie and Kiwi have strengthened against the US dollar since 3 February when US President Trump “fired” his trade tariffs salvo against Canada, Mexico, and China. The AUD/USD and NZD/USD rallied by 4.6% and 4% in the past two weeks from their respective 3 February lows to 17 February at this time of writing.

Market participants have started to price in 25 basis points (bps) cut by RBA, its first cut in four years after being “late” to the global interest rate cut cycle (excluding Bank of Japan) to reduce its policy cash rate to 4.1%. A slowdown in the Australian inflation trend came in faster than the RBA anticipated where the trimmed mean gauge of consumer rose 3.2% y/y in Q4 2024 versus a higher consensus expectation of 3.3%.

Meanwhile, New Zealand’s RBNZ is expected to deliver another “jumbo size rate cut” of 50 bps after three consecutive rate cuts conducted in 2024 to reduce its official cash rate to 3.75% due to a deceleration in inflation trend and a rapid slowdown in growth conditions. Business confidence has declined for three consecutive months coupled with a 22-month streak of contraction in manufacturing PMI data.

A weaker New Zealand labour market is supporting a further steepening of AU/NZ sovereign bonds’ yield spread

Fig 1: AU & NZ unemployment rate with 2-year & 10-year yield spreads of AU/NZ government bonds as of 18 Feb 2025 (Source: TradingView, click to enlarge chart)

New Zealand’s unemployment rate has accelerated to 5.1% in the three months through December 2024 which is almost its Covid peak of 5.2% recorded in Q3 of 2020 (see Fig 1).

Meanwhile, the unemployment rate for Australia remained stable at 4% for its latest reading of December 2024, within the range of 4.1% to 3.7% recorded in 2024.

The bleaker labour market condition in New Zealand increases the odds that RBNZ is likely to adopt a relatively more dovish monetary policy in 2025 over RBA.

Therefore, the 2-year and 10-year yield spreads between Australia and New Zealand sovereign bonds are likely to steepen further and, in turn, may ignite upside pressure on the AUD/NZD cross rate.

Potential bullish change of trend for AUD/NZD

Fig 2: AUD/NZD major and medium-term trends as of 18 Feb 2025 (Source: TradingView, click to enlarge chart)

Since 17 July 2024, the price actions of AUD/NZD have not been above to break above a “stubborn” range resistance of 1.1165/1190 as it continued to consolidate above a rising 200-day moving average.

Several positive technical elements have emerged that support a potential impending bullish breakout above 1.1165/1190 for the AUD/NZD.

Firstly, its price actions have started to trade above its 50-day moving average since 4 February.

Secondly, the daily MACD trend indicator has just staged a bullish breakout from its descending trendline resistance, and its centreline on 10 February suggests a potential start of a medium-term bullish momentum condition that may lead to higher price actions on the AUD/NZD (see Fig 2).

Watch the 1.0980 key medium-term pivotal support and clearance above 1.1190 may see the next medium-term resistances coming in at 1.1245 and 1.1430/1460 (also the upper boundary of a major ascending channel from 22 February 2024)

However, failure to hold above 1.0980 invalidates the bullish scenario for a corrective decline to expose the next medium-term supports at 1.0850 and 1.0735.

Source: ACTIONFOREX

Federal Reserve governor Christopher Waller said recent economic data support keeping interest rates on hold, but if inflation behaves as it did in 2024, policymakers can get back to cutting “at some point this year.”

“If this wintertime lull in progress is temporary, as it was last year, then further policy easing will be appropriate,” Waller said in remarks he’s scheduled to deliver on Tuesday in Sydney. “But until that is clear, I favour holding the policy rate steady.”

The Fed lowered rates by a percentage point in the closing months of 2024 before leaving them unchanged at their January policy meeting. That decision looked sound when new data showed the consumer price index rose 0.5% in January, the most since August 2023.

Waller called the figures out last week “mildly disappointing,” but emphasized that forecasts for the Fed’s favoured gauge of inflation — the personal consumption expenditures price index — were less alarming.

He cited estimates that core PCE, which excludes food and energy, likely rose about 0.25% in January, and 2.6% from a year earlier.

Waller also joined a fellow Fed official in expressing scepticism over whether the CPI figures were properly adjusted for seasonal factors.

“There seems to be some pattern over the past few years of higher inflation readings at the start of the year,” Waller said. “This pattern brings into question whether the inflation data have ‘residual seasonality,’ which means that statisticians have not fully corrected for some apparent seasonal fluctuations in some prices.”

The Bureau of Labor Statistics seeks to remove the effect of certain seasonal factors — like recurring patterns in climate, production or price-hike cycles — from the data to allow for meaningful month-to-month inflation comparisons.

Philadelphia Fed president Patrick Harker raised similar concerns on Monday.

“In the last decade, CPI inflation in January has surprised on the upside nine out of 10 times,” Harker said. “My conjecture is that seasonal adjustments are struggling to keep up with a fast-changing economy, and we need to parse the underlying trends from the month-to-month noise.”

Waller said he’d monitor the data before deciding whether residual seasonality or “a different issue” was to blame for the elevated reading.

“Whichever case it may be, the data are not supporting a reduction in the policy rate at this time,” he said. “But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.”

Policy paralysis

The Fed governor otherwise characterised the economy as solid, with a labor market that is in a “sweet spot.”

Waller acknowledged the new Trump administration’s policies had introduced a degree of uncertainty, but cautioned against allowing that to delay the Fed’s response to economic data.

“We need to act based on incoming data even when facing great uncertainty about the economic landscape,” he said. “Waiting for economic uncertainty to dissipate is a recipe for policy paralysis.”

He also repeated his expectation that tariffs imposed by the administration would “only modestly increase prices and in a non-persistent manner.”

He conceded that their impact on prices could be greater than he anticipates, but added that “other policies under discussion could have positive supply effects and put downward pressure on inflation.”

Source: Theedgemarkets