The first full trading week of February 2025 brought heightened volatility across global financial markets as investors navigated a mix of monetary policy shifts, labor market updates, and renewed geopolitical tensions.
The U.S. dollar maintained its dominance as interest rate differentials widened, while other major economies struggled with slower growth, prompting rate cuts. Stronger-than-expected Canadian employment data buoyed the loonie, while U.S. tariff threats and equity market corrections added layers of uncertainty.
This weekly market recap delves into last week’s key macroeconomic developments and their implications for the forex market.
Divergence in Global Monetary Policies
At the outset of 2025, a notable divergence in monetary policies emerged among major central banks. The U.S. Federal Reserve maintained its interest rates, buoyed by a robust domestic economy. In contrast, central banks in Europe, Canada, India, and Mexico implemented rate cuts to stimulate their faltering economies.
This divergence led to a strengthening U.S. dollar, as lower interest rates in other regions made their currencies less attractive to investors. Consequently, currencies like the euro, Canadian dollar, and Mexican peso depreciated against the dollar. This depreciation inadvertently benefited foreign exporters by making their goods cheaper in the U.S. market, potentially offsetting the intended effects of U.S. tariffs.
U.S. Labor Market Insights
The U.S. labor market presented mixed signals. January’s payroll data revealed a significant decline in job additions compared to December, coupled with a rise in hourly earnings and a slight decrease in the unemployment rate. Consumer sentiment also dipped unexpectedly.
These indicators suggest potential challenges ahead, including a slowdown in job creation and consumer spending. The mixed data contributed to declines in major U.S. stock indices and heightened market uncertainty.
Canadian Dollar’s Resilience
In contrast to other currencies, the Canadian dollar strengthened against its U.S. counterpart. This appreciation was driven by stronger-than-anticipated domestic employment data. Canada added 76,000 jobs in January, significantly surpassing forecasts, and the unemployment rate fell to 6.6%.
This robust labor market performance tempered expectations for further interest rate cuts by the Bank of Canada, contributing to the loonie’s strength.
U.S.-Japan Foreign Exchange Coordination
Japanese Prime Minister Shigeru Ishiba and U.S. President Donald Trump agreed to delegate foreign exchange matters to their respective finance ministers. This decision underscores a collaborative approach to managing currency issues and reflects a mutual understanding of the importance of stability in the forex markets.
Analysts had speculated that President Trump might criticize the weak yen for making U.S. exports less competitive, but the agreement suggests a more measured approach.
Federal Reserve’s Economic Assessment
The Federal Reserve’s latest Monetary Policy Report to Congress highlighted a robust U.S. economy characterized by a balanced job market and declining inflation. However, the report also cautioned about elevated financial markets relative to fundamentals in sectors such as equity, corporate debt, and real estate.
The Fed emphasized its commitment to achieving 2% inflation and indicated a cautious approach to future interest rate policy changes.
Market Reactions to Tariff Announcements
Global markets reacted sharply to renewed tariff threats from President Trump. Major U.S. stock indices experienced significant declines, and U.S. Treasury yields rose. The dollar strengthened, while cryptocurrencies like Bitcoin and Ethereum saw declines.
Oil and gold prices also increased, reflecting heightened market jitters and a flight to safe-haven assets.
Conclusion
The first week of February 2025 was marked by significant macroeconomic developments, including divergent monetary policies among major economies, mixed signals from the U.S. labor market, and market volatility stemming from renewed tariff threats. These events underscore the complex interplay of factors influencing the forex market and highlight the importance for traders to stay attuned to both economic indicators and geopolitical developments.