Week Ahead: SCOTUS Decision on Tariffs? 8 Fed Officials Speak as the Market Discounts almost 65 bp of Cuts this Year snbchf.com

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Marc Chandler
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Week Ahead: SCOTUS Decision on Tariffs? 8 Fed Officials Speak as the Market Discounts almost 65 bp of Cuts this Year

Last week began with the LDP's stunning victory in Japan. However, rather than sell-off as the market expected, the yen and JGBs rallied. It appears that the yen's use as a levered funding leg for carry trades had already been adjusted. At the start of the week, reports circulated that Chinese officials were encouraging local financial institutions to de-risk from US Treasuries. Yet despite it and the better-than-expected January US employment data, the 10-year Treasury yield fell nearly 15 bp last week, the most in five months. The yield slipped below 4.05% ahead of the weekend the lowest in more than two months. The greenback fell against the G10 currencies last week but consolidation seemed to be the main feature. At the end of the week, the futures market discounted nearly 65 bp of Fed cuts this year, up from almost 56 bp at the end of the previous week. This is to say, the derivatives market is discounting two Fed cuts fully and about a 60% chance of a third.

Although it is not in economic diaries, February 20 is a "decision day" for the US Supreme Court. It is possible that the court delivers its decision about the president's use of emergency powers to levy broad tariffs. Judging from the event markets, most expect the court to rule against the administration. As we have noted some companies reported have sold their tariff refund claims to non-bank financial institutions for 40-50-cents on the dollar. Such a ruling may weigh on US yields, as a couple of rating agencies had cited the tariff revenue as credit positive. Although the House of Representatives approved a measure that would rescind the 25% emergency tariff on Canada over fentanyl, it seems largely symbolic. Even if it is approved by the Senate, the president will veto it.

Drivers: The market remains sensitive to any confirmation of the so-called debasement trade. News that Chinese officials are encouraging de-risking from US Treasuries hit the dollar hard. However, the unexpected strength in the January employment data helped steady the greenback. Still, after the CPI figures, the futures market is fully discounting two rate cuts this year and little more than a 50% chance of a third. The odds of a June cut, possibly the first that Warsh chairs, have eased to almost 85% from around 97% at the end of last week. Eight Fed officials speak this week but the market seems to be more aggressive than most.

Data: It is a packed week for US data and is squeezed into four sessions due to Monday's holiday. The highlights include what will likely soft January retail sales after the large drop in vehicle sales, an increase in manufacturing output despite the continued loss of jobs, and the first estimate of Q4 data. The Atlanta Fed's GDP tracker is 3.7% growth, while the median forecast in Bloomberg's survey is for 2.8%. Lastly, the December core PCE deflator is expected to have risen to 2.9% at the headline level from 2.8% in November.

Prices: At last week's lows, the Dollar Index retraced (61.8%) of its rally off the late January low. After the midweek low, DXY remained confined to Wednesday's range (~96.50-97.25). The 96.20-40 area may cap the upside. The momentum indicators are mixed, perhaps warning of continued consolidation in the coming days.

EMU

Drivers: US considerations seem to be the key force in moving the exchange rate. European developments seem scarce and steady. The ECB is widely seen on a protracted hold. There is a small bias in the swaps market toward a cut, but the odds no more than around 15% through H1. The correlation changes in the exchange rate and interest rates (US two-year yield, German two-year yield, and the differential) are hovering near zero.

Data: With the eurozone estimate initial estimate of 0.3% quarter-over-quarter growth in Q4 25, matching the Q3 pace, the remaining December data, which this week includes industrial output, the current account and construction output is of passing interest. Germany's ZEW February survey is due February 17, but it rarely has much market impact. That leaves the highlight of the week, the flash February PMI on Friday. As of January, the manufacturing PMI was still below the 50 boom/bust level, while the service PMI was at 51.6. The composite has been above 50 since the end of 2024.

Prices: The euro rose to start the week but remained within mostly Monday's range (~$1.1810-$1.1925) for rest of the week. The 20-day moving average is around $1.1840, and the euro has not closed below it in nearly a month. The euro's bounce stalled near the halfway point of the losses from the January 27 high (~$1.2080) and the February 6 low ($1.1765). The momentum indicators are mixed and not particularly helpful now.

China

Drivers: Chinese officials continue to sanction a gradual appreciation of the RMB. Beginning last May, the daily reference rate rose in only month (September). Last week was the 12th consecutive week the fix has been lowered. In fact, a week in late November is the only week that the fix has risen since the end of September. This seems to be more a signal that some estimate that the state-owned banks are intervening on behalf of the PBOC.

Data: Chinese markets are closed from February 16 through February 23 for the Lunar New Year.

Prices: With no onshore yuan trading next week and near is best levels in several years, the market may be reluctant to push the offshore yuan far from where it was trading when the onshore market closed (~CNH6.9065). The dollar's range last week was roughly CNH6.8910-CNH6.9330.

Japan

Drivers: The market was positioned for an LDP victory in the February 8 election. The outcome was anticipated to be good for Japanese equities and negative for JGBs and the yen. While the equity call was correct, the JGBs and yen were bought not sold. It turned out that lower yields did not prevent yen strength. Market positioning seems to be a more important driver of the exchange rate than interest rates presently. The rolling 30-day correlation between changes in the dollar-yen exchange rate and the Dollar Index bottomed last month near 0.50 and reached 0.80 last week, the highest since last October. It is now a little below 0.75.

Data: The busy week for Japanese economic data kicks off with the first look at Q4 25 GDP early Monday. The world's third-largest economy is expected to have grown by around 0.5% in the quarter after it contracted by 0.6% in Q3. Consumption seems to have remained soft but business spending likely expanded and net exports may have contributed in a small way after it shaved 0.2% off Q3 GDP. The January trade balance is due, and it has deteriorated without fail at the start of the year. It recorded a surplus of JPY113.5 bln in December. At the end of the week, Japan's January CPI will be reported shortly before the preliminary February PMI. We already know from the Tokyo figures released in late January that moderating food and energy prices will likely drag the headline rate below 2.0% for the first time since March 2022. The market typically has a muted response to the PMI series, but for the record, Japan 's January composite PMI of 53.1.

Prices: In what appears to be a classic "sell the rumor buy the fact" type of activity, the yen defied expectations after Takaichi led the LDP to a historic victory and rallied. In fact, last week's approximately 2.8% advance was the yen's biggest weekly rally since November 2024. The dollar found support near JPY152.25, a little above last month's low (~JPY152.10). The momentum indicators warn of the risk of further dollar losses, but we are less convinced. A break could signal a move toward the JPY150.80 area, which hosts the (61.8%) retracement of the dollar's rally from last September 17, when the Fed delivered its first of three rate hikes in 2025, and the 200-day moving average, which the dollar has not settled below since October 3. A move above JPY154.50 may be an early indication that a low is in place.

Drivers: The immediate risk that UK Prime Minister Starmer is forced out has receded, and that appears to have taken some pressure off sterling, as an idiosyncratic factor. The dollar seems to be driving the exchange rate. The 30-day rolling correlation between changes in sterling and the Dollar Index is around -0.80. This year's range has been about -0.70 to -0.85. The 30-day correlation of changes in sterling and the UK's two-year yield is near 0.20, and correlation with the US two-year yield is only slightly lower.

Data: The three most market significant economic reports are due this week: jobs, CPI, and retail sales. Government finances (January budget) and the preliminary February PMI also will be released. The dovish hold by the Bank of England on February 5 saw the market boost the odds of a hike at the next meeting (March) to a little more than 70% from about 20% before the meeting. Any weakness in price prices and/or activity will likely lift the chances.

Prices: After jumping from about $1.35 to $1.37 in two sessions (February 6 and February 9), sterling traded mostly sideways. It had the dubious honor of being the worst G10 currency last week, rising by about 0.20% against the dollar and falling by about 0.25% against the euro. It briefly traded at a four-day low ahead of the weekend, a little below $1.3600. A close below $1.3600 weakens the technical tone, while it may take a move above $1.3730 to indicate an upside break.

Canada

Drivers: The rolling 30-day correlation of change in the Dollar Index and in the US dollar against the US dollar has approached 0.85, the highest since June 2024. The inverse correlation of the exchange rate changes and Canada's two-year yield is about -0.42. Last March, it recorded 2025 extreme near -0.65. It reached almost +0.40 in early October 2025. The 30-day correlation of changes in the exchange rate and the US two-year note is near zero. It has not been above about 0.20 since last October.

Data: Canada saw the foreign appetite for its stocks and bonds wane last year as the merchandise trade deficit grew three-fold. The December updates are due this week. Though November, the merchandise trade deficit stood at C$30.6 bln compared with C$8.9 bln in the first 11 months of 2024. Foreign portfolio net inflows were about C$121 bln in the January-November period, down from C$179 bln in the comparable 2024 period. Canada also reports December retail sales, coming after a 1.3% surge in November (1.7%) excluding autos sales. The January CPI is on tap, as well. Headline inflation finished last year at 2.4%, with the core at 2.5%. Bank of Canada Governor Macklem has suggested that the underlying core measures (median and trimmed mean at 2.5% and 2.7%, respectively) may be exaggerated. The Bank of Canada is widely understood to be on hold, and the bar to another cut seem high.

Prices: The US dollar recorded a bullish outside up day in the middle of last week as it recovered from a test on CAD1.3500. Follow-through buying lifted it to almost CAD1.3640 ahead of the weekend. This largely met the (61.8%) retracement objective of the decline from February 6 high (~CAD1.3725) to the midweek low. The 20-day moving average is near CAD1.3660, and the greenback has not settled above it since January 21. A move above it could signal a return to the CAD1.3750 area.

Australia

Drivers: The bull case for the Australian dollar is predicated on the prospects of tighter monetary policy, as a G10 proxy for China, and its exposure to commodities, especially the metals. The rolling 30-day correlation with changes in gold is near 0.80, the highest in two years. It is around 0.48 with copper. It peaked last June twice as much. The inverse correlation with the Dollar Index is around -0.70, the most extreme since last October. The correlation of changes in the Aussie and Australia's two-year yield is a little below 0.25. It has not been above 0.40 for nearly three years. The correlation with changes in the two-year US yield is a little above 0.40. Except for a brief period last month, the counter-intuitive positive correlation has been the case since the middle of last October. Last year, it was inverted in January and February and was positively correlated between March and late May, when it became inverted until early Q4.

Data: The minutes from the recent meeting at which the central bank lifted the target rate by 25 bp, will be reported early Tuesday, followed by Q4 wage data the following day. On Thursday, the January employment data will be reported. In 2025, Australia's full-time positions increased by an average 8.3k a month. In 2024, the average was about 22.3k a month. The unemployment rate stood at 4.1% in December 2025 and 4.0% in December 2024. The participation rate eased to 66.7% at the end of 2025 from 67.1% at the end of 2024. Lastly, at the end of the week, the flash February PMI will be released. Recall that in January, the composite PMI jumped to 55.7 from 51.0, the highest since April 2022, with new orders and employment rising. Separately, the Reserve Bank of New Zealand meets early on February 18. Its easing cycle is over, and the swaps market has a hike fully discounted by the end of October.

Prices: The Australian dollar peaked on February 12 slightly shy of $0.7150, a three-year high. Profit-taking kicked in and the Aussie fell to about $0.7045 before the weekend. The momentum indicators are mixed. Chart support is seen in the $0.7000-20 area. It would seem that much of the good news has been discounted in the Aussie's nearly 6% rally in the first half of Q1. The four-week rally in tow is the longest since June-July 2024.

Mexico

Drivers: The dollar remains stuck it its trough against the Mexican peso. It is generally true for many Latam currencies, including the Brazilian real, and the Colombian and Chilean pesos. Two shared characteristics stand out: relatively high rates and commodity exposure. The Mexican peso may also benefit from mostly global liquidity (admittedly it is not evenly distributed) and relatively low volatility. Over the past 30 sessions, changes in the US dollar against the peso are more inversely correlated with the JP Morgan Emerging Market Currency Index than the MSCI Emerging Market Currency Index (~-0.80 vs. -0.38). To dollar-based investors, between the yield pickup and the peso's gains, the return so far this year is about 5.7%. It is 4.7% for euro-based investors and 3.3% for yen-based investors.

Data: There are two notable reports in the coming days, and both are due in the second half of the coming week. On Thursday, the record from the recent Banxico meeting that seemed to confirm an extended pause in policy will be reported. On Friday, December retail sales will be announced. In November, they rose by an unexpectedly sharp 1.0%. That helped lift the average gain in the first 11 months of 2025 to 0.4%, compared with a 0.1% decline in the January-November 2024 period.

Prices: The dollar remained stuck in its trough against the Mexican peso last week. It traded in a range of about MXN17.1265 to MXN17.2820. The high was recorded ahead of the weekend. Given the strength of the yen and the resilience of the peso, it appears that the long peso/short yen carry trades were already adjusted. President Trump reportedly indicated he is considering ending the USMCA, which he negotiated in his first term and had said it was the best trade deal ever. The market hardly reacted as it looked more like a negotiating ploy. Continued consolidative trading, even if choppy, seems to be the most likely near-term scenario.

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About Marc Chandler

He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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