Introduction

As the second full week of February 2025 gets underway, global markets remain finely balanced between optimism over potential trade diplomacy and caution due to new tariff threats. Federal Reserve Chair Jerome Powell is set to appear before Congress, where his testimony could reshape monetary policy expectations. Meanwhile, the U.S. inflation report, the UK’s BRC Retail Sales Monitor, and Eurozone employment data will inject fresh volatility into currency markets. Below, we dive into the key themes likely to define trading over the next five days.

1. Powell’s Congressional Testimony: Where Does the Fed Stand?

After a mixed U.S. jobs report last Friday, all eyes turn to Fed Chair Powell’s semi-annual appearance on Capitol Hill. Recent Fed statements have emphasized caution in the face of tariff uncertainties and fluctuating inflation. Investors will look for signs that Powell’s stance has evolved—especially regarding potential rate cuts in 2025.

• Hawkish or Dovish?
  • Hawkish Lean: Powell might highlight solid wage growth and stable jobless rates, indicating limited scope for further cuts. The dollar could rally, and U.S. Treasury yields might edge higher.
  • Dovish Tone: If Powell cites trade frictions and below-target inflation, markets may price in more cuts, pressuring the greenback and lifting equities.

2. U.S. Inflation Under the Microscope

Wednesday’s Consumer Price Index (CPI) release provides a critical checkpoint on the inflation trajectory. Markets expect a month-on-month rise of 0.3% (core at 0.2%), with annualized figures holding around 2.9% for headline and 3.2% for core. Any deviation from these forecasts could dramatically alter sentiment, particularly given the Fed’s inflation concerns.

• Implications for the USD: Higher-than-expected CPI would likely bolster the dollar, convincing traders the Fed might hold off on additional cuts. A softer print could revive bets on more aggressive easing.

3. UK’s Retail Recovery?

The British Retail Consortium’s Retail Sales Monitor, due Tuesday, is predicted to surge to 3.1% from 0.2% previously—suggesting a notable rebound in consumer spending. A strong figure could offer relief to the pound, which has been drifting lower amid global uncertainties and lingering Brexit outcomes. However, sterling’s fate may hinge on additional data or comments from the Bank of England as it navigates external pressures.

• GBP Watch:
  • Positive Surprise: Could push GBP/USD higher, especially if accompanied by upbeat commentary from BoE officials.
  • Letdown: If numbers miss, expect renewed pound selling, especially if risk aversion flares due to new tariff tensions.

4. Eurozone GDP and Employment

On Friday, the Eurozone releases Q4 GDP (0.4% QoQ expected) and Employment Change (1% YoY). Though neither figure typically matches the market-moving force of U.S. data, a meaningful surprise could spark euro volatility—especially if the region’s industrial production or sentiment readings paint a bleaker picture earlier in the week.

• Euro Outlook:
  The single currency has struggled under trade-war concerns and patchy domestic data. A strong print might trigger a short-lived relief rally against the dollar, but persistent global headwinds could limit gains.

5. Tariff Watch: U.S.-China Talks and More

Trade tensions refuse to fade, with President Trump warning of “reciprocal tariffs” on unspecified countries. Meanwhile, China’s retaliatory measures on certain U.S. imports intensify the standoff. Yet markets cling to the possibility that Trump and Xi could hold direct talks soon. Any progress or positive news could reignite risk appetite, lifting trade-sensitive currencies like the Australian and New Zealand dollars.

• Key Indicators:
  • USD/CNH: A sensitive barometer of U.S.-China relations. A slip in this pair might signal improved sentiment, while further gains hint at escalating tensions.
  • Equities: Renewed negotiation hopes would typically buoy stocks, whereas tariff escalations could spark a sell-off.

6. U.S. Retail Sales and Broader Health Check

Capping the week, the U.S. releases retail sales data on Friday. Consensus sits at a 0.4% monthly gain, reflecting steady consumer spending. Given the U.S. economy’s dependence on consumer strength, a robust showing could reinforce the dollar and weigh on Treasuries, especially if Powell’s testimony points to a cautious but not dovish Fed. Disappointment here, coupled with inflation missing forecasts, might push investors to reprice the path of U.S. interest rates more aggressively.

7. Political and Policy Wild Cards

Beyond the scheduled events, traders must remain vigilant for unscripted developments:

• Geopolitical Flashpoints: Any unexpected comments from the White House on tariffs or from Beijing regarding trade retaliation could alter risk sentiment in seconds.
• Central Bank Speeches: Multiple Fed officials, along with ECB President Christine Lagarde, BoE Governor Andrew Bailey, and other policymakers, are scheduled to speak. Watch for shifts in tone that might reinforce or contradict official statements.

Conclusion

This week’s trading environment is a potent mix of economic indicators, trade rhetoric, and policy signals. Markets will zero in on Powell’s Congressional testimony and the U.S. inflation report to gauge whether further Fed easing is on the table. Meanwhile, sterling awaits clarity on UK retail spending, hoping for confirmation that domestic demand is resilient. The euro looks to Friday’s GDP and employment figures for a potential reprieve from trade-induced woes.

Ultimately, the ongoing tariff backdrop adds an element of unpredictability to any well-laid trading plan. A conciliatory gesture between Washington and Beijing could spark a wave of risk-on buying, while new threats from either side could re-energize haven flows into the dollar and yen. For traders, staying attuned to real-time headlines—both economic and geopolitical—remains paramount in navigating what promises to be another eventful week.