FED: Powell Says Possibility of Recession Has Risen, But Not High

• Tuesday’s January CPI report is the sole CPI release since the Jan 29 decision. The market currently sees marginally less than 50/50 odds of another 25bp cut on Mar 12, slightly leaning in favour of a pause, although US tariff deliberations are likely a more important factor.
• The initial 25% tariffs on all Canadian products except for 10% on energy products saw a 30-day postponement until Mar 4 after Canada agreed to bolster border security, whilst 25% tariffs specifically on steel & aluminium is currently set for Mar 10.
• With downside risks to Canadian growth, GDP data for Q4 and the January advance on Feb 28 should be watched increasingly closely after recent signs of prior monetary policy easing boosting activity.
• With those points in mind, Bloomberg consensus currently sees headline CPI inching a tenth higher to 1.9% Y/Y along with one tenth increases for both median and trim to 2.5% and 2.6% Y/Y respectively (BoC target range 1-3%).
• Remember that Senior Dep Gov Rogers downplayed the strength seen in CPI-trim at last month’s BoC press conference, saying the way it’s calculated has led them not to put much weight on it at this point in time.
• That leaves only one of its three 'new' core measures actively watched, CPI-median, having abandoned CPI-common earlier in the cycle. All else equal, we imagine this will start to see greater market focus on the more traditional core metrics such as CPIxFE and CPIX.
• Headline CPI will continue to be impacted by the two-month GST/HST holiday that began in mid-December, but median, trim and CPIX all account for indirect price changes.  
• Our crude “underlying” inflation measure – an unweighted average of median, trim, CPIX and CPIxFE, stood at 3.1% annualized in the three months to December for its first time above the target range since Dec 2023 (and despite CPIxFE biased lower by the tax holiday). However, the six-month run rate held at a more acceptable 2.4% annualized. 

Chart of recent trends: 

• RES 4: 1.2811 High Dec 6 
• RES 3: 1.2767 50.0% retracement of the Sep 26 ‘24 - Jan 13 bear leg 
• RES 2: 1.2667 High Dec 19
• RES 1: 1.2630 High Feb 14
• PRICE: 1.2600 @ 15:42 GMT Feb 17
• SUP 1: 1.2449 20-day EMA     
• SUP 2: 1.2333/2249 Low Feb 11 / 3 and a key short-term support
• SUP 3: 1.2161 Low Jan 17 / 20
• SUP 4: 1.2100 Low Jan 10 and the bear trigger   

A bull cycle in GBPUSD remains in play and last week’s climb strengthens the short-term bullish condition. Recent gains have resulted in a move above both the 20- and 50-day EMAs, and a breach of resistance at 1.2550, the Feb 5 high. Furthermore, 1.2610, 38.2% of the Sep 26 ‘24 - Jan 13 bear leg, has been pierced. A continuation higher would open 1.2767, the 50.0% retracement. Initial firm support to watch lies at 1.2333, the Feb 11 low.

• The USD index has spent Monday consolidating its most recent decline near two-month lows. The Japanese yen continues to be the best performing G10 currency on Monday, slowly grinding higher in a subdued session owing to the US President’s Day holiday. As such, USDJPY has declined 0.60%, and sits 100 pips off the overnight highs at 151.40. Price action has steadily narrowed the gap to key support and the bear trigger, which remains unchanged at 150.93, the Feb 7 low. Clearance of this level would resume the bear cycle that started on Jan 10.
• In similar vein, EURJPY’s technical resistance at the 50-day EMA has remained intact, and losses in 2025 now total 2.5% in 2025. Renewed weakness would refocus attention on 155.61, the Feb 10 low and bear trigger. Below here, the August and September lows from last year also mark important medium-term parameters, at 154.41 and 155.15 respectively.
• A bull cycle remains in play for GBPUSD, and spot looks set to close at its highest level for two months, above the 1.2600 handle. Recent gains have resulted in a move above both the 20- and 50-day EMAs, and a continuation higher would open 1.2767, the 50.0% of the Sep 26 ‘24 - Jan 13 bear leg retracement.
• Last week, we noted AUDUSD’s first close back above the 50-day EMA since October last year. Since then, the pair has extended higher, eroding the FOMC-induced decline on Dec 18, and now reaching a fresh 2-month high at 0.6374. Above here, 0.6384 (Dec 13 high) and 0.6429 (Dec 12 high) remain the most notable short-term targets for the move. A stronger rally would open 0.6471, the Dec 9 high.
• Developments are significant given the RBA is expected to cautiously ease policy overnight and lower the cash rate by 25bps to 4.10%. Elsewhere, UK labour market and German ZEW data re due, before Canada CPI highlights the North American docket.