The US Federal Reserve is expected to hold rates steady at its January meeting today, maintaining a range of 4.25%-4.50%. This would mark the first pause since the Fed began easing in September 2024, having already delivered 100bps in cuts last year. Policymakers are likely to assess how President Trump’s policies compare to his campaign promises, particularly regarding inflation risks. Additionally, strong December labour market data also support the case for a pause today. Finally, US Treasury yields have risen sharply in recent months, tightening financial conditions and curbing economic activity without any Fed action. Looking ahead, Fed funds futures point to market expectations for two more 25bp cuts this year, but there is some risk that Chairman Powell’s forward guidance could be more dovish than the market’s positioning given recent progress in the disinflationary process.

This will have a bearing on the SARB’s deliberations. The market still anticipates that the SARB will cut 25bp tomorrow, but the economy is starting to look up, with some green shoots evident in the data that might provide the SARB with some flexibility. The SARB’s leading indicator, which includes economic variables that tend to move before changes in the overall economy, inched up 0.6% m/m to 114.7 points in November, marking the third consecutive monthly increase and the highest level since November 2022. One might argue that soft inflation justifies rate cuts to ease pressure on households and businesses. However, marginally lower interest rates alone will not drive significant GDP growth. Meaningful economic expansion will depend largely on policy reforms that empower the private sector to play a greater role in shaping the economy.

ZAR Markets

The ZAR recovered some ground after Monday’s selloff as the dust settled around the US tech stock rout and broader market sentiment stabilised. The bulls thus regained some tentative control of the market after the USD-ZAR ran into technical resistance at the 61.8% Fibonacci retracement level of its Jan 13-24 decline. However, although the ZAR is still trading on the front foot this morning, it has a consolidatory tilt to it. Short-term direction will be determined by the US Federal Reserve’s policy update and forward guidance today, as well as tomorrow’s ECB and SARB decisions. In the background, the market may also be cheering the DA’s public commitment to the GNU yesterday, which would have allayed some concerns about ongoing disputes within the ruling coalition.

Global FX Markets
The U.S. dollar’s recent price action suggests a potential base formation on the daily chart. After dropping to its lowest level since mid-December (106.960) on Monday, the USD index rebounded yesterday as the Federal Reserve meeting commenced. Monday’s candlestick formed a doji pattern with a long tail, indicating indecision but also a rejection of further downside. While 14-day momentum remains negative, a recovery toward the 109.420 January 17 high is possible. All eyes will be on the Fed decision later today. The single currency has consolidated above EUR/USD1.0420 this morning with a tight trading range the order of the Asian session. Only second tier Eurozone data is due for release today leaving the market to focus squarely on the Fed later today, and then the ECB tomorrow where a 25 bp cut is expected. Sterling has settled this morning following yesterday’s losses with GB/USD1.24230 providing the floor for the Asian session. British finance minister Rachel Reeves is expected to reinforce her determination to push ahead with plans to boost the sluggish economy, especially after a recent bond market slump. Before July’s election, she and Prime Minister Keir Starmer pledged to make Britain the fastest-growing G7 economy. However, since Labour took power, economic momentum has slowed, with many employers criticizing Reeves’ first budget for increasing business taxes. The USD/JPY took a bid tone initially yesterday, but this faded as the session wore on. The market focused on comments by former BOJ board member Makoto Sakurai. He stated that he believed that the BOJ is expected to raise interest rates again around June or July and aims to increase its policy rate to at least 1.5% within the next two years. This underpinned the currency during what can only be termed a difficult trading session once again.
Further commentary, techs and market levels including the cost of forward cover matrix available in the full report.