Top stories
- As expected, the US Federal Reserve left interest rates on hold at 3.5-3.75% – a decision that brought to an end a run of three consecutive rate cuts. The Fed noted that the US unemployment rate “showed signs of stabilisation” and economic activity had expanded at “a solid pace”. Fed Chair Jay Powell said the Fed was “well positioned”, rates did not appear to be in “significantly restrictive” territory and that “the economy has once again surprised us with its strength, not for the first time”. Powell declined to comment on the Department of Justice investigation into his handling of a renovation of the central bank’s headquarters but defended the importance of bank independence, saying “It’d be hard to restore the credibility of the institution if people lose their faith that you’re making decisions only on the basis of our assessment of what’s best for everyone.” Markets continue to price 45 basis points of cuts in 2026 with most of the easing in the second half of the year, after Powell has stepped down.
- India and the European Union agreed a trade deal that Brussels claimed was the “largest ever” on either side. Tariffs on 96.6% of EU exports to India will be removed, cutting the cost of goods including alcohol, cars and machinery. The EU will cut tariffs on 99.5% of imports from India worth around $75 billion. EU President Ursula von der Leyen, visiting India to seal the agreement, described it as the “mother of all trade deals”. Indian levies of 110% on EU cars will be reduced gradually to 10% while tariffs of up to 44% on machinery, 22% on chemicals and 11% on pharmaceuticals will be mostly eliminated. The EU is India’s largest trading partner, with 11.78% share, valued at $136.5 billon. The figure is expected to grow thanks to the trade deal and US tariffs on India, which reached as high at 50%.
- President Trump threatened a 100% tariff on Canada if it proceeds with what Trump called a ‘trade deal’ with China. Trump accused Canadian Prime Minister Mark Carney of trying to make Canada a “drop off port” for Chinese goods. China and Canada had agreed to a limited deal to remove barriers on certain goods including electric vehicles after Mark Carney’s visit to Beijing, a deal Trump initially encouraged. Trump posted at the weekend “If Canada makes a deal with China, it will immediately be hit with a 100 per cent tariffs against all Canadian goods and products.” In response, Mark Carney noted that under the USMCA trade deal between the US, Canada Mexico, they had committed not to pursue free trade agreements without prior notification and “we have no intention of doing that with China or any other economy”. Canada has agreed to the importation of 49,000 Chinese electric cars with a tariff reduced from 100% to 6.1%.
- President Trump also said tariffs on South Korea would increase from 15% to 25% in response to South Korea’s legislature not yet enacting the trade agreement from last year. The deal included a promise to invest $350 billion in the US.
By the numbers
- 3.4% – UK inflation in December, up from 3.2% previously and ahead of expectations. This was the first acceleration in CPI for five months. The consensus view remains that the disinflationary trend is intact and that this spike was due to the impact of the budget on tobacco prices and the timing of the survey which picked up a jump in airfares relating to pre-Christmas travel. Market expectations for Bank of England policy adjustments were not impacted by the data.
- 5% – China’s level of GDP growth in 2025, meeting the government’s growth target despite the trade war with the US. Fourth quarter growth slowed to 4.5%. For the year as a whole, export growth was similar to 2024 levels, climbing 5.5%, highlighting once again China’s ability to find new export markets to offset a slump in exports to the US.
- 633 million – the size of China’s population by 2100 based on current trends. China registered the lowest number of births in 2025 since records began, marking the fourth consecutive year in a row of population decline. 7.92 million babies were born in 2025, down from 9.54 million in 2024. During the year, 11.34 million people died, leaving the overall population at 1.405 billion. The fertility rate, at 0.98 is well below the 2.1 level for a stable population. China is 17% of the global population, but only 6% of births.
Market movers
The US Dollar softened further this week, with the dollar index touching a four year low – a trend that erased all of the gains seen since the Federal Reserve began hiking interest rates in 2022. In echoes of the decline in the US dollar in the first half of 2025, erratic US policymaking has once again led investors to rethink their exposure to the US, and as a result we are seeing the currency move lower, with other havens, including the Swiss Franc and gold in demand. The Swiss Franc climbed to the highest level against the dollar in over a decade this week, while gold and silver continued their momentum, setting yet more record highs. The dollar was down 9% last year and is already down a further 1.83% so far this year. President Trump insisted the dollar is “doing great”, he was unconcerned by steep falls in recent days and he did not believe the currency had weakened too much, saying he wanted the currency “to just seek its own level, which is the fair thing to do”. Trump’s apparent relaxed view of the weakness of the currency was seen as confirmation no intervention was likely for now; and while a weaker dollar will help US exports become more competitive, imports will become more expensive, and at the margin, will be inflationary. For now, further tariff brinkmanship, uncertainty over the leadership and independence of the Federal Reserve and the sense the US is no longer a reliable ally are combining to make the US dollar a less appealing choice for international investors.
The investment lens
The past few weeks have seen plenty of trade deals announced with a common theme – countries or economic blocs that have significant trade with the US seeking to diversify their exports away from what has become an unreliable trading partner, at least in terms of the predictability of policy and tariffs. The recent trip to China by Mark Carney resulted in a number of agreements, much to the disliking of President Trump. UK Prime Minister Keir Starmer is in Beijing this week, with German Chancellor Friedrich Merz following next month. There is clearly a softening of views among western nations towards China as relationships with the US deteriorate. Meanwhile, the EU trade deal with India comes swiftly on the heels of a deal with four members of the Mercosur trade bloc (Brazil, Argentina, Paraguay and Uruguay) and both agreements are the culmination of many years of negotiations. Swift ratification in the European Parliament is not guaranteed, but would signal that the EU is intent on rapidly diversifying from reliance on the US as a trading partner. The willingness of major economies to deepen trading relationships is a reminder that while globalisation as interpreted by the US may be on the decline, plenty of other economic powers still see the positives from global trade.
