Important calendar events
The dollar gained strength early on Monday and the dollar index rose above 110.0, its highest value in over two years, but pared gains later in the day dropping back to 109.5. US treasury yields also increased, with the US 10-year bond yield rising from 4.76% to 4.79%.
The dollar has gained strength on expectations that Trump’s fiscal policies and trade tariffs will boost economic growth. Last week, conflicting reports on US President-elect Donald Trump’s future economic measures caused market turmoil. The uncertainty surrounding Trump’s proposed tariffs has been boosting the dollar, as Trump’s risky economic plans raised the demand for safe-haven assets.
Trump will take office next week on January 20 and his proposed tariffs could ignite trade wars. In addition, Tramp’s plans may reignite inflationary pressures. Concerns that global inflation will rise, triggered a shift towards safe-haven assets this week, boosting the dollar. Global bond yields surged on Thursday on the rising inflation outlook.
Last week’s Nonfarm Payrolls (NFPs) showed that the US economy added 256K jobs in December against 160K anticipated. In addition, November’s print was revised downward to 212K from 227K originally. December’s NFP report was more optimistic than anticipated and showed that the US jobs sector remains robust.
The US Federal Reserve cut interest rates by 25 basis points at its latest meeting to a target range of 4.25% to 4.50%. Fed Chair Jerome Powell delivered a hawkish message after the policy meeting, emphasizing the need to be cautious about further rate cuts. Powell stated that the Fed’s approach will remain data-driven and hinted that the pace of future rate cuts will be slower, as inflation in the US remains above the central bank’s 2% target.
The Fed’s latest dot plot indicated that only two rate cuts will take place in 2025, down from four projected in September. In quantitative terms, policymakers expect to deliver a total of 50 basis points of rate cuts in 2025, which will bring the central bank’s interest rate to 3.9% by the end of 2025, which is significantly higher than the 3.4% estimated in September.
The minutes of the latest FOMC meeting confirmed that Fed policymakers are shifting to a more hawkish policy. Most Fed policymakers were cautious about future rate cuts, stating that it would be appropriate to slow down the pace of easing. This indicates that interest rates might stay at high levels for longer than previously anticipated.
In recent speeches, most policymakers advise caution in moving forward with rate cuts and are in favor of a gradual and slow approach in returning to neutral policy settings. The NFP report released on Friday showed that the US jobs sector remains secure and solidified policymakers’ shift to a more hawkish direction.
US inflation is proving to be sticky despite the Federal Reserve’s efforts to bring it down to its 2.0% target. US Headline inflation rose to 2.7% year-on-year in November from 2.6% in October. Monthly inflation rose by 0.3% in November, the same as in October, which was in line with expectations. Core CPI, which excludes food and energy, rose by 0.3% in November.
Final GDP data for the third quarter of the year showed that the US economy expanded by 3.1% in the third quarter of 2024, up from 2.8% estimated earlier. In addition, the US economy expanded by 3.0% in the second quarter of the year and by 1.4% in the first quarter of the year.
This week is heavy with important US data. Key US economic data releases during the week are likely to cause volatility in the price of the dollar. US inflation data in particular are likely to affect the Fed’s rate outlook and are eagerly awaited by traders. Producer Price Index (PPI) data is due on Tuesday, and more importantly Consumer Price Index (CPI) data on Wednesday will show if inflationary pressures in the US remain high. Wednesday’s inflation report is expected to show that headline inflation rose by 2.9% year-on-year in December from 2.7% in November, indicating that the progress of disinflation is slow. US Retail Sales data on Thursday are indicators of economic health and are also likely to affect the dollar.
EUR/USD plummeted from 1.024 to 1.017 in early trading on Monday, its lowest level since November 2022, driven down by the dollar’s strength. The currency rate pared losses later in the day, rising to 1.025 as the dollar weakened. If the EUR/USD pair declines, it may find support at 1.017, while resistance may be encountered near 1.043.
The ECB lowered its benchmark interest rate by 25 basis points in December, bringing its main refinancing rate to 3.15%. This was the fourth rate cut for the ECB this year, which started its easing cycle in June and has already lowered interest rates by a total of 100 bps. More importantly, ECB President Christine Lagarde hinted at further easing in the coming months as Eurozone inflation nears the central bank’s target while the economy remains weak.
Lagarde’s press conference after the policy meeting was dovish, raising expectations of further rate cuts. The central bank is currently expected to cut interest rates up to five more times next year, to a total of 125bps, until neutral policy settings are reached. Expectations that the ECB will return to a more normalized policy setting sooner than the Fed are putting pressure on the EUR/USD rate. This coming week the minutes of the latest ECB meeting are due on Thursday and may provide some insight into the central bank’s rate outlook.
Eurozone inflation remains above the ECB’s 2% target and may prevent the ECB from cutting interest rates further. Eurozone inflation rose to 2.4% year-on-year in December from 2.2% in November, which was in line with expectations. Every month, Eurozone inflation rose 0.4% in December after dropping 0.3% in November. Core CPI, which excludes food and energy, remained steady at 2.7% in December, matching market expectations. This week, Final CPI and Core CPI data for December are due on Friday. The final data, however, is expected to match last week’s Flash estimates.
Flash GDP data showed that the Eurozone economy expanded by 0.4% in Q3 of 2024, rising from 0.2% in Q2. The Eurozone economy also expanded by 0.3% in the first quarter of 2024. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.
The Sterling plummeted from 1.220 to 1.209 early on Monday, its lowest level since November 2023, but rallied later in the day, rising to 1.222. If the GBP/USD rate goes up, it may encounter resistance at 1.261, while support may be found near 1.209.
Concerns that global inflation will rise have caused a surge in global bond yields. US President-elect Donald Trump’s proposed fiscal policies and trade tariffs may reignite inflationary pressures.
UK borrowing costs rose to their highest level since 1998 on Monday, raising concerns for the British economy and causing the Sterling to plummet. Long-term bonds on UK government debt (gilts) spiked on Thursday, amid a global rise in bond yields and concerns over the future of the British economy. The yield on the 10-year gilt hit 4.9%, the highest since 2008, while the yield on the 30-year UK gilt rose to 5.47% on Monday, its highest level since 1998. Rising borrowing costs pose a big problem for UK Chancellor Rachel Reeves, as she was about to implement her administration’s first budget, in which she has vowed to cut public spending.
UK Treasury Minister Darren Jones attempted to reassure markets last week, stating at the House of Commons that it is normal for treasury yields to fluctuate. In addition, Jones clarified that the government's decision to borrow only for investment was non-negotiable.
The BOE kept interest rates steady at its latest policy meeting, having cut interest rates twice already this year. MPC members voted 6-3 to keep rates on hold, with three members in favor of cutting interest rates.
Bank of England Governor Andrew Bailey has stated that the central bank needs to adopt a gradual approach to future rate cuts. Bailey has also stressed that the BOE’s policy outlook will remain data-driven and refused to commit to a timeline or magnitude of future rate cuts.
Headline inflation in the UK rose to 2.6% year-on-year in November from 2.3% in October. Core annual inflation, which excludes food and energy, climbed to 3.5% in November from 3.2% in October against 3.6% anticipated. This coming week, UK inflation data for December are due on Wednesday and are expected to show that inflationary pressures in the UK remain high.
Final GDP data for the third quarter of the year showed that the British economy is stagnating. Earlier forecasts indicated slight economic growth by 0.1% in the third quarter of 2024, but the British economy is being stifled by high interest rates and cannot expand. GDP data due on Thursday are expected to show that the British economy expanded by 0.2% in November after contracting 0.1% in October.
USD/JPY traded sideways on Monday, oscillating around the 157.5 level, as both the dollar and the Yen benefitted from rising safe-haven demand. If the USD/JPY pair declines, it may find support at 156.2. If the pair climbs, it may find resistance at 159.0.
The USD/JPY rate has been trading precariously close to the key 160.0 level. The last time the Yen dropped to this point, it triggered an intervention by the Japanese government to support the currency, last April and May.
The BOJ maintained its current monetary policy guidelines steady and its interest rate at 0.25% at its latest policy meeting. BOJ policymakers decided to keep rates unchanged in an 8-1 vote split, as one member voted in favor of a 25-bps hike. BOJ Governor Kazuo Ueda stated that Japan’s economic and inflationary outlook remains uncertain and stressed that the central bank’s policy will remain data-driven. In a recent speech, Ueda reaffirmed the BOJ’s commitment to continue raising interest rates if Japan’s economy continues to improve and the BOJ's 2% inflation target is reached. Ueda cautioned, however, that the timeline of the rate hike will depend on economic and inflationary conditions.
Odds of a BOJ rate hike at the next policy meeting in January are rising, but the exact timing of the next BOJ rate hike remains uncertain. Markets are pricing in a 25-basis points rate hike by the end of March, which will raise Japan’s interest rate from 0.25% to 0.50%.
Inflation in Japan is on the rise, raising the odds of future rate hikes and providing support for the Yen. The headline Tokyo CPI inflation rose to 3.0% annually in December, up from 2.6% in November. Headline inflation in Japan rose by 2.7% year-on-year in November from 2.3% in October against expectations of a 2.6% print. In addition, BOJ Core CPI rose to 1.7% year-on-year in November from 1.5% in October against expectations of 1.5%.
Final GDP data for the third quarter of the year showed that Japan’s economy expanded by 0.3%, exceeding initial estimates of 0.2%, but down from 0.7% in the second quarter. The Japanese economy is expanding, after shrinking by 0.5% in the first quarter of the year.
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Written by:
Myrsini Giannouli
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