Important calendar events
The dollar continued to decline on Thursday, with the dollar index dropping from 109.1 to 108.9 on disappointing US economic data. US treasury yields dipped, putting pressure on the dollar, with the US 10-year bond yield dropping from 4.66% to 4.62%.
Soft US economic data drove the dollar down on Thursday. US Retail Sales climbed by just 0.4% in December, falling short of expectations of 0.6% growth and following November’s 0.8% rise. Core Retail Sales, which exclude the sales of automobiles, rose 0.4% in December, disappointing expectations of a 0.5% print but surpassing November’s 0.2% growth. In addition, US Unemployment Claims on Thursday rose to 217K for the week ending January 10, exceeding expectations of 210K and following a print of 203K the week before. The Philly Fed Manufacturing Index, however, came in better than expected on Thursday, providing some support for the dollar. The index climbed to 44.3 in January from -16.4 in December, against expectations of a -5.0 print, indicating that the manufacturing sector is expanding.
US inflation data this week came in lower than anticipated, indicating that disinflation in the US is progressing, which may affect the Fed’s rate outlook. After the release of lower-than-expected PPI data on Tuesday, soft Consumer Price Index (CPI) data on Wednesday drove the dollar down. Headline inflation rose by 2.9% year-on-year in December from 2.7% in November, which was in line with expectations. Monthly inflation rose by 0.4% in December against 0.3% in November, as expected. Core CPI, however, which excludes food and energy, rose by just 0.2% in December following a 0.3% rise in November and against expectations of a 0.3% print. Core CPI rose 3.2% year-on-year in December, below estimates for a 3.3% increase and November’s 3.3% gain.
Producer Price Index (PPI) data on Tuesday surprised on the downside, indicating that US inflation is easing, putting pressure on the dollar. PPI rose by 0.2%, in December, falling short of expectations of a 0.4% print and following a rise of 0.4% in November. Core PPI, which excludes food and energy, came in flat against expectations of a 0.2% rise and following a rise of 0.2% in November. PPI climbed 3.3% year-on-year in December, falling below expectations of 3.4% but rising above November's 3.0% print. Core PPI came in at 3.5% annually, falling short of expectations of a 3.8% print but above November’s reading of 3.4%.
The dollar has been gaining 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 turmoil in markets. 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 potentially 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.
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.
EUR/USD traded sideways on Thursday, oscillating around the 1.029 level. If the EUR/USD pair declines, it may find support at 1.017, while resistance may be encountered near 1.035.
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.
On Wednesday, ECB member François Villeroy gave a dovish speech, hinting that interest rates in the EU should come down to 2% by summer as the battle against inflation has been almost won. The minutes of the latest ECB meeting were released on Thursday and confirmed that ECB policymakers are likely to continue lowering interest rates, putting pressure on the Euro. Most ECB members agreed that interest rates should be lowered gradually if the progress of disinflation in the EU meets the central bank’s projections.
On the data front, Eurozone industrial production came in at 0.2% in November same as in October, disappointing expectations of 0.3% growth. Eurozone Industrial Production contracted by 1.9% annually in November falling below October’s contraction by 1.1%.
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 dipped in early trading on Thursday, on disappointing UK GDP data, but gained strength later in the day as the rivalling dollar weakened. GBP/USD dropped from 1.223 to 1.218 but bounced back to 1.223 later. If the GBP/USD rate goes up, it may encounter resistance at 1.250, while support may be found near 1.209.
Monthly GDP data released on Thursday showed that the British economy expanded by just 0.1% in November, disappointing expectations of 0.2% growth and following contraction by 0.1% in October. Final GDP data for the third quarter of the year have previously shown 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.
In addition, Manufacturing and Industrial Production data released on Thursday missed expectations, putting pressure on Sterling. Industrial Manufacturing Production contracted by 0.4% in November against expectations of 0.1% growth. Manufacturing Production contracted by 0.3% in November against a 0.2% drop anticipated.
Inflation data released on Wednesday showed that price pressures in the UK are easing, raising the odds of a BOE rate cut in February and providing support for the Sterling. Headline inflation in the UK rose to 2.5% year-on-year in December, dropping from 2.6% in November, against expectations of a 2.6% print. Core annual inflation, which excludes food and energy, also came in lower than expected, rising by 3.2% annually in December, against a 3.5% reading in November and 3.4% anticipated.
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.
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.
USD/JPY moved in a downtrend on Thursday, dropping from 156.3 to 155.2. If the USD/JPY pair declines, it may find support at 154.4. 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.
Market expectations of a BOJ rate hike next week rose on Wednesday after Ueda commented that wage growth in Japan is progressing satisfactorily, driven by structural labor shortages. A report by Bloomberg hinting that BOJ officials are considering raising interest rates next week boosted the Yen further on Thursday.
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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