Important calendar events
The dollar edged slightly higher on Thursday, a shortened trading day for former US President Karter’s funeral. The dollar index rose from 109.1 to 109.2. US treasury yields edged lower, with the 10-year bond yielding 4.68%.
The US trading day was shortened on Thursday due to the National Day of Mourning for former President Jimmy Carter.
The dollar has been gaining strength as the start of President-elect Donald Trump’s presidency is drawing near on expectations that Trump’s fiscal policies and trade tariffs will boost economic growth. On Monday, however, reports that Trump’s tariffs will be more moderate than previously anticipated, drove the dollar down. According to the Washington Post, Trump is considering imposing international tariffs that are only related to sectors deemed critical to national or economic security. Trump, however, later denied these rumors, stating that the claims by the Washington Post were completely false.
The uncertainty surrounding Trump’s proposed tariffs rose even more on Wednesday after CNN reported that the incoming US President is considering declaring a national economic emergency to provide legal justification for the new tariffs. The news agency cited four unidentified sources familiar with the matter. According to the CNN article, the declaration of a national emergency would allow Trump to construct a new tariff program by using the International Economic Emergency Powers Act, known as IEEPA. The dollar gained strength after the release of the CNN article, as Trump’s risky economic plans boosted demand for safe-haven assets.
Trump will take office 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.
On the data front, ADP Non-Farm Employment Change on Wednesday showed that US employment rose by 122K people in December, compared to a 146K increase recorded in November, coming below market expectations of 140K. US jobless claims came in at 201K in the week ending January 4, following a print of 211K the week before, against market expectations of 218 K.
US JOLTS openings released on Tuesday came in above expectations, indicating that the US labor market remains robust and boosting the dollar. The number of job openings rose to 8.09M in November from 7.83M in October, above market expectations of 7.7M. In addition, ISM Services PMI rose to 54.1 in December from 52.1 in November, exceeding market estimates of 53.3. A print above 50.0 indicates that the US Services sector continues to expand.
The Institute for Supply Management (ISM) data released on Tuesday were slightly inconsistent with US Services PMI data reported on Monday by S&P Global. According to the S$P data, Final Services PMI for December came in at 56.8, below expectations of 58.5. US factory orders dropped by 0.4% in November against expectations of a 0.3% drop, but October’s print was revised upward to reflect 0.5% growth.
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 were released on Wednesday and confirmed that Fed policymakers are shifting to a more hawkish policy. Most Fed policymakers voted in favor of a 25 basis point rate cut in December but 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.
Several Fed policymakers delivered speeches on Thursday, reiterating policymakers’ opinions expressed in the FOMC meeting minutes released on Wednesday. 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.
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.
Traders on Friday will focus on the release of Nonfarm Payrolls (NFPs), which are this week’s most highly-anticipated fundamentals and are likely to cause volatility in the dollar. NFPs are expected to drop to 160K in December from 227K in November, which may raise worries that the US labor market is slowing down.
EUR/USD traded sideways with low volatility on Thursday, oscillating around the 1.030 level. If the EUR/USD pair declines, it may find support at 1.022, while resistance may be encountered near 1.045.
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.
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.
German Preliminary CPI data released on Monday also came in above expectations. German CPI rose to 2.6% year-on-year in December from 2.2% in November, exceeding market expectations of 2.4%. Every month, German inflation rose by 0.4% after declining by 0.2% in November. The Eurozone Sentix Investor Confidence Index released on Monday came in at -17.7 in January falling below December’s print of -17.5, indicating that investors’ confidence is declining.
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 on Thursday on heightened concerns about British bond yields. GBP/USD plunged from 1.236 to 1.223 on Thursday, its lowest level since November 2023 but recovered slightly towards the end of the day, rising to 1.230. If the GBP/USD rate goes up, it may encounter resistance at 1.258, while support may be found near 1.218.
UK bond yields rose to their highest level since 1998 on Thursday, raising concerns for the British economy and causing the Sterling to plummet. Long-term gilts on UK government debt spiked on Thursday, amid a global rise in bond yields and concerns over the future of the British economy.
Concerns that global inflation will rise, caused a surge in global bond yields on Thursday. US President-elect Donald Trump’s presidency is drawing near, and Trump’s proposed fiscal policies and trade tariffs may reignite inflationary pressures.
British Construction PMI data released on Tuesday were disappointing, putting pressure on the Sterling. UK Construction PMI came in at 53.3 in December from 55.2 in November against expectations of a 54.3 print. The British Construction sector continues to expand, as evidenced by a print above the threshold of 50.0, but it is expanding at a reduced pace. Similarly, UK Services PMI data released on Monday revealed a drop in the PMI index to 51.1 in December from 51.4 in November.
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.
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.
USD/JPY traded sideways on Thursday, fluctuating around the 158.0 level. If the USD/JPY pair declines, it may find support at 155.9. If the pair climbs, it may find resistance at 158.8.
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, in 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 speech on Monday, Ueda reaffirmed the BOJ’s commitment to continue raising interest rates if Japan’s economy continues to improve. Ueda cautioned, however, that the timeline of the rate hike will depend on economic and inflationary conditions.
Odds of a BOJ rate hike in January are rising, and markets are pricing in a total of 50 basis points worth of rate cuts by the end of March.
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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