### United States
The US dollar is experiencing minimal changes across the G10 currencies but is slightly weaker overall. Comments from Bank of Japan Governor Ueda have shaken markets, sending the yen to its best level since January 6. In the US, the focus is on consumer prices, with yesterday’s PPI data showing slightly softer results than expected, although components key to the PCE deflator were firm. Equity markets are mostly up, but Asia-Pacific markets were mixed, with China, South Korea, Taiwan, and Australia seeing losses. Europe’s Stoxx 600 is trying to break a three-day losing streak. US index futures arefirming up. European benchmark 10-year yields are seeing a slight drop, with UK Gilts seeing the largest decrease. The 10-year US Treasury yield is softer by a few basis points at 4.77%. Gold is approaching the week’s high set on Monday, nearing $2695, while crude oil’s strong momentum this year has paused after peaking slightly above $79.25.
Market watchers are skeptical that December’s jobs data or recent PPI figures, or even today’s CPI data, will significantly affect the Federal Reserve’s decisions for the year’s second half. Nonetheless, there’s a belief that the economy’s momentum will lead to easing, with 32 basis points of easing already priced in for the year, a decrease from 43 basis points at the previous year’s end. Consumer prices are anticipated to have risen by nearly 0.4% last month, with a year-over-year increase of 2.9%, up from 2.7% in November. Core CPI is expected to climb by 0.2% or 0.3%, maintaining the year-over-year rate at around 3.3%. The Beige Book also releases today, but it might not command much attention given the low probability of a stance change. Adding to this, the confirmation hearings for Trump’s nominee for Treasury Secretary are scheduled, and there are discussions around implementing tariffs immediately but in stages, although it’s unclear how much power will go to the Cabinet versus the White House.
### Eurozone
The Euro showcased resilience by extending Monday’s rally, reaching close to $1.0310 and nearly hitting the 50% retracement mark from the January 6 high. It’s now edging up above $1.0315, with the next target in the $1.0335-50 range. A downside break to $1.0250 could lead to a retest of the $1.02 level. Other notable events include a modest 0.2% rise in November’s industrial output across the Eurozone, with Germany leading the pack as its industrial production surged past expectations with a 1.5% rise. France also reported a positive figure at 0.2%, while Italy’s output grew by 0.3%. Spain, however, lagged with a 0.8% decline. The Bundesbank estimates Germany’s economy shrank by 0.2% last year, following a 0.3% contraction in 2023.
### United Kingdom
Sterling found brief resistance at $1.2250 but remains below critical averages. Options around $1.2275 are expiring soon, but they are less significant compared to yesterday. December’s CPI was softer than expected, with data collection timing potentially skewing the report. The headline rate increased by 0.3%, curbing the year-over-year rate to 2.5%. The core and service sector prices also moderated. Growing expectations of a Bank of England rate cut are now at nearly 90%, and the market anticipates about 52 basis points of cuts this year. The 10-year Gilt yield is consolidating within last Thursday’s range. However, a notable Gilt sale exhibited the lowest bid-cover ratio since September 2023.
### China
The People’s Bank of China has been tightening liquidity in Hong Kong and the mainland to stabilize the yuan, which hovers near its lower band against the US dollar. Approaching the US administration’s inauguration and possible tariff threats, investors are cautious with the yuan. The greenback has stayed within the range it traded against the offshore yuan at the end of last year. Some speculate that China is letting the yuan depreciate within the band to signal potential tariff retaliations against the US, although the broader dollar strength is primarily attributed to US economic conditions rather than Beijing’s intentional devaluation tactics.
### Japan
Recent remarks by Bank of Japan Governor Ueda highlighted the possibility of a rate hike, boosting the yen in forex markets. The dollar fell to around JPY156.70, its lowest since January 6. The market is increasingly anticipating a BOJ rate hike, affecting option levels with $1.8 billion at JPY157 expiring soon.
### Canada
The US dollar is maintaining a lateral movement relative to the Canadian dollar. The sideways action echoes a diminishing US-Canada two-year interest rate premium, shrinking from 137 basis points earlier this month to about 120 basis points. Although Canada is reporting November’s manufacturing and wholesale sales today, these figures seldom move markets. December’s existing home sales report might garner attention, as it’s anticipated to show a decline following several months of growth. Currently, the prospect of a rate cut has been reduced to under 65% from nearly 80% at year-end. The swaps market is pricing in lesser cuts for the year.
### Australia
The Australian dollar saw its rally from recent lows fizzle slightly above $0.6200 but is attempting gains today, testing critical retracement levels. There’s been a failure to close above its 20-day moving average since early November. Tomorrow brings December job data, with yearly job creation figures nearing 394k, indicating robust employment prospects.
### Mexico
Thus far, the dollar has traded within a 3% range against the Mexican peso this year. After peaking recently, it has drifted lower, with today’s trading range between MXN20.50 and MXN20.56. A breach of the MXN20.40-MXN20.45 range might pave the way to recent lows. With impending US tariff threats, the peso remains sensitive to political developments. Meanwhile, Mexico’s president plans to announce initiatives to persuade multinational corporations to pivot from Chinese imports to boosting domestic production.
