The US Dollar strengthened despite weak US ADP Employment data, as hawkish FOMC Minutes and comments from Treasury Secretary Janet Yellen supported expectations of higher interest rates. The FOMC highlighted inflation risks, and Yellen hinted that rates could rise more than anticipated.
Geopolitical tensions, including Trump’s threats to impose tariffs on China, Canada, and Mexico, as well as challenges to China's role in the Panama Canal, further fueled risk aversion. While these factors boosted the US Dollar, they weighed on major currencies, equities, and crude oil. Gold, however, remained resilient due to market uncertainty and strong demand from China and India.
EURUSD dropped as the firm US Dollar and mixed EU data dampened sentiment. ECB policymaker Piero Cipollone’s resistance to predetermined rate cuts amplified the pair's weakness. Similarly, GBPUSD fell, pressured by declining UK shop prices and soft inflation signals, raising expectations of Bank of England rate cuts.
USDJPY bucked the trend, pressured by rising Japanese wages and a stronger regional economic outlook, fueling concerns about Bank of Japan rate hikes.
While the US Dollar’s strength joined sour sentiment to weigh on the risk-barometer pair AUDUSD, Australian data failed to defend the buyers and drag the quote toward the 27-month low marked late December. That said, Aussie Retail Sales grew less than expected in November, despite increasing from the previous month, while the Trade Balance improved but the details were mixed.
Adding to the pressure, China’s weaker inflation figures weighed heavily on AUDUSD, given China's role as Australia's largest trading partner. China's December CPI posted its slowest rise since April, while the PPI extended its deflationary streak to 27 consecutive months, further dampening sentiment for the Aussie.
NZDUSD mirrored AUDUSD, dropping to its lowest level since October 2022 amid China’s economic concerns and a lack of domestic catalysts.
USDCAD gained for a third day as weaker oil prices, political uncertainty, and the Bank of Canada’s dovish stance supported the pair. Crude Oil saw its largest daily drop in a month, weighed down by China’s slowdown, a stronger US Dollar, and rising supply fears.
Gold managed to hold its recent gains, supported by market uncertainty and demand from China and India, despite early losses after China’s weak inflation data.
On the other hand, Crude Oil marked the biggest daily slump in a month despite witnessing a higher-than-expected draw in the weekly US inventories. In doing so, the black gold justifies firmer US Dollar, China woes and chatters about increased supplies from Russia and OPEC.
Cryptocurrencies ignored heavy ETF inflows and Trump-inspired industry optimism to fall in the last two consecutive days, mildly offered as we write. In doing so, the Bitcoin (BTCUSD) and Ethereum (ETHUSD) also justify the market’s less preference for riskier assets ahead of Friday’s US jobs report, especially after witnessing hawkish FOMC Minutes.
Looking ahead, speeches from five Fed officials could provide market direction, but with a US holiday and a light global calendar, volatility might remain subdued. The US Dollar's strength is likely to persist, keeping pressure on EURUSD, GBPUSD, and Antipodeans, while USDJPY could move lower amid BoJ concerns. Gold may trade sideways, while crude oil remains under pressure. Cryptocurrencies and equities could continue to decline amid rising geopolitical tensions and trade war fears ahead of Trump’s inauguration.
May the trading luck be with you!
