The market remains uncertain as traders await the U.S. January employment report, with weak expectations. Along with potentially disappointing job data, Tuesday's downbeat Retail Sales, mixed Federal Reserve (Fed) signals, and concerns about President Donald Trump’s trade tariffs are putting pressure on the U.S. Dollar’s recovery.
In the U.S., a procedural vote in the House of Representatives failed, dealing a blow to Speaker Mike Johnson and possibly reopening efforts to unwind tariffs from Trump’s presidency. The vote blocked a rule that would have kept tariff rollback bills from reaching the House floor. However, any major policy shift still needs broader legislative support.
On the trade front, the White House updated its factsheet on U.S.-India trade discussions, removing references to agricultural tariff cuts, particularly on pulses like lentils and chickpeas, which are politically sensitive in India.
Regarding economic data, U.S. December retail sales were flat at 0.0%, missing the expected +0.4%. November business inventories grew by 0.1%, below the expected +0.2%. Import prices rose by 0.1%, in line with expectations, while the U.S. employment cost index for Q4 rose by 0.7%, slightly below the expected 0.8%. The Atlanta Fed’s GDPNow tracker for Q4 was revised down to 3.7% from 4.2%.
Fed regional presidents Beth Hammack and Lorie Logan adopted a hawkish stance on Tuesday, signaling that the Fed isn’t rushing to cut rates further. Fed’s Logan said no further rate cuts are necessary if inflation falls and the labor market remains stable, while Hammack highlighted that inflation is still too high, and trade tariffs continue to be an issue.
From China, January inflation showed a smaller-than-expected rise in the Consumer Price Index (CPI), while producer price deflation continued. The People’s Bank of China set the USD/CNY reference rate at its strongest level since May 2023. After the release, the yuan weakened slightly but then recovered, showing managed stability instead of significant weakness.
Elsewhere, hawkish comments from the European Central Bank (ECB) officials joined the softer USD and allowed the EURUSD to edge higher.
It was a holiday in Japan, so there was no trading in stocks or bonds, but the yen strengthened, maybe due to fading fears of a fiscal crisis in Japan and the ongoing difference between the Bank of Japan (BoJ) tightening and the Fed easing.
The Australian Dollar (AUD) rose to a three-year high above 0.7125 against the U.S. Dollar, marking its first time above 0.71 since early 2023. This strength came after Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser stated that inflation remains too high. The RBA raised its cash rate to 3.85%, and markets are pricing in a 70% chance of another hike to 4.10% in May. That said, Australia's housing finance jumped in Q4, adding some support to the “higher for longer” outlook for Australian rates. However, this data alone isn’t likely to trigger big moves. AUD and short-term yields will likely remain sensitive to surprises in inflation and the labor market.
A private inventory survey showed a much larger-than-expected build in crude oil stocks. The API (American Petroleum Institute) data caused a pullback in WTI (West Texas Intermediate) crude oil prices, which then rose again on Wednesday. That said, buzz that the U.S. is weighing options to seize tankers carrying Iranian oil seemed to have favored the black gold of late.
While the U.S. Dollar Index (DXY) struggles to defend the previous day’s gains, EURUSD and GBPUSD edge higher, whereas the USDJPY posts a three-day downtrend and hits the lowest level in more than a week. Meanwhile, AUDUSD hits a three-year high before easing a bit, while NZDUSD renews its weekly top and stays mildly positive as we write. That said, USDCAD drops for the fourth consecutive day and benefits from firmer crude oil, Canada’s key export, whereas prices of gold and silver also reverse the previous day’s pullback. Additionally, cryptocurrencies drift lower, and the Asia-Pacific shares also trade mixed while tracing Tuesday’s performance of the Wall Street benchmarks.
The EURUSD pair has multiple factors supporting its strength, including the likely downbeat U.S. employment report, hawkish statements from European Central Bank (ECB) officials, concerns over Fed independence, and Trump’s tariffs. However, today's U.S. data could surprise the markets with stronger outcomes.
ECB Vice President Luis de Guindos dismissed the recent surge in the EURUSD exchange rate, calling it "not dramatic at all." This is in contrast to his comments last year, when he said a rise above 1.20 would be problematic. Regarding monetary policy, the ECB policymaker repeated the usual stance, stating that the ECB is in a "good place" with interest rates and inflation.
The U.S. Dollar's retreat and stronger UK retail sales allowed GBP/USD to recover from the previous day's losses, though it still lacks strong upside momentum.
Meanwhile, USDJPY is unaffected by Japan's holiday, buoyed by optimism following the Prime Minister's big win in snap elections and a hawkish Bank of Japan (BoJ) stance. The Yen pair benefits from a weaker U.S. Dollar and overlooks concerns about potential stimulus.
AUDUSD surged to a fresh three-year high, driven by hawkish comments from Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser and cautious market optimism. The Aussie pair overlooked the weak performance of China's Producer Price Index (PPI) and focused more on a softer U.S. Dollar and stronger China’s Consumer Price Index (CPI).
Meanwhile, NZDUSD followed the Aussie’s lead with mild gains. USDCAD dropped for the fourth consecutive day, hitting its lowest in over a week, supported by optimism around Canada and a rise in crude oil prices due to supply concerns, especially with fears of escalating U.S.-Iran tensions.
Despite Tuesday's pullback, buyers of gold, silver, and crude oil remain in control, pushing these commodities higher early Wednesday. The market is optimistic that weaker U.S. job numbers could strengthen the case for Fed rate cuts. Additionally, uncertainty around trade and geopolitics, along with China’s commodity buying, is also supporting the bullish trend.
Bitcoin (BTC) and Ethereum (ETH) both hit fresh weekly lows as investor interest wanes, driven by uncertainty over upcoming risk events. The U.S. Dollar’s resistance to significant decline also puts pressure on these assets. Despite dovish expectations from the Fed, Wall Street didn’t react positively.
In the stock market, Marriott was a notable performer, with strong results in the luxury segment. CEO Anthony Capuano pointed out a “K-shaped” recovery in consumer spending, with continued solid demand in the premium market throughout the year.
The U.S. monthly employment report for January and Federal Reserve (Fed) discussions will be key drivers to watch for market direction on Wednesday, along with Trump’s response to new challenges to his trade tariffs.
The U.S. non-farm payrolls report is expected to show job growth of 70K, along with a significant downward revision for the year through April 2025.
Concerns about weaker U.S. employment data for January and a potential downward revision to 2025 projections could put downside pressure on the U.S. Dollar (USD), especially if the figures match expectations. Additionally, the market's cautious optimism and ongoing discussions about the Fed’s independence could also weigh on the Greenback.
With the expected USD weakness, gold and silver could continue their recent recoveries, while EURUSD may need confirmation from the U.S. data to hold its gains. Equities and crude oil might see modest gains, but cryptocurrencies may struggle to rebound.
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