Risk sentiment remains slightly positive early Monday, despite Japan’s holiday, as the Ukraine-Russia peace talks show progress and markets prepare for a likely hawkish Federal Reserve stance in December. The market’s cautious optimism is also supported by expectations of stronger U.S. economic data this week.
Over the weekend, Boston Federal Reserve President Susan Collins said she’s undecided about supporting another rate cut at the Fed’s next meeting. Her caution reflects the Fed's overall cautious approach, which keeps short-term yields high and reduces expectations for near-term rate cuts, as both growth and inflation risks remain.
Last week, several Federal Open Market Committee (FOMC) members expressed caution about further rate cuts, which increased market uncertainty about the Fed’s next move and weighed on risk assets. The FOMC’s meeting minutes were also somewhat hawkish, making it less likely for the Fed to cut rates soon.
U.S. employment data, despite a slight rise in the Unemployment Rate, didn’t signal significant weakness, reinforcing the view of a hawkish Fed. However, the cancellation of the October jobs report and the delay of November’s release to December 16—after the Fed’s December meeting—raised concerns. This means the Fed may have less data to act on and could pause rate cuts.
As a result, the probability of a December rate cut dropped from 56% to 33%, according to the CME Group's FedWatch Tool.
In the geopolitical arena, news about a potential peace plan for Ukraine and Russia didn’t boost market sentiment. Reports surfaced that President Trump quietly approved a peace plan, and both Putin and Zelenskyy expressed willingness to discuss it. However, major issues, including Ukraine’s long-term security, remain unresolved.
Meanwhile, rising tensions in Venezuela and between China and Japan are causing flight cancellations, with the U.S. increasing its military presence in the region. China’s diplomatic tensions with Japan over Taiwan and maritime issues have also led to more flight cancellations between the two countries.
In other developments, President Trump touted the future economic benefits of his tariffs, claiming that the U.S. will soon experience unprecedented wealth from them.
Japan is signaling a stronger readiness to intervene in the currency market to combat the weakening yen, which may limit further gains in the USD/JPY exchange rate. Japan’s government is concerned about inflationary pressures from the weak yen, and expectations are rising for a potential rate hike from the Bank of Japan due to strong wage demands.
In New Zealand, the majority of the NZIER Shadow Board is recommending a 25-basis-point cut to the Official Cash Rate this week, while Canada and India have resumed trade talks after a two-year freeze, aiming to double trade to $50 billion by 2030.
Against this backdrop, the U.S. Dollar Index (DXY) pauses after an upbeat week, allowing major currencies and commodities to recover some losses, though gold remains under pressure. EUR/USD halted a six-day losing streak, while GBP/USD is on a three-day uptrend. AUD/USD saw a bounce from a multi-month low, but NZD/USD struggles due to dovish expectations for the Reserve Bank of New Zealand. USDCAD’s three-day winning streak paused as crude oil rebounded. Bitcoin and Ethereum also recovered after a four-week downtrend, while the Asia-Pacific market edged higher following Wall Street’s positive close on Friday.
With the U.S. Dollar stabilizing, EURUSD and GBPUSD had the chance to recover from their previous weekly losses, boosted by market optimism. Meanwhile, USDJPY gained ground, reversing the prior day's losses despite Japan's holiday. This is partly due to USD/JPY being a key risk barometer and news about Japan's stimulus plans. However, fears of Japanese intervention to defend the weakening yen and expectations of a potential rate hike by the Bank of Japan are keeping USDJPY buyers cautious.
The market’s cautious optimism helped commodity-linked currencies recover some of their previous losses. AUDUSD managed to hold its rebound from a multi-month low, but NZDUSD continues to struggle, weighed down by expectations of a rate cut from the Reserve Bank of New Zealand. Meanwhile, USDCAD paused its three-day winning streak, affected by news about improving Canada-India relations and a corrective bounce in crude oil, a key export for Canada.
Hopes for a Ukraine-Russia ceasefire, along with the possibility of a U.S. attack on Venezuela, helped Crude Oil halt its three-day losing streak at the month's low. However, concerns about weaker demand due to U.S. tariffs, a potentially hawkish Fed, and increased supply from OPEC+ continue to challenge oil buyers. At the same time, declining U.S. inventories may have contributed to oil's recent bounce.
Gold prices remain under pressure for the third day in a row, falling below a two-month support level due to market optimism and expectations of a hawkish Fed. Meanwhile, cryptocurrencies gained from the market’s consolidation, and the Asia-Pacific market followed Wall Street’s positive performance on Friday, driven by mixed Fed signals and anticipation of key data releases this week.
Monday’s economic calendar will feature the German IFO Sentiment Index, ECB President Lagarde’s speech, the Chicago Fed National Activity Index, and the Dallas Fed Manufacturing Index. With odds shifting towards no FOMC rate change in December, traders will focus on this week’s U.S. Retail Sales, Durable Goods Orders, and Core PCE Price Index for clearer direction.
If the data shows U.S. economic strength, along with mixed Fed signals, the U.S. dollar could rise further, putting downward pressure on risk assets like equities and cryptocurrencies. Gold may trade sideways, but a technical breakdown could attract sellers.
May the trading luck be with you!
