Risk aversion prevails early Tuesday as geopolitical fears surrounding the Middle East join China's woes and doubts about the US Federal Reserve’s (Fed) much-anticipated rate cut in March. Also, the return of full markets and cautious mood ahead of the January FOMC underpin the risk-off mood, which in turn allows the US Dollar to remain firmer despite a light calendar.
Given the US Dollar’s sustained run-up, Gold Price prints the first daily loss in four while crude oil also fails to cheer the supply-crunch fears.
Elsewhere, the sour sentiment and the first US Dollar join downbeat Aussie data to weigh on the AUDUSD while GBPUSD drops to the lowest level in one week amid mixed UK data and economic pessimism ahead of today’s speech from Bank of England (BoE) Governor Andrew Bailey.
With this, the US Dollar Index (DXY) rises to a seven-day high surrounding 103.00 while equities in the Asia-Pacific zone edge lower. Further, the US stock futures also retreated from the multi-day high marked last week and portray a risk-off mood.
Despite the firmer US Dollar and dicey risk profile, the cryptocurrencies remain mildly bid, extending the week-start recovery, amid optimism surrounding spot ETF approvals.
Following are the latest moves of the key assets:
Earlier in the day, the latest UK employment report showed an increase in the Employment Change for December and a softening in the Average Earnings for November. That said, the ILO Unemployment Rate for three months to November remained intact while the Employment Change rose. With this, the GBPUSD initially dropped to the lowest level in a week before licking its wounds near 1.2660.
On a different page, Atlanta Fed President Raphael Bostic spoke during the weekend to the Financial Times (FT) that he believes the interest rates need to remain high until at least the summer, citing the current economic uncertainty in the US. The same challenges the market’s firm belief that the US central bank, namely the Federal Reserve (Fed), will cut the benchmark rates starting from March, which in turn joined the geopolitical tensions in the Middle East and China woes to underpin the US Dollar’s run-up despite the US Holiday.
That being said, Iran's Islamic Revolutionary Guard Corps fired several ballistic missiles near the US Consulate in Iraq. The same spread fears of strong US retaliation and more drama in the West versus the East fights as the Washington and the London battle with the Houthis in the Red Sea. Additionally, the FT came out with the news suggesting that Chinese Communist Party authorities have told some investors not to sell stocks amid the ongoing equity rout in the dragon nation. The news raised skepticism among investors and drove them toward the US Dollar, especially amid the recent bout of hawkish Fed talks.
It should be noted that the latest Reuters Poll suggests China’s GDP for 2024 is likely to improve to 4.6% from 4.5% anticipated earlier. The growth forecast, however, appears softer than the 2023 GDP of 5.2% and the expected figures for Q3 2023 of 5.0%. Also, Bloomberg came out with the news suggesting the latest China-Russia tensions as Beijing-backed banks recently tightened funding to Russia amid more stringent US sanctions on Moscow. The same adds strength to the market’s geopolitical fears and underpins the US Dollar run-up.
Apart from the aforementioned catalysts, downbeat German data flagged economic fears surrounding the Eurozone and weighed on the regional currency Euro even if the European Central Bank (ECB) officials pushed back dovish concerns to defend the EUR. Additionally, a slump in the Bank of Canada business sentiment contrasted with strong business confidence in New Zealand and disappointing Aussie Consumer Sentiment to weigh on the Antipodeans. It should be observed that Japan’s PPI improved and favored the hawkish calls for the Bank of Japan (BoJ) but failed to prod the USDJPY buyers amid a recovery in the benchmark bond yields.
In contrast to the US holiday on Monday, multiple inflation data from Canada, a speech from Fed Governor Waller and the return of the full markets will entertain traders on Tuesday. With this, the riskier assets are likely to witness an additional weakness and the US Dollar may extend the latest run-up. It’s worth noting, however, that the easing geopolitical tensions and Waller’s inability to convince hawks might prod the Greenback. Elsewhere, BoE Governor Bailey is scheduled to testify on the UK economy before the Lords Economic Affairs Committee in London and may try to defend the GBPUSD. However, the latest data aren’t favoring any such optimism and hence the Cable bears may seek dovish clues to tighten their grips.
May the trading luck be with you!