Financial markets showed modest gains early Wednesday, continuing Tuesday’s recovery, as traders focus on a busy economic calendar with expectations of a dovish Federal Reserve (Fed).
On Tuesday, the market largely ignored mixed geopolitical news and light economic data. The reason could be linked to a pullback in the bond yields, especially at the shorter end, while overall market activity remained volatile.
The Fed is in a quiet period before its December 10 meeting, with the market pricing in an 88% chance of a 25 basis points (bps) rate cut, versus nearly 40% mid-November, keeping the traders hopeful and weighing on the U.S. Dollar.
In geopolitical news, U.S. envoy Steve Witkoff, along with Jared Kushner, met Russian President Vladimir Putin to discuss a potential peace plan for the Ukraine-Russia conflict. Putin described the talks as productive, although tensions remain high. Ukraine’s President Zelenskyy voiced concerns about Russia’s aim to push the U.S. out of involvement in the war. President Trump, during a cabinet meeting, called the Ukraine situation “a mess.”
President Trump hinted at his choice for the next Fed Chair, with National Economic Advisor Kevin Hassett seen as a strong candidate. Trump canceled interviews with other candidates, signaling a decision may have already been made. However, the White House maintained that no official announcement has been made.
Meanwhile, the Japanese Government Bond (JGB) market saw mixed signals. 30-year JGB yields stalled near an all-time high, while 10-year yields retreated slightly, allowing risk-averse traders a breather after rising yields triggered risk-off sentiment.
Global data showed mixed results: Japan’s services PMI showed slight expansion, while inflation concerns rose due to higher input costs.
In economic news, Australia’s GDP growth slowed to 0.4% quarter-on-quarter in Q3, below expectations. However, the Australian Dollar (AUD) quickly rebounded, helped by inflation data and hawkish remarks from Reserve Bank of Australia (RBA) Governor Michele Bullock. Chinese data also showed weakness, raising expectations for potential stimulus focused on consumer spending.
The U.S. Dollar Index (DXY) remained under pressure, allowing major currencies like the Euro (EUR) and British Pound (GBP) to strengthen. The Australian Dollar (AUD) and New Zealand Dollar (NZD) also saw gains. Gold reversed its pullback, reaching a six-week high, while Bitcoin (BTC) and Ethereum (ETH) also posted gains. Despite mixed performances across Asia-Pacific markets, the Nikkei posted a notable rise.
Geopolitical and economic developments, particularly surrounding Ukraine and expectations for the Fed’s policy moves, continue to shape market sentiment, with cautious optimism prevailing globally.
The softer U.S. Dollar has helped the EURUSD pair remain firm, despite weaker-than-expected Eurozone inflation data and mixed comments from ECB policymaker Martins Kazaks. Both the EU HICP (Harmonized Index of Consumer Prices) and CPI (Consumer Price Index) for November were softer than anticipated. Kazaks remarked that a negative economic shock would increase the likelihood of a rate cut, while a positive shock wouldn't justify a rate hike.
Meanwhile, USDJPY reversed the previous day's gains, driven by a risk-on mood and a pullback in Japanese government bond yields. Traders have shifted their focus back to the softer U.S. Dollar and the growing divergence in monetary policy between the Federal Reserve (Fed) and the Bank of Japan (BoJ).
GBPUSD ended its three-day losing streak, bouncing off a one-week low, driven by a broad risk-on sentiment and mixed updates from the UK's Financial Stability Review (FSR). However, the latest gains for the pair are primarily linked to the weakness of the U.S. Dollar, as multiple negative factors continue to weigh on the UK economy. These include concerns over the British Budget, disappointing employment, activity, and sentiment data, and growing expectations that the Bank of England (BoE) may be forced to cut rates. Additionally, a cautious mood prevails ahead of today’s UK and U.S. PMI reports, as well as the U.S. ADP Employment Change and trade data, which could challenge GBPUSD bulls despite the softer U.S. Dollar.
AUDUSD and NZDUSD both hit five-week highs, supported by a softer U.S. Dollar and market optimism, along with a hawkish bias towards the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ). However, mixed data from Australia has tested AUDUSD buyers, while NZDUSD remains more neutral. Meanwhile, USDCAD is seeing volatile price action after a downbeat session, largely ignoring sluggish crude oil prices.
Gold has regained some ground, reversing the previous day's losses, as a softer U.S. Dollar and cautious market sentiment provide support. Mixed geopolitical news also adds to the upward pressure, while a cautious mood ahead of key U.S. data today further boosts the safe-haven appeal of gold.
On the other hand, crude oil remains subdued after a significant drop, driven by concerns that a potential Ukraine-Russia peace deal could lead to a surge in Russian oil production, putting downward pressure on prices amid lower demand and higher OPEC+ supply.
Bitcoin (BTC) reached a two-week high, while Ethereum (ETH) extended its previous day's recovery, driven by a softer U.S. Dollar and a broader risk-on mood. Hopes for a potential Fed rate cut also fueled optimism in the cryptocurrency market.
Meanwhile, U.S. stock indices closed mostly higher, with the NASDAQ leading the gains. The Dow rose by 0.39%, the S&P 500 gained 0.25%, and the NASDAQ climbed 0.59%. However, the Indian rupee faced another tough day, hitting a record low of 90 rupees per U.S. dollar for the first time.
The economic calendar will be packed with Swiss inflation data, Eurozone and the UK PMIs for November, ECB President Christine Lagarde’s speech, U.S. ADP Employment Change, and the ISM Services PMI, making for a busy trading day. However, the spotlight will likely be on President Trump’s Fed Chairman selection, updates on the Ukraine-Russia conflict, and the performance of technology stocks in defending their recent gains.
Despite the U.S. Dollar's failure to rebound, even with a shift in market sentiment, risk assets like equities and cryptocurrencies could see further recovery. However, traders are advised to stay cautious ahead of the December FOMC (Federal Open Market Committee) meeting.
That said, the GBPUSD is less likely to face further upside, amid a likely softer UK data and upbeat US statistics. However, the broad Fed bias can help the Cable pair defend the latest gains.
May the trading luck be with you!
