Global FX Market Summary:  US Dollar Strength, Diverging Monetary Policies, Economic Uncertainty 13 January 2025

Strong USD, driven by hawkish Fed, rising yields, and robust US data, pressures other currencies amid economic uncertainties and diverging monetary policies.

US Dollar Strength and its Impact

The US dollar (USD) is experiencing a period of significant strength, reaching levels not seen since November 2022. This is clearly reflected in the US Dollar Index (DXY), which has surpassed the 110.00 mark. Several key factors contribute to this dollar strength. Firstly, market participants now anticipate a more hawkish stance from the Federal Reserve (Fed), expecting them to maintain current interest rates (4.25%-4.50%) for a longer duration, potentially limiting rate cuts to only one in 2025 or even none at all. This shift in expectations is supported by robust US economic data, most notably the Nonfarm Payrolls (NFP) report for December, which revealed a substantial addition of 256,000 jobs, significantly exceeding market forecasts. Secondly, US Treasury yields, particularly the benchmark 10-year yield, have been on the rise, reaching levels around 4.80%. This increase makes US bonds more appealing to global investors seeking higher returns, thereby boosting demand for the USD. Consequently, the strong USD is exerting downward pressure on other currencies, such as the Euro (EUR) and the British Pound (GBP). The EUR/USD exchange rate has fallen below the critical 1.0200 level, reaching a two-year low, while GBP/USD has also experienced considerable declines.

Diverging Monetary Policies

A distinct divergence in monetary policy approaches is evident between the Fed and other major central banks, particularly the European Central Bank (ECB). The Fed’s primary focus remains firmly on controlling inflation, signaling a cautious approach to easing monetary policy. This is underscored by statements from Fed Chair Jerome Powell, who has consistently emphasized the need to bring inflation back to the 2% target before considering further rate cuts. In contrast, the ECB is expected to continue its easing cycle despite rising inflation figures in the Eurozone. This contrasting approach is primarily driven by concerns surrounding the region’s weak economic outlook, particularly the slowdown in Germany. This divergence in monetary policies plays a significant role in the USD’s strength against the EUR, further widening the gap between the two currencies.

Economic Uncertainty and Potential Risks

Several uncertainties and potential risks are currently impacting market sentiment and contributing to the overall economic picture. Inflation remains a key concern, despite some indications of cooling, particularly in both the US and the Eurozone. Upcoming releases of Consumer Price Index (CPI) data will be closely scrutinized by market participants and policymakers alike. Geopolitical risks, including the ongoing Russia-Ukraine war and persistent tensions in the Middle East, continue to generate uncertainty and bolster demand for safe-haven assets such as the USD. The potential reintroduction of trade tariffs, as proposed by President-elect Trump, adds another layer of complexity to the economic outlook. Such measures could further fuel inflationary pressures and potentially trigger retaliatory actions from other countries, creating further economic instability. These uncertainties, combined with the evolving expectations surrounding the Fed’s monetary policy, have contributed to increased volatility in equity markets, with investors shifting their investments away from tech stocks and towards other sectors. While the Dow Jones Industrial Average has demonstrated some resilience, other major indices have experienced declines, reflecting the prevailing market anxiety.

Top economic events for this week:

• January 13, 2025, 03:00 CNY: Exports (YoY), Imports (YoY), Trade Balance (CNY & USD) (MEDIUM): Trade data is crucial for understanding the health of China’s economy and its impact on global trade. These figures provide insights into demand for Chinese goods and domestic consumption, influencing the CNY and related currencies.
• January 13, 2025, 23:30 AUD: Westpac Consumer Confidence (MEDIUM): Consumer confidence is a leading indicator of spending and economic activity in Australia. A significant shift in confidence can signal changes in consumer behavior and impact the AUD.
• January 13, 2025, 23:50 JPY: Current Account n.s.a. (MEDIUM): The current account balance reflects a country’s trade in goods, services, and investments. It’s a key indicator of Japan’s economic health and can influence the JPY.
• January 14, 2025, 13:30 USD: Producer Price Index (MoM & YoY), Producer Price Index ex Food & Energy (MoM), Producer Price Index ex Food & Energy (YoY) (MEDIUM/HIGH): PPI measures inflation at the wholesale level. The “ex Food & Energy” figures are particularly important as they provide a clearer picture of underlying inflationary pressures, impacting Fed policy and the USD. The YoY ex Food & Energy is considered a high impact event.
• January 15, 2025, 07:00 GBP: Consumer Price Index (MoM & YoY), Core Consumer Price Index (YoY) (HIGH), PPI Core Output (MoM & YoY), Retail Price Index (MoM & YoY) (MEDIUM): UK inflation data is critical for the Bank of England’s monetary policy decisions. High inflation can lead to interest rate hikes, impacting the GBP. The CPI releases are considered high impact, while PPI and RPI are medium impact.
• January 15, 2025, 07:45 EUR: Consumer Price Index (EU norm) (YoY) (MEDIUM): This data provides a harmonized measure of inflation across the Eurozone, influencing ECB policy and the EUR.
• January 15, 2025, 10:00 EUR: Industrial Production s.a. (MoM) (MEDIUM): Industrial production data reflects the output of the Eurozone’s manufacturing sector and is an important indicator of economic health.
• January 15, 2025, 13:30 USD: Consumer Price Index (MoM & YoY), Consumer Price Index ex Food & Energy (MoM & YoY) (HIGH), NY Empire State Manufacturing Index (MEDIUM): US CPI data is crucial for understanding inflationary pressures and anticipating Federal Reserve policy. These figures significantly impact the USD and global markets. The NY Empire State Manufacturing Index provides insight into manufacturing activity in the New York region.
• January 16, 2025, 00:30 AUD: Employment Change s.a., Unemployment Rate s.a. (HIGH), Full-Time Employment, Participation Rate, Part-Time Employment (MEDIUM): Employment data is a key indicator of the Australian economy’s health. Changes in employment and the unemployment rate can significantly impact the AUD.
• January 16, 2025, 07:00 GBP: Gross Domestic Product (MoM), Industrial Production (MoM), Manufacturing Production (MoM) (MEDIUM), Harmonized Index of Consumer Prices (YoY) (HIGH): These releases offer a comprehensive view of the UK’s economic performance. GDP growth, industrial and manufacturing production provide insight into economic activity, while the harmonized CPI offers an inflation overview.

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