• USD Volatility: The dollar faced resistance after a Washington Post report on selective U.S. tariffs, despite Trump’s denial, with markets cautious ahead of his January 20 inauguration. Central banks may also be increasing dollar supply through interventions.
• Risk Assets Gain: Optimism over potential softer tariffs and the resignation of Fed official Michael Barr lifted U.S. regional bank stocks temporarily, though DXY struggles to rally past the 108.40/60 range.
• EUR/USD Outlook: EUR/USD held gains from Monday, with upside potential to 1.05 if eurozone CPI surprises. Rising inflation could challenge the market’s expectations of significant ECB rate cuts.
• FX Market Sentiment: Elevated EUR/USD risk reversals and reduced confidence in the dollar reflect investor caution as markets rebalance positioning.
• GBP Retail Rebound: GBP/USD rose to 1.2530, supported by strong December UK retail sales and a subdued dollar. However, weak Q4 retail performance highlights ongoing economic challenges.

USD: Market Momentum Faces Resistance

The FX market saw heightened volatility on Monday following a Washington Post report suggesting U.S. tariff policies might be more selective than initially feared. Although swiftly denied by Trump, the report impacted dollar sentiment.

1. Dollar Consolidation: Despite a three-month rally, the dollar struggled to recover Monday’s losses. Market caution prevails ahead of Trump’s January 20 inauguration, with limited appetite for active dollar selling but potential for rebalancing in the interim.
2. Central Bank Activity: USD/JPY nears intervention levels seen in July when Japan intervened heavily. Meanwhile, China appears to be reducing USD/CNY, potentially adding to global dollar supply.
3. Risk Assets Rally: Hopes for softer tariffs and Fed official Michael Barr’s resignation (after opposing Wall Street on capital controls) lifted U.S. regional bank stocks briefly.

Today’s key events include U.S. JOLTS job openings and ISM Services index data, which could influence dollar movements. However, any DXY rallies may stall around the 108.40/60 level as investors reassess long positions.

EUR: Inflation and ECB Policy in Focus

EUR/USD retained Monday’s gains after last week’s overshoot. With eurozone CPI data for December due, upside surprises could temper expectations of significant ECB rate cuts (currently 107bp priced in).

1. Short-Term Outlook: Fair value models hint EUR/USD could climb to 1.05 with the right catalyst.
2. Key Risks: Rising eurozone inflation, particularly in core readings, may reshape ECB easing expectations.
3. Options Market Sentiment: Elevated one-week risk reversals signal investor concerns about a potential upside correction in EUR/USD.

Despite a broader bearish trend, EUR/USD could test 1.0460 or 1.05 if CPI data or softer U.S. figures surprise markets.

GBP: Resilient on Retail Rebound

GBP/USD extended its gains to 1.2530 during Tuesday’s Asian session, buoyed by a weaker USD and strong UK retail sales data.

1. Retail Sales Recovery: December’s 3.1% rise in BRC Like-for-Like sales marked a sharp rebound from November’s decline, driven by Black Friday spending. However, Q4 growth remained subdued at 0.4% YoY.
2. Market Focus: Traders eye the ISM Services PMI today and the Fed’s December meeting minutes tomorrow for further cues.
3. Tariff Speculation: Trump’s rejection of scaling back tariff plans provided slight support for the dollar but didn’t derail GBP/USD’s upward trajectory.

Overall, while December retail strength offered hope, the UK’s broader retail performance for 2024 remained underwhelming, reflecting ongoing economic challenges.