Market Watch: USD Settles, EUR Holds, GBP Struggles.

  • USD Steady Amid Calmer Markets: After early-week volatility from tariff speculation and Treasury sell-offs, improved auction results and a US Federal holiday offer a reprieve, with the dollar remaining strong ahead of key NFP data tomorrow.
  • Fed Stance Supports USD: December FOMC minutes highlight the Fed’s cautious approach, delaying rate cuts until mid-year; strong dollar momentum persists leading up to Trump’s 20 January inauguration.
  • EUR/USD Vulnerable to Tariff Risks: Narrowing swap rate spreads favor EUR slightly, but strong US yields and trade concerns keep EUR/USD gains capped within a tight range.
  • GBP Weakens on Gilt Sell-Off: A bond market rout triggered profit-taking on sterling, as investors reevaluate the currency’s resilience against a strong dollar trend, signaling modest downside risks.
  • Japan’s Data Points to BOJ Action: Strong wage data increases the likelihood of a Bank of Japan rate hike on 24 January, while USD/JPY faces resistance around 158-160.

USD: A Calmer Day Ahead
The start of the week brought volatility:

  • Monday: Sharp FX swings driven by US tariff speculation.
  • Tuesday: Trump’s press conference hinted at aggressive foreign policy and more tariffs.
  • Wednesday: Treasury sell-offs and weak auctions shook markets, pressuring sterling.

A calmer outlook emerges as:

  • Last night’s 30-year US Treasury auction performed better than expected.
  • US bond markets are quieter today due to a Federal holiday marking former President Jimmy Carter’s funeral.

Despite a steadier day, the dollar remains strong:

  • December FOMC minutes reaffirmed the Fed’s cautious approach, with a rate cut unlikely until June.
  • Focus shifts to tomorrow’s NFP report, which could reshape expectations for Fed easing.

The dollar is likely to remain firm leading up to Trump’s 20 January inauguration, as he may continue his aggressive stance, reinforcing USD strength.

Elsewhere: Japan’s strong wage data suggests a potential Bank of Japan rate hike on 24 January, while USD/JPY faces resistance at 158-160.

EUR: Tariffs Keep Pressure on
EUR/USD remains vulnerable:

  • Firm US Treasury yields and looming tariff threats weigh on EUR gains.
  • Narrowing swap rate spreads slightly favor EUR/USD, but US trade concerns dominate.

Key data today:

  • German industrial production exceeded expectations, but its impact is muted.
  • A potential eurozone retail sales rebound is unlikely to lift EUR/USD from its 1.0290-1.0330 range.

GBP: Sterling Under Pressure
Sterling faced a sharp sell-off yesterday:

  • A global bond market rout hit the gilt market, widening spreads and triggering sterling profit-taking.
  • Investors reassessed the narrative of “sterling exceptionalism” amid a strong dollar trend.

Outlook:

  • While local UK factors are unlikely to drive further gilt sell-offs, downside risks remain.
  • Sterling positions may pare back further, and modest declines are expected in the near term.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.