Dollar Weakens on Optimism Over Trump-China Relations
The U.S. dollar edged lower on Monday as market optimism grew following reports of President-elect Donald Trump’s conciliatory moves toward China. A phone call with President Xi Jinping, focusing on trade and Taiwan, signaled potential easing in U.S.-China tensions. Trump also unveiled a crypto-friendly executive order and announced plans for a new government agency, the External Revenue Service, hinting at a dynamic policy agenda. Treasury yields declined as dovish Federal Reserve remarks, including comments from Governor Christopher Waller, suggested inflation trends could enable faster rate cuts than anticipated.
BOJ Decision Looms Amid Economic Strength
The Bank of Japan’s upcoming policy decision is in focus, with growing expectations of a January rate hike following stronger-than-expected November machinery orders. The potential 25-basis-point hike has heightened volatility in yen pairs, as markets anticipate a shift in BOJ policy amid improving economic conditions.
Mixed Performance in Commodities and Equity Markets
Oil prices rose to a 12-week high before pulling back, reflecting buoyant demand amid U.S.-China optimism. Commodity-linked currencies gained modestly, supported by stronger Asian equities and upbeat sentiment in resource-driven markets. However, lingering uncertainty around U.S. trade policies capped gains.
Key Events to Shape Markets This Week
- U.S.: President Trump’s inauguration and light economic data, including jobless claims, PMIs, and consumer sentiment, are likely to dominate the agenda, alongside Q4 earnings reports.
- Europe: Eurozone finance ministers will meet, while key releases include PMIs and German ZEW sentiment data.
- UK: The pound faces pressure amid political and economic uncertainties, with industrial orders and PMIs due later in the week.
- China: Steady loan prime rates and better-than-expected Q4 data support optimism, but uncertainty around U.S. policy looms.
- Canada & New Zealand: New Zealand’s inflation report and the Bank of Canada’s business outlook survey will be closely watched for policy implications.
Currency Market Summary: Yen and Euro Lead Amid Shifting Sentiment
- EUR/USD: Rebounded to 1.0313 as short-covering offset earlier losses, though technical resistance remains strong.
- USD/JPY: Volatile ahead of the BOJ decision, with the yen supported by expectations of monetary tightening.
- GBP/USD: Gained modestly on improved risk sentiment but remained capped by bearish technicals and U.K. political uncertainties.
- AUD/USD: Benefited from positive sentiment around U.S.-China relations and global risk appetite.
- Cross-Currency Pairs: Mixed movements, with euro and yen strength contrasting with weaker sterling and commodity-linked currencies.
Market Outlook: U.S. Policy and Central Bank Actions in Focus
- Dollar: The trajectory will hinge on Trump’s policy announcements and economic data, with dovish Fed signals adding potential downside risks.
- Euro: Poised to gain from easing U.S. yields and shifting sentiment, though technical resistance and economic challenges may limit upside.
- Yen: Likely to strengthen if the BOJ signals monetary tightening, with haven demand also supporting gains.
- Pound: Vulnerable to U.K. political and economic developments, though improved risk sentiment offers near-term stability.
- Commodity Currencies: Australian and Canadian dollars could benefit from sustained risk appetite, but trade policy shifts and geopolitical tensions remain key risks.
Conclusion: Volatility Expected as Markets React to Key Events
The dollar faces headwinds as markets adjust to easing inflation expectations and shifting U.S. policy dynamics under the incoming administration. The euro and yen stand to benefit from dovish Fed commentary and global risk sentiment, while the pound remains susceptible to political and economic uncertainties. Commodity-linked currencies may gain from stronger global demand but remain exposed to policy-driven volatility. Central bank decisions, including the BOJ rate decision, are expected to play a critical role in shaping sentiment, ensuring a volatile and pivotal week for global markets.