Daily Market Update

Overview

FX price action on the surface has normalized a bit, returning close to ranges seen in the first and second weeks of December rather than the outsized dollar-negative movements seen in the last two weeks of 2023. US stock indices dropped for the second day in a row yesterday but are set to open slightly higher, and in its usual inverse correlation, the Dollar is trading slightly lower against most majors today.

Yesterday saw the release of the Federal Reserve’s minutes from its December meeting, with more of a fizzle than a bang. The minutes served as a reconciliation between Powell’s dovish statement last month and the pushback the market almost immediately received on the idea of cuts from several regional Fed governors. While further hikes, should they be necessary, are not entirely off the table, the Fed does see the potential for cuts closer to the end of this year than the beginning. Our reading: the Fed does not want to cut interest rates as early as the markets want it to, so a March cut is increasingly unlikely, whether oddsmakers believe it or not. As the Fed fell victim first to overzealous oddsmakers, the Dollar, in response, was the first to lose substantially on rate cut rumors and the first to claw back those losses early this week. It’s also going to be the first to normalize after the dust has settled, hence today’s slight downward move.

This morning, ADP employment change showed the US economy added more jobs than expected last month, and initial and continuing jobless claims declined. Though on the surface, this is news of a continuing resilience in the US labor market, it’s quite often that nonfarm payrolls and ADP have come in on opposite sides of market expectations, so tomorrow’s US employment data is likely to be the real market mover.

What to Watch Today…

EUR ⇑

The single currency, after taking heavy losses against USD to open this year, is attempting to claw back some ground this morning and has gained just shy of a quarter of a percent against USD. The EUR/USD pair is now sitting much closer to prices last seen just before both the Fed and ECB meetings last month, more in line with the macroeconomic data out of the region. French CPI this morning showed inflation increased 4.1% annually, with Germany’s year-over-year inflation slightly lower at 3.8%.

JPY ⇓

Japanese Yen, moving contrary to most major currencies once again has continued to slide against the Dollar to the tune of nearly a further percent overnight and into this morning. Since the beginning of this calendar year, JPY has weakened 2.5% against USD as speculation abounds that the earthquake that hit the island nation on New Year’s Day is likely to delay any major move from the Bank of Japan as the economic damage is assessed. An ending to the BoJ’s negative interest rate policy as soon as this month is all but out of the question.