The dollar posted a sharp increase on Tuesday with the Dollar index (USDX) ending the session 0.77% higher as market participants dialed back expectations for a March rate cut from the U.S. Federal Reserve, fueled in part by comments by Board Governor Christopher Waller. Waller noted that achieving a 2% inflation rate will not be as easy as expected and intends only three rate cuts in 2024.
Markets are pricing in a 66.9% chance of a rate cut of at least 25 basis points (bps) in March from the Fed, compared with an 81% view in the prior session according to CME's FedWatch Tool.
The Pound Sterling delivers a stalwart recovery early on Wednesday after the release of the surprisingly stubborn United Kingdom consumer price inflation data for December. The Consumer Price Index (CPI) came in higher than expected amid a significant rise in Oil prices and slightly higher service inflation.
European equities broadly ended Tuesday in the red as central bank policymakers saw a rapid-fire rotation of comments during the World Economic Forum in Davos, Switzerland. European Central Bank (ECB) policymakers diverged slightly in their comments, but the overall outline of policymakers was clear-cut enough that money markets balked on rate-cut hopes in March.
In the US, the earnings season continues Wednesday with results from Charles Schwab Corp, U.S. Bancorp, and Prologis Inc.
Energy prices retreated on Tuesday, pressured as the dollar jumped to its highest in a month but supported by jitters about the impact on energy supplies from escalating tensions in the Middle East.
For Wednesday, The Federal Reserve's Beige Book and business inventories for November are due for release, along with remarks from John Williams, President, and CEO of the New York Federal Reserve. The December retail sales report could provide further insights into the health of the consumer sector. Moreover, later today ECB's president Christine Lagarde is expected to speak at the world economic forum in Davos.
EUR/USD
The EUR/USD pair dropped significantly on Tuesday ending the session 0.61% lower just below the level of 1.0880.
Comments from ECB officials, who, despite favoring rate cuts this year, their timing appeared largely in contrast with investors’ expectations. So far, market participants anticipate the central bank to trim its interest rates by around 120 bps in the current year. The marked decline in spot also came against the backdrop of rising yields across the board, with German 10-year bunds at yearly highs of around 2.25% and US yields sharply up across different maturities.
On another front, the improvement in the Economic Sentiment in both Germany (15.2) and the broader Euroland (22.7) for the current month did nothing to lend some support to the European currency. In U.S., the NY Empire State Manufacturing Index weakened considerably to -43.7 also in January.