28/01/2025 Market Watch

Market Watch: U.S. Dollar Rebounds Amid Tariff Developments

The US dollar, after recording monthly lows against major currencies yesterday, has regained momentum today. This recovery aligns with the anticipated consolidation ahead of the Federal Open Market Committee (FOMC) meeting conclusion tomorrow. However, today’s dollar gains were primarily driven by new tariff threats. Treasury Secretary Bessent, considered a moderate, reportedly proposed a gradual increase in universal tariffs by 2.5% per month to allow businesses and countries time to adjust and provide room for negotiations. Yet, President Trump warned this rate might be insufficient, signaling that new tariffs on semiconductor chips, pharmaceuticals, steel, copper, and aluminum would soon be announced. The greenback strengthened against all G10 currencies, with most trading 0.4%-0.6% lower, except for the Canadian dollar, which saw a more modest decline of 0.2%-0.3%. Emerging market currencies also softened.

In equity markets, many Asia-Pacific exchanges were closed today, while those open traded lower. Europe’s Stoxx 600 reversed two days of losses, rising 0.7% to fresh record highs. US markets showed signs of recovery, with S&P 500 and NASDAQ futures up by approximately 0.35%-0.65% following yesterday’s sharp declines. Meanwhile, the rise in equities has exerted pressure on bonds. Benchmark 10-year yields in Europe edged higher, while the US 10-year Treasury yield climbed 3.5 basis points to nearly 4.57%.

Commodities experienced mixed movement. Gold, after suffering its largest monthly loss of 1% yesterday amid equity declines, has stabilized today around $2,742. March WTI crude oil has also steadied after a 2% drop in two of the past five sessions. Prices have mostly held above $73.15 but have not reclaimed the $74 level.

United States of America

The US dollar is gaining momentum today, buoyed by new tariff threats that have lifted the Dollar Index back to the 107.75 level. This area is pivotal as it challenges the bearish trend that has defined the month. However, it remains uncertain whether the pullback since the January 13 high has concluded. The next key resistance level lies at 108.20. Following the fading of downside momentum yesterday, the greenback was expected to consolidate ahead of tomorrow's Federal Open Market Committee (FOMC) meeting conclusion.

Meanwhile, today's release of December's durable goods orders could influence economists' adjustments to Q4 GDP estimates ahead of Thursday's announcement. Boeing reported a surge in orders during December, though cancellations nearly offset the gains. Nonetheless, the company’s overall performance, including increased plane deliveries, is expected to help the sector recover from November's 1.2% decline. Additionally, US housing prices appeared to rise modestly in November, offering further insight into the economy's resilience.

Attention is also turning to consumer confidence data. The Conference Board's measure of consumer confidence is in focus, especially after the University of Michigan's sentiment index declined for the first time in six months.

Key Points:

• The Dollar Index has reclaimed the 107.75 area, with 108.20 as the next resistance level.
• December durable goods orders, driven by Boeing’s performance, may improve Q4 GDP estimates.
• US housing prices showed modest gains in November.
• Consumer confidence data is under scrutiny following weaker sentiment reports.

Australia

The Australian dollar was among the weakest G10 currencies yesterday, falling around 0.35%. The broader dollar bloc struggled, while the yen and Swiss franc emerged as the strongest performers. After closing last week above $0.6300, the Australian dollar retreated to $0.6275 before finding some support in European and North American trading. However, renewed selling pressure today has tested critical support near $0.6250.

In the European morning session, the currency hovered around this key level, and a close below it could further weaken its technical outlook. A break of $0.6230 may pave the way for a decline toward $0.6200, potentially exposing this month’s low near $0.6130.

Looking ahead, Australia is set to release its Q4 Consumer Price Index (CPI) data tomorrow. The annual inflation rate is expected to ease to approximately 2.5% from the previous 2.8%, with underlying inflation measures also anticipated to show moderation.

Key Points:

• Australian dollar fell 0.35%, underperforming most G10 currencies.
• Critical support levels: $0.6250, $0.6230, and $0.6200, with a potential test of $0.6130.
• Q4 CPI data release tomorrow is expected to show inflation easing to 2.5%.

Canada

The US dollar has been trading in a range between CAD1.4300 and slightly above CAD1.4400 in recent days but is showing signs of a potential breakout to the upside. Among the G10 currencies, the Canadian dollar and British pound are the only ones that have not gained against the US dollar this month. The Canadian dollar is down around 0.2% for the month, while sterling has declined by 0.6%.

The Canadian dollar remains vulnerable to factors such as US tariff threats and diverging monetary policies. The Bank of Canada is widely expected to announce a quarter-point rate cut tomorrow, while the Federal Reserve is likely to maintain its current stance. This divergence continues to weigh on the Canadian currency.

Despite the US dollar’s choppy sideways movement since mid-December, momentum indicators have eased without significant pullbacks, supporting a constructive outlook for the greenback. Last week’s high, driven by tariff concerns, touched CAD1.4515 and remains a key level to watch.

Key Points:

• The US dollar is testing the upper range near CAD1.4400, with potential to break higher.
• Canadian dollar is down 0.2% this month, underperforming alongside the British pound.
• Market anticipates a rate cut from the Bank of Canada, contrasting with the Federal Reserve’s steady policy.
• US dollar consolidation since mid-December supports a bullish technical outlook.
• Key resistance level for the US dollar: CAD1.4515.

China

As Mainland China celebrates the Lunar New Year, the offshore yuan (CNH) is trading weaker against the US dollar today. The greenback, which peaked near CNH7.37 at the end of last year, found a January low near CNH7.2345 last Friday. It has since regained strength, approaching the pre-weekend high of around CNH7.2880. However, the CNH7.30 level, which acted as resistance late last week, remains intact.

Despite falling nearly 3% in 2024, the offshore yuan has rebounded by approximately 1.3% this month. Meanwhile, the correlation between the yuan and the yen remains muted following last August’s unwinding of carry-trade strategies. Yesterday, the yen surged nearly 1%, marking its best performance since November, while the offshore yuan remained flat, highlighting the divergence in their recent trajectories.

Key Points:

• The offshore yuan rebounded by about 1.3% in January but faces resistance near CNH7.30.
• The US dollar’s recent strength has capped the yuan’s gains after touching a January low near CNH7.2345.
• The correlation between the yuan and yen remains weak post-carry trade unwinding.
• The yen gained nearly 1% yesterday, contrasting with the flat performance of the yuan.

Europe

The euro is consolidating after reaching a high near $1.0535 yesterday, marking a recovery of around 3.5% from its January 13 low of approximately $1.0180. This rally represents the largest advance since July and August last year. However, the euro has pulled back to $1.0420 today, reflecting a cautious tone ahead of tomorrow's Federal Reserve (FOMC) decision and Thursday's European Central Bank (ECB) meeting.

The $1.0460 level serves as a critical area for the euro to regain in order to avoid a deeper test of $1.04. A break below $1.04 could see support emerge near $1.0355. The current price movement indicates a consolidative phase as markets await updates from the central banks.

Key Points:

• The euro recently climbed to $1.0535, its highest level since mid-January, before retreating to $1.0420.
• A recovery above $1.0460 is crucial to avoid testing support at $1.04 and possibly $1.0355.
• The euro’s advance of 3.5% since January 13 is its largest rally since mid-2023.
• Price action suggests consolidation ahead of the FOMC and ECB meetings this week.

Japan

A sharp decline in US stocks, triggered by concerns over valuations following China’s DeepSeek developments, caused a significant drop in US yields. This, in turn, provided support for the yen, pushing the dollar below a key trendline connecting lows from mid-September (~JPY139.60) and early December (~JPY148.65).

However, the dollar regained strength today, buoyed by firmer US rates. The greenback rebounded from a monthly low near JPY153.70 yesterday to approach JPY156. Although it briefly reached near yesterday’s high of JPY156.25, the dollar is yet to break higher, marking the potential for a fourth consecutive session of lower highs.

Key Points:

• US stock declines led to falling yields, boosting the yen against the dollar.
• The dollar broke below a trendline linking key September and December lows.
• A rebound in US rates helped the dollar recover to JPY156 from JPY153.70.
• The dollar faces resistance near JPY156.25, with lower highs observed over the past four sessions.

United Kingdom

Sterling has recovered approximately 3.5% since its mid-January low, reaching near $1.2525 yesterday after depreciating around 10% from late September. However, it remains below the month’s high of $1.2575, which aligns with the 50% retracement level of its losses since the US election. A slightly higher resistance lies near $1.2610, marking the 38.2% retracement of losses since late September.

Today, sterling encountered resistance and pulled back toward the top of a key support zone between $1.2400 and $1.2425. A decisive break below this level could lead to a further test of $1.2360.

Key Points:

• Sterling recovered 3.5% from mid-January lows, reaching $1.2525.
• Resistance levels include $1.2575 (50% retracement) and $1.2610 (38.2% retracement).
• Support zone is found between $1.2400 and $1.2425, with $1.2360 as the next target if breached.