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Euro resumes gains on interest rate gap outlook
Euro rose in European trade on Wednesday against a basket of major rivals, resuming gains against the US dollar and about to hit a week high on hopes that the eurozone-US interest rate gap will remain unchanged in January.
As inflation accelerated in Europe, investors are now doubting the possibility of an ECB interest rate cut later this month.
The Price
The EUR/USD rose 0.2% today to $1.0356, with a session-low at $1.0336.
The pair closed down 0.5% on Tuesday, the first loss in three sessions on profit-taking away from a week high at $1.0437.
The euro has lost ground back then following strong US services and labor data.
Eurozone Inflation
Eurozone’s consumer prices rose for the third straight month in December, renewing inflationary pressures on ECB policymakers.
Prices rose 2.4% y/y in December as expected, up from 2.2% in November.
Core prices rose 2.7% in December as expected, same as November.
European Rates
Following the data, the odds of an ECB 0.25% interest rate cut in January stood at 50%.
US Rates
According to the Fedwatch tool, the odds of a 0.25% Fed interest rate cut in January stood at just 5%.
It comes after strong US services and labor data this week, which showcased the flexibility of the US economy.
Interest Rate Gap
The current US-eurozone interest rate gap stands at 135 basis points in favor of the US, and will likely remain unchanged through January.
Yen under pressure once more as US yields rebound
The yen fell in Asian trade for the third straight session against the US dollar, about to plumb six-month lows under pressure from higher US 10-year treasury yields.
As the yen approaches the 160 barrier once more, Japanese authorities have sounded the alarm about its excessive weakness.
The Price
The USD/JPY pair rose 0.15% today to 158.26 yen per dollar, with a session-low at 157.90.
The yen lost 0.3% yesterday, the second loss in a row, plumbing six-month lows at 158.42 as US yields rallied.
US Yields
US 10-year treasury yields fell 0.1% on Wednesday and maintained the gains for the fourth straight session, trading near nine-month highs at 4.688% and boosting dollar demand.
It comes after strong US services and labor data this week, which showcased the flexibility of the US economy.
The data reduced the odds of a Federal Reserve interest rate cut in January.
At the December 2024 meeting, the Federal Reserve expected only two rate cuts in 2024, below the 4 cuts estimated at the September meeting, with the markets now expecting the first Fed rate cut to occur in July.
According to the Fedwatch tool, the odds of a 0.25% Fed interest rate cut in January stood at just 5%.
A larger long-term treasury yield gap between Japan and the US hurts the appeal of Japanese bonds and the standing of the yen.
Japanese Warnings
Japan’s finance minister Katsunobu Kato issued fresh warnings about speculative yen selling as the currency approaches 160 yen per dollar once more.
Kato reiterated the government’s stance and warnings, and asserted its readiness to intervene against excessive movements when needed.
The Japanese government last intervened in the forex market in July 2024 to support the local currency when it plumbed 38-year lows at 161.
Japanese Rates
The current odds of a BOJ 0.25% interest rate hike in January stood at 55%, with investors now waiting for more inflation and labor data to gather more clues.
Wall Street reverses lower on profit-taking
US stock indices fell in American trade on Tuesday after a positive start, with chipmakers such as Nvidia sustaining losses on profit-taking.
A batch of important data will be released this week, including the US payrolls report on Friday.
Analysts expect the US economy to have added 154 thousand new jobs in December, compared to 227 thousand in the previous month.
The Federal Reserve will also release the minutes of its December meeting, at which it cut interest rates by 25 basis points.
On trading, Dow Jones was little changed at 42,707 points, while S&P 500 slipped 0.4%, or 24 points to 5951 points, as NASDAQ gave up 0.9%, or 188 points to 19,685 points.