Written by the Market Insights Team
Dollar hits highs, stocks face pressure
Boris Kovacevic – Global Macro Strategist
Investors have recalibrated their expectations for Federal Reserve policy in the year ahead. According to fed funds futures, the probability of the Fed pausing its easing cycle at upcoming meetings has increased significantly in recent months.
This shift reflects growing sentiment that economic conditions might not warrant further rate cuts in the near term. We are starting the year with investors pricing in a single rate cut for 2025. The US dollar has clearly benefited from this trend and currently sits at the highest level since November 2022. We remain in the mini cycle that started in October, when yields, stocks, and the dollar bottomed.
However, equities are starting to struggle with yields and the dollar on a run. The S&P 500 has fallen around 5% since peaking in mid-December, while the VIX has risen from around 14 to 19 points in the same period. Investors are looking forward to getting the first two important US data points of the week in form of the NFIB Business Optimism Index and the Producer Price Index. The latter is expected to have jumped from 3% to 3.4%, potentially strengthening the case for the Fed to keep rates unchanged in H1.
Oil price surge sends euro sliding
Boris Kovacevic – Global Macro Strategist
Germany has long enjoyed a sovereign position in the global market. But beneath the surface of its export-driven success lies a web of dependencies that impacts the country’s strategic decisions. Notably, Germany is deeply dependent on two major global players: the US and China. Germany’s challenge lies in maintaining a delicate balance between these two powerful economic forces.
As the world shifts toward new geopolitical and economic realities, Germany will need to continue leveraging its trade relationships with both the US and China, while also diversifying its economic partnerships to minimize risks. This it what we call the dual dependency dilemma. It will be a difficult task given the lack of consensus within the German government and its people.
This lack of optimism is reflected in the recent downward spiral of the euro, which shortly fell below the $1.02 mark against the dollar. Implied volatility for the euro on the three-month tenor climbed to the highest level since March 2023 this week to around 9.4%. Spiking oil prices due to the new US sanctions against Russia have been counterproductive for the common currency as well. Brent crude prices seem to have established a bottom at $70 multiple times over the past months and are now sitting at around $81.
Lose-lose for the pound?
George Vessey – FX Strategist
The pound has clocked five consecutive daily declines in a row versus the US dollar. Since the start of October 2024 until yesterday, GBP/USD has only clocked 29 positive days and shed almost 10% in value. A broadly stronger US dollar is mostly to blame, but negative structural considerations have returned to haunt the pound of late, with higher UK long bond yields accelerating the downtrend.
It could get worse before it gets better for sterling, with traders eying the psychological $1.20 handle as a key downside target. Although the relative strength index is flashing oversold conditions, which could prompt a short-term rebound, a more meaningful recovery largely depends on a U-turn in the positive US dollar narrative. This seems unlikely given the relentless stream of positive news flow emanating from the US. Meanwhile, a domestically led bounce relies on the UK economy picking up, and an adequate fiscal response to the surging debt-repayment costs. A key focus point this week is UK inflation data published on Wednesday, but unfortunately for the pound, it could be a lose-lose situation.
Sticky inflation could keep Bank of England (BoE) rate cuts in check and add further pressure to an already strained gilts market, widening the divergence between yields and sterling. Conversely, a softer inflation report might offer some initial relief for GBP as bond-market stress eases, but a slide in short-dated GBP interest rates as the market re-prices more BoE easing could also weigh on the pound. Therefore, at this stage, the path of least resistance looks lower.
Dollar dominates the FX landscape
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 13 – 17
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
