Markets are showing cautious optimism early Monday, driven by hopes for a pro-business coalition in Germany, progress on the Ukraine-Russia deal, and easing concerns over Trump’s tariffs and China’s stimulus. In doing so, traders overlook the multi-year high US inflation expectations and Fed officials' hawkish remarks. The positive sentiment, combined with mixed US data, keeps the US Dollar Index (DXY) low, allowing other major and commodity-linked currencies to rise. However, commodities remain cautious ahead of this week’s key US Core PCE Price Index report, the Fed’s preferred inflation measure.
Germany's CDU/CSU secured 28.7% of the vote in the Federal Elections, raising hopes for an industry-friendly conservative alliance. This boosted optimism for the Euro (EUR), overshadowing fears of a German economic slowdown and supporting the potential for Ukraine-Russia peace talks, especially after the US mineral deal with Ukraine. The same, despite dovish comments from ECB officials like Jose Luis Escriva and Francois Villeroy de Galhau, allowed the EURUSD to rise to a month’s high.
Additionally, Reuters reported that US President Trump pushed the EU to lower tariffs but witnessed positive reactions, which stirred concerns that his tariff threats might just be a bargaining tactic, lifting market sentiment. This allowed the EUR to rise and weighed on the US Dollar, even as mixed US PMI data and a 30-year high in inflation expectations from the University of Michigan added pressure on EURUSD buyers at its one-month peak.
The US Dollar's weakness is overshadowing expectations of consecutive rate cuts from the Bank of England (BoE), following underwhelming UK data. This has pushed GBPUSD to its highest level since mid-December 2024.
Meanwhile, USDJPY fell to its lowest point since early December 2024, before recovering slightly to end a three-day losing streak. The Yen pair benefitted from rising expectations of consecutive rate hikes by the Bank of Japan (BoJ) and concerns over a potential US-Japan trade deal to avoid Trump’s steel tariffs. Reuters cited an anonymous source noting that the BoJ isn't overly concerned about gradual increases in Japanese Government Bond yields, a view that contrasts with BoJ Governor Ueda’s cautious stance, helping USD/JPY bounce off its multi-week low.
The Antipodean currencies have been stronger recently, buoyed by cautious market optimism, China’s 2025 plan for rural reforms, and the US Dollar’s weakness. However, buyers of Australian, New Zealand, and Canadian dollars remain cautious due to expectations of further rate cuts from their respective central banks. Additionally, the slump in Crude Oil prices is weighing on the Canadian Dollar, as oil is Canada’s biggest export. Overall, traders in AUDUSD, NZDUSD, and USDCAD are lacking momentum ahead of this week’s inflation data, despite a slightly positive risk outlook and hopes for Chinese stimulus.
Gold prices have remained steady after retreating from a record high, as traders await further clues on China’s stimulus and confirmation of the recent market shift driven by news from Russia and the US. Hawkish Fed expectations and strong US inflation forecasts also act as upside filters for gold.
Crude Oil is fluctuating around a two-month low, following its biggest daily drop since early November 2024. That said, optimism over Russian oil returning to the market, along with news that Iraq and Kurdistan will resume oil exports after a two-year pause, weighed on prices before mixed market sentiment challenged sellers.
Bitcoin (BTCUSD) and Ethereum (ETHUSD) are both down early Monday as crypto whales shift their focus to Litecoin, amid concerns over industry security following Bybit’s $1.4 billion hack. Last week, Trump-inspired optimism and a weaker US Dollar supported crypto sellers.
After a volatile start to the week, traders may experience a quieter Monday due to a light calendar, with only German IFO sentiment data, final Eurozone inflation figures for January, and the Chicago Fed National Activity Index on tap. However, headlines around German politics, the Russia-Ukraine deal, and Trump tariffs will keep momentum traders busy. Key events to watch include Thursday’s US Durable Goods Orders and Q4 GDP, followed by Friday’s US Core PCE Price Index, the Fed’s preferred inflation gauge.
With the US Dollar struggling despite a hawkish Fed bias and current market optimism, the Greenback may face further downside ahead of the week’s data. A disappointing release could join a technical breakdown for the US Dollar Index, benefiting Gold, Euro, and JPY. However, GBPUSD and the Antipodeans might lag driven by their own downbeat catalysts.
May the trading luck be with you!
