Market Watch: A Phase of Relative Stability

Financial and commodity markets analytics

After the turbulence of the previous day, the foreign exchange market has entered a phase of relative stability. The US dollar experienced some losses following the postponement of tariffs on Mexico and Canada, a decision accompanied by only minor concessions. Meanwhile, the 10% tariffs on Chinese goods were implemented, but Beijing's measured response suggests that there is still room for potential negotiations in the future. Apart from trade politics, market participants are anticipating the US quarterly refunding announcement and the upcoming jobs report, both of which could influence market movements. While the US dollar is showing strength against most G10 currencies, its performance is mixed against emerging market currencies. In the Asia Pacific region, currencies are mostly stronger, while some central European currencies, along with the South African rand and the Mexican peso, have weakened slightly.

Asia Pacific Markets

The Japanese yen stood out as the strongest G10 currency against the dollar in the previous session, gaining approximately 0.3%. This movement may have been driven by the unwinding of short yen carry trades, but a more significant factor was likely the drop in US 10-year Treasury yields. The correlation between the yen and US yields has been particularly noticeable during the European and North American sessions. The dollar fluctuated between JPY155.00 and JPY155.50, maintaining a firm but relatively quiet stance.
Meanwhile, China responded to US tariff hikes with measured countermeasures, imposing a 15% tariff on $5 billion worth of US energy and a 10% tax on oil and agricultural equipment. These new tariffs, set to take effect on February 10, appear to leave room for negotiation. The offshore yuan saw sharp movements, initially spiking to CNH7.3735 before retreating to CNH7.29, reflecting shifting market sentiment.

European Markets

The euro experienced a sharp decline, briefly dropping to $1.0140 before rebounding to nearly $1.0350 after the announcement of the tariff delay. However, as US tariffs on China took effect, the euro dipped to $1.0270 before recovering again. Despite potential for minor gains, the currency remains under pressure. Additionally, market participants are closely watching developments in France, where the government faces a confidence vote.
Meanwhile, the British pound avoided a gap-down opening but still fell to a nine-day low near $1.2250 before recovering to $1.2455. The Bank of England is widely expected to cut interest rates later this week, with markets pricing in at least three rate reductions for the year. The pound is currently facing resistance near $1.2475, with upcoming data likely to influence its direction further.

American Markets

The US dollar experienced a volatile session, initially declining after the announcement of delayed tariffs on Mexico and Canada, but ultimately settling above pre-weekend levels. Despite market fluctuations, the Dollar Index has remained within a narrow range, with key support around 108.00. Investors are now shifting their focus to upcoming US economic data, including the December JOLTS report, factory orders, and durable goods orders. However, these reports are expected to have limited impact on the market, as attention is primarily on the anticipated rate cut by the Federal Reserve. Futures markets indicate a high probability of a rate cut by mid-year, with an 80% chance of a reduction on June 18 and near certainty for another cut by the end of July. Nonetheless, expectations for additional cuts later in the year have diminished, with probabilities falling from nearly 100% a week ago to around 67% now. Fed officials are maintaining a cautious stance, signaling that further rate adjustments will depend on evolving economic conditions.