In early trading in Europe on Thursday, risk flows were still popular, and the US dollar (USD) and US treasury bond bond yields both struggled. The optimistic sentiment in the market is related to the expectation that the Federal Reserve (Fed) will make two interest rate cuts this year, as inflation data is moderate.
The US Consumer Price Index (CPI) rose 2.9% year-on-year in December, in line with expectations, from 2.7% in November. However, the core CPI excluding food and energy prices rose by 3.2%, lower than the expected 3.3%. Earlier this week, the annual producer price index (PPI) for December in the United States rose by 3.3%, lower than the expected 3.4% growth.
The dovish Federal Reserve bet, hope for more stimulus measures from China, and easing concerns about potential destructive trade tariffs during President Donald Trump's tenure have boosted investor sentiment while weakening the safe haven appeal of the US dollar.
However, major foreign exchange currencies have failed to capitalize on risk sentiment and the weak US dollar, with the Australian dollar (AUD) and Japanese yen (JPY) becoming the weakest currencies in the foreign exchange market. The Australian dollar/US dollar surged to 0.6250 in a knee jerk reaction to strong Australian employment change data, approaching the level of 0.6200. However, the rise in Australia's unemployment rate has increased the Reserve Bank of Australia's (RBA) early loose bets.
At the same time, the US dollar/Japanese yen experienced volatility again during the Asian session on Thursday, initially falling sharply from 156.00 to 155.20, as the market expects the Bank of Japan (BoJ) to raise interest rates next week. Bloomberg, citing unnamed sources, reported that unless there is significant market turbulence after the inauguration of US President elect Donald Trump, the Bank of Japan is expected to raise interest rates next week. After comments from Bank of Japan Governor Kazuo Ueda, buyers of USD/JPY returned strongly and regained 156.00.
The pound maintained a selling tone, with GBP/USD fluctuating around 1.2200 as traders digested disappointing UK November GDP and industrial production data. The UK economy grew by 0.1% monthly in November, lower than the expected+0.2%. Other data shows that industrial and manufacturing production in the UK decreased by 0.4% and 0.3% respectively in November. Both of these data are lower than market expectations.
EUR/USD defended against small buying near 1.0300, failing to stabilize above that level due to improved market sentiment. However, due to the dovish expectations of the European Central Bank (ECB) and the release of the ECB's December meeting policy minutes, further upward momentum is limited. The currency pair also maintains cautious trading before the release of retail sales and initial jobless claims data in the United States.
The US dollar/Canadian dollar gained support above 1.4350 as oil prices consolidated their gains to a six-month high. WTI oil prices fell 0.45% on the day and were trading below $79 as of press time.
Gold prices rebounded during the European session, testing $2700 and reversing a brief drop to $2690.
