Choppy action continues, eyes on BOC

Markets remain indecisive mid-week as investors look for the next significant catalyst. The US Dollar Index stays near 102.00 following Tuesday’s failed recovery attempt and the 10-year US Treasury bond yield stays slightly below 3.5%. Meanwhile, US stock index futures trade in negative territory, pointing to a cautious market mood in the European morning. IFO sentiment surveys from Germany will be featured in the European economic docket. Later in the day, the Bank of Canada (BoC) will announce its policy decisions.

On Tuesday, S&P Global PMI surveys from the US showed that the economic activity in the private sector continued to contract in early January with the Composite PMI arriving at 46.6. In the press release, “the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks,” noted Chris Williamson, Chief Business Economist. This comment helped the US Dollar outperform its rivals but the late rebound witnessed in Wall Street’s main indexes made it difficult for the currency to preserve its strength.

During the Asian trading hours on Wednesday, the data from Australia showed that the Consumer Price Index (CPI) climbed to 7.8% on a yearly basis in the fourth quarter from 7.3%. With this reading surpassing the market expectation of 7.5%, market participants reconsidered the odds of the Reserve Bank of Australia (RBA). In turn, AUD/USD gained traction and was last seen trading at its highest level since mid-August at 0.7110, rising nearly 1% on a daily basis.

Statistics New Zealand reported on Wednesday that the annual CPI in the fourth quarter remained steady at 7.2%. New Zealand’s new Prime Minister (PM) Chris Hipkins said inflation was putting a strain on household budgets and added that more must be done to combat high inflation. Unlike AUD/USD, NZD/USD failed to gather bullish momentum after inflation data and was last seen posting small daily losses slightly below 0.6500.

USD/CAD closed the fourth straight trading day in negative territory on Tuesday and continued to push lower toward 1.3350 early Wednesday. The BoC is forecast to raise its policy rate by 25 basis points to 4.5%.

USD/JPY continues to trade in a relatively tight range above 130.00 as market participants try to figure out how the Bank of Japan’s (BoJ) monetary policy will be shaped when the new governor takes over. Eiji Maeda, a former BoJ Executive Director in charge of monetary policy during the pandemic, told that it was more likely than not that the BoJ will take steps within the first six months of a new governorship.

EUR/USD managed to regain its traction after dropping toward 1.0830 with the initial reaction to US PMI data on Tuesday. The pair was last seen trading in positive territory a few pips above 1.0900.

GBP/USD closed the second straight day in negative territory on Tuesday but didn’t have a difficult time holding above 1.2300. Nevertheless, the pair is having a hard time erasing its losses early Wednesday as markets keep a close eye on political developments in the UK.

After having spent the first half of the day fluctuating in a narrow channel, Gold price fell sharply in the early American session before reversing its direction. With the 10-year US Treasury bond yield dropping below 3.5% late Tuesday, XAU/USD registered its highest daily close since April. Early Wednesday, the pair stays in a consolidation phase slightly above $1,930.

Bitcoin lost more than 1% on Tuesday but didn’t have a hard time finding support. At the time of press, BTC/USD was posting small daily gains at around $22,700. Ethereum extended its downward correction and erased more than 4% on Tuesday before stabilizing slightly above $1,500 early Wednesday.

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