Before the Federal Open Market Committee (FOMC) meeting in January, many investors were on edge, but that didn’t prevent various asset classes and significant currencies from experiencing notable movements ahead of this major event.
Here’s a recap of market performance:
Key Developments:
- For Australia in the fourth quarter of 2024, the Consumer Price Index grew by 0.2% quarter-on-quarter, hitting the forecast, while the annual rate matched expectations at 2.5%. The trimmed mean CPI came in slightly lower at 0.5%.
- Japanese consumer confidence slipped, coming in at 35.2, falling short of the expected 36.6.
- Howard Lutnick, Trump’s pick for Commerce Secretary, mentioned in a Senate confirmation hearing that increased tariffs on Canada and Mexico aren’t set in stone.
- The API reported a rise in U.S. crude oil stocks by 2.86 million barrels for the week ending January 17.
- Germany’s GfK consumer confidence for January dropped further than anticipated to -22.4.
- Spain’s flash GDP for the fourth quarter of 2024 surprised on the upside at 0.8% quarter-on-quarter.
- The U.S. reported a December goods trade deficit of $122.1 billion, wider than expected.
- The Energy Information Administration highlighted a larger-than-expected increase in crude oil stockpiles, rising by 3.5 million barrels.
- The Bank of England’s governor emphasized the need to boost economic growth rates.
- The Bank of Canada cut interest rates by 0.25% to 3.00%, without future rate guidance, but lowered the GDP forecast to 1.8%, highlighting tariffs as a potential inflationary threat.
- The Federal Reserve held interest rates steady at 4.25% to 4.50% and provided an optimistic take on inflation and employment.
- Fed Chair Jerome Powell cooled off speculation about a March interest rate cut, suggesting no rush to ease policy.
- New Zealand’s December trade balance swung to a surplus of 219 million NZD, defying forecasts of a deficit.
Market Movements:
Dollar Index, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TradingView
Markets began the day with mixed behavior, as participants focused on specific asset catalysts while awaiting the FOMC’s key announcement.
Crude oil prices struggled throughout the session, especially after Howard Lutnick’s comments suggested that tariffs could be avoided if Mexico and Canada addressed issues like illegal migration and fentanyl trafficking. A smaller-than-anticipated increase in API inventories didn’t provide much support. The Department of Energy’s report of a larger-than-expected rise in crude oil stocks further weighed on prices.
Meanwhile, U.S. Treasury yields had been climbing leading up to the FOMC meeting but saw some gains rolled back by session end. The 2-year yield stood at 4.219%, increasing slightly by 1.5 basis points.
U.S. equities were losing momentum before the FOMC decision but managed to recover slightly as the day wound down. Yet, the S&P 500 ended 0.47% in the red, and the Dow closed down by 0.31%.
Gold held steady despite the firming dollar, while Bitcoin remained on an upward trajectory, topping $103,000 as the cryptocurrency market shrugged off the Fed’s firm stance.
FX Market Dynamics: U.S. Dollar vs. Majors:
Overlay of USD vs. Major Currencies Chart by TradingView
The U.S. dollar exhibited considerable volatility throughout the day, swayed by both domestic and international developments. It initially gained against the Aussie dollar following weak inflation data from Australia, raising the likelihood of an RBA rate cut.
Activity surged during the London session, with the dollar broadly rising in anticipation of a potential hawkish message from the Fed. However, the trend softened as New York traders hit their desks.
The Bank of Canada’s decision to reduce interest rates brought some pressure on the Canadian dollar due to concerns about tariffs impacting growth and maintaining the easing cycle.
Despite holding rates steady, the Fed’s announcement induced a brief dollar rally, prompted by nuances hinting at a hawkish stance. Yet, these gains were promptly pared back following Powell’s press conference.
At the end of trading, the dollar remained slightly above most peers, though it weakened against the British pound and Japanese yen, while posting its best performance against the Australian dollar, gaining 0.29%.
Looking Ahead: Upcoming Economic Data:
- French flash GDP at 6:30 am GMT
- Swiss trade balance at 7:00 am GMT
- German import prices at 7:00 am GMT
- Swiss KOF economic barometer at 8:00 am GMT
- Spanish flash CPI at 8:00 am GMT
- German preliminary GDP at 9:00 am GMT
- Eurozone preliminary GDP at 10:00 am GMT
- European Central Bank monetary policy decision at 1:15 pm GMT
- U.S. advance GDP at 1:30 pm GMT
- ECB press conference at 1:45 pm GMT
- Tokyo core CPI at 11:30 pm GMT
- Japanese preliminary industrial production at 11:50 pm GMT
- Japanese retail sales at 11:50 pm GMT
The focus shifts towards Europe today, with a slew of preliminary data releases related to growth and inflation set to provide insights just before the much-awaited ECB policy statement. Additionally, the U.S. GDP report for the fourth quarter of 2024 could further highlight the Fed’s confident outlook, possibly adding layers of market volatility.
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