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The dollar posted a moderate recovery against most major currencies on Friday, with the dollar index (USDX) adding 0.63% to its value, still ending the week 1.31% lower. Part of the pressure in the dollar could be attributed to the Fed’s shifting its policy outlook towards rate cuts, that are anticipated as early as March 2024. According to the CME fed watch tool, the possibility for a 25-basis points rate cut taking place in March is at 67.5% and the possibility for an additional 25-basis points rate cut taking place in May rose to 60.2%.
In contrast to the Fed’s stance, both the European Central Bank and the Bank of England expressed their desire to keep policy tight well into next year to combat inflation, as they kept interest rates unchanged on Thursday. The ECB did not make any references to easing in its two-day meeting while the BOE said rates would remain high for “an extended period.”
U.S. stock markets paused their recent ascend that was tied to the outcome of the Fed’s latest monetary policy meeting, with all three main stock indices ending Friday’s session almost unchanged. Nonetheless, on a weekly basis, the US 30, the US 500 and the US tech 100 registered a seventh straight gain, marking their longest weekly winning streak since 2017 and hitting new all-time highs. On a negative note, the real estate and utilities sectors gave back some of their recent gains following comments from New York Fed President John Williams that it is too soon to be talking about rate cuts.
On the cryptos front, the top two cryptocurrencies by market capitalization Bitcoin and Ethereum ended their first week in a month in negative territory, closing 3.41% and 4.80% lower. The estimated crypto market capitalization fell from levels close to $1.69 trillion now at $1.62 trillion.
On Monday, investors shift their focus towards the German ifo business climate data as well as Canada and US housing prices while later in the session, New Zealand trade balance is due. Among the main highlights for this week are the UK annual inflation data, the Bank of Japan monetary policy statement and the US GDP and Core PCE Price data.
EUR/USD
The EUR/USD pair tumbled sharply on Friday after hitting a ten-day high, but better than expected data from the United States, coupled with weaker than expected business activity report from the Eurozone pushed the pair down 0.90%.
On the Eurozone (EU) front, business activity continued to deteriorate, revealed a poll by S&P Global. The agency revealed that activity in Germany and France shrank, while in the EU, none of the three Flash PMI indices were in expansionary territory.
This week, the EU’s docket will feature business and consumer climate, inflation figures, and consumer confidence. On the US front, housing data, GDP, consumer confidence, and sentiment, alongside durable goods orders.
US 500
U.S. stocks were mixed after the close on Friday, as gains in the Technology, Consumer Services and Basic Materials sectors led shares higher while losses in the Utilities, Telecoms and Healthcare sectors led shares lower.
At the close in NYSE, the US 30 gained 0.07% to hit a new all-time high, while the US 500 declined 0.09%, and the US Tech 100 added 0.35%.
Euphoria over the U.S. Federal Reserve’s dovish pivot was dampened a bit after New York Federal Reserve President John Williams pushed back against rate cut expectations, reiterating that the central bank remains focused on bringing inflation down to its 2% target.
On the economic front, manufacturing activity fell more than expected in December, but services activity, which makes up the bulk of the inflation, increased by more than expected.
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