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The dollar continues to gain ground early on Tuesday, following a slight increase in the session before, with the dollar index (USDX) around 0.5% higher as investors await the addresses from Fed officials this week, which are expected to offer more cues on when the central bank will begin trimming interest rates this year. Fed Governor Christopher Waller is expected to speak later on Tuesday.
According to the CME FedWatch Tool, the possibility for a rate cut in the March FOMC meeting is at 69% while the possibility for an additional rate cut taking place in May is at 65.7%.
European stock markets started off Tuesday falling into negative territory, as data released earlier Tuesday showed that German inflation rose in December to 3.7%, climbing from 3.2% year-on-year in November, illustrating the difficulties the ECB officials have in deciding when to cut rates.
In the US, some price action could be seen later in the session, following a subdued trading session on Monday due to the Martin Luther King, Jr. Day. Fourth quarter earnings reports are in the spotlight, with Goldman Sachs, US Bank, and Schlumberger publishing their results later this week.
Energy prices edged lower on Tuesday, despite developments in the Middle East that could cause supply disruptions and expectations for a retaliation by the Iran-backed Houthi group following a series of strikes carried out by U.S. and UK forces last week. However, prices are possibly pressured by wavering demand as well as fears that global economic conditions will deteriorate further this year.
For Tuesday, market focus could be shifted towards the ZEW economic sentiment reports from Germany and the eurozone as well as inflation data from Canada in the form of monthly and annual CPI’s. Later in the day, all eyes will possibly be set upon the Empire State Manufacturing index release and a speech by BOE governor Bailey. U.S. industrial production and retail sales data readings due on Wednesday could also attract some investor attention as they could provide more signals on the economy.
The EUR/USD pair ended the session on Monday almost unchanged with minor losses. The Euro fails to gain strength despite European Central Bank (ECB) policymaker Joachim Nagel pushed back against market expectations of early rate cuts. Nagel said it is too early to discuss rate cuts as inflation is too high.
ECB policymaker Robert Holzmann opposed rate cuts for the entire year, citing upside risks to energy prices due to deepening conflicts over commercial shipments from the Red Sea. The German economy shrank by 0.3% in 2023 as higher interest rates by the ECB were resulted in not favorable financial conditions.
Market participants await the United States monthly Retail Sales data for December, which will provide more cues about early rate cuts from the Federal Reserve (Fed).
Gold prices advanced on Monday, as the metal's appeal was boosted by safe-haven demand owing to tensions in the Middle East, while markets raised bets that the Federal Reserve will cut rates as soon as March.
The war between Israel and Hamas has passed the 100-day mark as Israel continues its fierce offensive, while the Houthi militia's threat to respond to U.S. air strikes on Yemen kept risks elevated.
Gold tends to perform well during economic turmoil, with reliability that can help offset the risk of more volatile assets in conditions such as geopolitical uncertainty.
Supporting gold, data on Friday showed U.S. producer prices unexpectedly fell in December, sending 10-year Treasury yields lower.
Oil prices weakened slightly on Monday as the Middle East conflict's limited impact on crude output prompted profit taking. Several tanker owners avoided the Red Sea and multiple tankers changed course on Friday after U.S. and Britain launched strikes against Houthi targets in Yemen after the Iran-aligned group's attacks on shipping in response to Israel's war against Hamas in Gaza.
There have been no oil supply losses so far, but the shipping disruption is indirectly tightening the market by keeping 35 million barrels at sea owing to longer journeys shippers must take to avoid the Red Sea.
U.S. stocks were mixed after the close on Monday, as gains in the Telecoms, Oil & Gas and Utilities sectors led shares higher while losses in the Consumer Goods, Consumer Services and Healthcare sectors led shares lower.
US stock futures pointed to a lower start on Monday as Wall Street anticipates upcoming data and bank earnings, which could shed light on the current state of the American consumer.
This holiday-shortened week will also see the release of another set of bank earnings, offering additional insights into consumer health and information on credit card payments and delinquencies. Goldman Sachs, Morgan Stanley, and PNC Financial Services are scheduled to report on Tuesday.
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