Dow Rallies Amid Tariff Speculation While Currency Markets React to Global Events

Key events:

• Eurozone - CPI (YoY) (Dec)
• USA - ISM Non-Manufacturing PMI (Dec)
• USA - ISM Non-Manufacturing Prices (Dec)
• USA - JOLTS Job Openings (Nov)
• USA - 10-Year Note Auction

The Dow Jones Industrial Average started the week on a positive note, rebounding above the 43,000 mark with a gain of 300 points. This surge followed a Washington Post report indicating that President-elect Donald Trump and his team might adopt a more nuanced strategy concerning the broad tariffs he had previously threatened. This shift in approach seemed to have alleviated some investor concerns, boosting market sentiment.

The tech sector continued to drive market gains, with chipmakers leading the rally into 2025. Nvidia saw a significant jump of over 4.5%, crossing the $151 per share threshold, reflecting the ongoing optimism in the tech industry. Goldman Sachs also performed well, posting a 2% rise to reach around $590 per share.

By the market close on the New York Stock Exchange, the Dow Jones Industrial Average had slipped slightly by 0.04%, while the S&P 500 and the NASDAQ Composite posted gains of 0.58% and 1.25%, respectively.

In currency markets, GBP/USD continued its upward trajectory for the third day in a row, trading near 1.2530 during the Asian session on Tuesday. The weakening of the US Dollar primarily drove this movement. Meanwhile, the British Pound showed little reaction to the latest UK Retail Sales data. The British Retail Consortium (BRC) reported a 3.1% increase in Like-For-Like Retail Sales for December 2024, rebounding from the previous month's 3.4% decline and surpassing market expectations of a 0.2% drop. This boost was largely attributed to robust Black Friday sales, marking the most substantial monthly increase since March 2024.

Despite this December spike, the overall retail landscape in the UK remained sluggish, with the BRC noting only a 0.4% year-on-year sales growth for Q4 2024. For the entire year, retail sales edged up by 0.7%, with Like-For-Like sales rising by 0.5%. Helen Dickinson, the BRC's Chief Executive, commented on the challenging year, highlighting weak consumer confidence and difficult economic conditions as factors that dulled the 'golden quarter' performance.

In Japan, the Yen regained strength against the US Dollar after hitting a six-month low earlier in the day, amid concerns that Japanese authorities might intervene to stabilize the currency. The USD remains under pressure, unable to reclaim the highs from the previous week, contributing to the capped USD/JPY pair. Speculation about the timing of the next Bank of Japan rate hike continues to be a significant factor, potentially creating a headwind for the Yen. Japan’s Finance Minister, Katsunobu Kato, issued a verbal warning on Tuesday, indicating that the government is prepared to counter excessive currency fluctuations, particularly those driven by speculators.

The Bank of Japan's recent decision to possibly delay the next rate hike, citing uncertainty about US President-elect Donald Trump's economic policies, has further weakened the Japanese Yen. This stance reflects broader concerns about the impact of US economic strategies on global markets.

Meanwhile, the Canadian Dollar edged higher against the Greenback, with the USD/CAD pair slipping to around 1.4310 during early European trading. This strength in the CAD followed reports suggesting Canadian Prime Minister Justin Trudeau's impending resignation. Reuters noted that Trudeau might announce his departure before an emergency Liberal Party meeting on Wednesday, fueling gains in the Canadian Dollar.

Adding to the complexity, The Globe and Mail reported that the Canadian government is contemplating an early release of a list of US goods that could face retaliatory tariffs if President-elect Trump enacts a 25% tariff on Canadian imports. This news further supported the Canadian Dollar as markets braced for potential trade tensions under the new US administration.

The Australian Dollar extended its rally for the fourth straight session against the US Dollar, despite disappointing Building Permits data for November. The AUD/USD maintained its strength, bolstered by broader market dynamics, even as new construction permits in Australia fell by 3.6% month-on-month to 14,998 units, missing the expected 1.0% decline. This decline followed a revised 5.2% increase in October, marking the first drop in three months.

Traders are now focused on Australia’s Monthly Consumer Price Index (CPI) for November, due Wednesday, which could significantly impact the Reserve Bank of Australia's policy decisions. A lower-than-expected CPI could heighten expectations for a rate cut in February, potentially weighing on the AUD. In the US, upcoming releases, including the ISM Services PMI and JOLTS Job Openings, are awaited for fresh impetus, alongside the Federal Reserve's December meeting minutes and Nonfarm Payrolls data later in the week. These events are likely to shape market expectations and currency movements as investors seek clarity on the direction of US monetary policy.