Global Markets React to Trump’s Return and Anticipated Rate Hikes | Daily Market Analysis

Key events:

• UK - Employment Change 3M/3M (MoM) (Nov)
• UK - Unemployment Rate (Nov)

US stock index futures rose on Monday evening as President Donald Trump resumed office and announced a series of executive orders. The markets had been closed earlier in the day for the Martin Luther King, Jr. Day holiday.

S&P 500 Futures climbed 0.6% to 6,066.25 points, Nasdaq 100 Futures gained 0.6% to 21,729.75 points, and Dow Jones Futures were also up by 0.6% at 43,943.0 points.

The week ahead promises a flurry of activity as investors gear up for a series of major corporate earnings reports that could provide insights into the financial health and future prospects of several leading US companies.

The earnings season is set to begin with Netflix Inc (NASDAQ: NFLX), which will release its fourth-quarter results on Tuesday. This will be followed by reports from industry giants like Johnson & Johnson (NYSE: JNJ) and Procter & Gamble Company (NYSE: PG) on Wednesday, offering a closer look at the healthcare and consumer goods sectors.

On the currency front, the EUR/JPY cross fell to near 161.10 during the early European session on Tuesday. The Japanese Yen strengthened against the US Dollar, bolstered by rising speculation that the Bank of Japan will raise interest rates at its policy meeting later in the week. The markets are currently pricing in a 92% probability of a rate hike by the conclusion of the January 23-24 meeting, a move that would push borrowing costs to levels last seen during the 2008 financial crisis.

Japan’s Vice Finance Minister for International Affairs, Atsushi Mimura, commented on the US economic outlook, attributing it to Trump’s macroeconomic policies. Meanwhile, Finance Minister Katsunobu Kato expressed that Japan’s central bank is expected to pursue appropriate monetary policies to achieve a 2% inflation target, while also keeping a close watch on the potential impact of US policies on the global economy.

In contrast, the Euro faced potential headwinds against the Japanese Yen due to dovish expectations surrounding the European Central Bank. According to the ECB’s Monetary Policy Meeting Accounts released recently, policymakers in the December meeting highlighted the need for caution in cutting interest rates, despite indications of further cuts to address weakening price pressures. The market anticipates a 25 basis point rate cut at each of the next four ECB meetings, driven by concerns over the Eurozone’s economic outlook.

The GBP/USD pair traded around 1.2300 during Asian hours on Tuesday, retracting from previous gains. The US Dollar regained strength following news that President Trump intends to direct federal agencies to review tariff policies with key trading partners like Canada, Mexico, and China.

The US Dollar Index, tracking the currency’s performance against a basket of six major currencies, stood around 108.30 after shedding recent gains. The Dollar faced downward pressure as US Treasury yields on 2-year and 10-year bonds remained subdued at 4.23% and 4.54%, respectively.

The Pound Sterling had earlier gained traction due to increased demand for UK gilts after weaker-than-expected UK Retail Sales data for December. The unexpected contraction of 0.3% in retail sales, against an expected growth of 0.4%, has reinforced dovish expectations for the Bank of England. Analysts forecast that the BoE may reduce interest rates by 100 basis points, potentially bringing them down to 3.75% by year-end.

In Australia, the Australian Dollar lost momentum on Tuesday following a strong performance in the previous session. The AUD/USD pair faced challenges as President Trump suggested the possibility of imposing tariffs on China, reviving concerns about trade relations. Australia’s economy, closely tied to China’s, could feel the effects of any economic shifts in its major trading partner.

Meanwhile, the S&P/ASX 200 Index in Australia surged to its highest level in six weeks, nearing 8,400, as markets reacted positively to Trump’s re-inauguration and his decision to delay new tariffs.

Traders are now anticipating that the Reserve Bank of Australia might cut interest rates soon, following softer core inflation data that neared the lower bound of the RBA’s target range of 2% to 3%. Attention will now shift to Australia’s upcoming quarterly inflation report for further clues on the future path of interest rates.

In China, the People’s Bank of China maintained its Loan Prime Rates (LPRs), keeping the one-year rate at 3.10% and the five-year rate at 3.60%.

Gold prices continued to rise, reaching their highest level since November 6, driven by increased demand for the safe-haven asset. This surge came amid fears of a potential trade war reignited by Trump’s tariff policies and the possibility of further interest rate cuts by the Federal Reserve, which could bolster the yellow metal’s appeal.

Despite some recovery in the US Dollar and a positive tone in the equity markets, the fundamental backdrop suggests a bullish outlook for gold in the near term, with its price dynamics largely influenced by broader risk sentiment and Dollar movements.