Markets Rebound as Tech Stocks Recover Ahead of Fed Decision | Daily Market Analysis

Key events:

• Canada - BoC Interest Rate Decision
• USA - Crude Oil Inventories
• USA - FOMC Statement
• USA - Fed Interest Rate Decision
• USA - FOMC Press Conference

Stock markets closed higher on Tuesday, with tech stocks bouncing back after a sharp decline the previous day. Investor attention shifted toward the Federal Reserve’s upcoming policy decision on Wednesday, adding to the market’s cautious optimism. The Dow Jones Industrial Average advanced by 136 points, up 0.3%, while the S&P 500 climbed 0.9%. The NASDAQ Composite outperformed, gaining 2%.

The technology sector led the recovery, with Nvidia regaining some ground after suffering the largest single-day loss for any company, erasing $593 billion in market value. Concerns over competition from Chinese AI startup Deepseek were downplayed by some analysts, who believe that more affordable AI solutions could drive broader adoption rather than diminish US dominance. The rebound also came ahead of a crucial earnings week for major tech players like Microsoft, Meta Platforms, Apple, and Tesla, which are set to release quarterly results.

Meanwhile, the EUR/USD pair ended its two-day decline, hovering around 1.0440 during Asian trading hours on Wednesday. However, the euro may continue facing challenges as traders anticipate the European Central Bank will cut its deposit rate by 25 basis points to 2.75% on Thursday. This expectation stems from the Eurozone’s sluggish economic outlook and confidence that inflation is on track to return to the ECB’s 2% target. With a rate cut largely priced in, markets will closely watch ECB President Christine Lagarde’s remarks for insights into how potential US tariffs under Trump’s policies could influence monetary decisions.

The Australian dollar extended its losing streak for the third consecutive day against the US dollar, following the release of lower-than-expected inflation data. Australia’s Consumer Price Index (CPI) rose by 0.2% quarter-over-quarter in the final quarter of 2024, mirroring the previous quarter’s growth but falling short of the anticipated 0.3%. On an annual basis, inflation eased to 2.4% in Q4 from 2.8% in Q3, slightly below forecasts of 2.5%.

The monthly CPI for December climbed 2.5% year-over-year, aligning with market expectations and up from November’s 2.3%. Despite this uptick, inflation remained within the Reserve Bank of Australia’s  2%-3% target range for the fourth consecutive month. The trimmed mean CPI, a key measure of underlying inflation, increased 3.2% annually - its slowest pace in three years - coming in just below the projected 3.3%. Australian Treasurer Jim Chalmers suggested that the worst of the inflationary challenges were behind them, reinforcing the possibility of a rate cut in February. The RBA has held rates steady at 4.35% since November 2023, emphasizing that inflation must stabilize within its target range before considering any cuts.

Apart from that, the Japanese yen attracted buyers during Asian trading hours, recovering some of its previous losses against the US dollar. Expectations that the Bank of Japan will continue raising interest rates provided support to the yen. Additionally, a decline in US Treasury yields fueled speculation that the Federal Reserve could ease monetary policy in 2025, limiting the downside for the Japanese currency.

However, the yen had weakened sharply on Tuesday after reaching a six-week high the day before, largely due to fresh tariff threats from former US President Donald Trump.

The British pound, meanwhile, remained under pressure, trading around 1.2440. The GBP/USD pair had previously faced losses amid mounting risk aversion tied to Trump’s proposal to impose tariffs on key imports, including computer chips, pharmaceuticals, steel, aluminum, and copper. The move is part of a broader push to boost domestic manufacturing and reduce reliance on foreign production.

Further downside pressure on the British pound came from expectations that the Federal Reserve would maintain its policy rate within the 4.25%-4.50% range at its upcoming decision. According to the CME FedWatch tool, traders see nearly 100% certainty of no immediate rate change, but all eyes will be on Fed Chair Jerome Powell’s press conference for any hints on future policy direction.

The outlook for the pound also remains clouded by concerns over stagflation in the UK economy, as weakening labor demand and persistent inflation weigh on growth. Market participants are already pricing in a 25-basis-point rate cut by the Bank of England at its first policy meeting of 2025 in early February, which would bring borrowing costs down to 4.5%. The uncertain economic environment has kept traders cautious despite UK Prime Minister Keir Starmer’s reassurances that the economy is showing signs of improvement.

During an interview with Bloomberg, Starmer emphasized that the Labour government remains focused on driving economic growth. He also highlighted the strong trade relationship between the UK and the US, noting that there is potential to build on existing ties to strengthen both economies. However, with global economic uncertainty persisting, investors will be closely monitoring upcoming policy decisions and geopolitical developments for further market direction.