S&P 500 Rises Amid Choppy Trading, USD Falters Ahead of CPI Data  | Daily Market Analysis

Key events:

• UK - CPI (YoY) (Dec)
• USA - Core CPI (MoM) (Dec)
• USA - CPI (YoY) (Dec)
• USA - CPI (MoM) (Dec)
• USA - Crude Oil Inventories

On Tuesday, the S&P 500 closed with a slight gain, supported by a cooler-than-expected Producer Price Index (PPI) report, which helped ease recent spikes in Treasury yields. The Dow Jones Industrial Average climbed 0.5%, while the S&P 500 edged up 0.1%. In contrast, the NASDAQ Composite fell by 0.2%, weighed down by ongoing challenges in the technology sector.

The softer-than-anticipated PPI data offered some relief to investors, hinting at the potential easing of inflationary pressures. However, market participants remained cautious ahead of the US Consumer Price Index (CPI) release for December, set for Wednesday. The CPI report is expected to provide further insights into inflation trends and shape future monetary policy expectations.

The USD/CHF pair traded with a slight negative bias around 0.9120 during the early European session on Wednesday. The Greenback's performance against the Swiss Franc was hampered by the softer US PPI report, which curtailed its recent strength. Market sentiment is now shifting focus to the upcoming CPI data, with analysts suggesting that any impact on the USD might be short-lived as traders also watch for potential trade policy shifts under President-elect Donald Trump's administration.

On the geopolitical front, cautious optimism emerged from the Middle East, where Palestinians and Israelis appeared close to a ceasefire agreement in the Gaza Strip after 15 months of conflict. The resolution of hostilities, coupled with the ongoing Russia-Ukraine war, has bolstered safe-haven demand, benefiting the Swiss Franc amid rising geopolitical tensions.

In Japan, the Yen gained strength following hawkish remarks from Bank of Japan Governor Kazuo Ueda. His comments, along with BoJ Deputy Governor Ryozo Himino's remarks, signaled a potential rate hike in January or March, propelling the USD/JPY pair lower to the 157.50 region. Japan's inflationary pressures and consecutive monthly declines in household spending and real wages have set the stage for a possible tightening of monetary policy.

BoJ Governor Ueda reaffirmed on Wednesday that the central bank would adjust its support levels if economic and price conditions improve further. Some economists speculate that the BoJ may also assess the impact of President-elect Trump's economic policies before making definitive moves.

Meanwhile, the Australian Dollar held steady after two days of gains against the US Dollar, buoyed by positive trade data from China and rising commodity prices. The AUD/USD pair has benefited from risk-on sentiment, but traders await the upcoming Australian employment data for more clues on the Reserve Bank of Australia's policy direction.

Australia's consumer confidence index continued to decline for the second consecutive month, reflecting ongoing economic pessimism. The Westpac Consumer Confidence Index dropped by 0.7% in January, stoking concerns about Australia's economic outlook and prompting speculation about potential rate cuts by the RBA. Market participants currently anticipate a 67% likelihood of a 25-basis-point cut in February, with expectations for a full rate cut by April.

In Europe, the EUR/USD pair remained steady around 1.0300 after recent gains, supported by improving market sentiment. Reports of a gradual implementation of import tariffs by the incoming US administration helped boost investor confidence. However, the pair could face downward pressure as the European Central Bank continues to hint at further policy easing to counter the Eurozone's sluggish economic performance.

ECB policymaker Olli Rehn suggested that monetary policy might exit its restrictive phase by midyear, indicating potential shifts ahead. This backdrop has kept the Euro's outlook cautious, even as temporary gains were observed.

The GBP/USD pair attracted some selling during the Asian session on Wednesday but managed to stay within the previous day's trading range, trading near the 1.2200 mark. Investors are now eyeing the high-impact CPI data from both the UK and the US, which will likely influence the Bank of England  and Federal Reserve's interest rate outlooks.

Stagflation concerns, characterized by high inflation and weak economic growth, continue to weigh on the British Pound. The recent surge in UK borrowing costs has exacerbated worries about the nation's fiscal health, further pressuring the GBP/USD pair. Despite these challenges, the USD's recent dip, prompted by softer US PPI data, has helped limit the pair's downside.

As markets brace for the CPI data, the Federal Reserve's hawkish stance remains a tailwind for the Greenback, keeping traders on edge about the potential direction of monetary policy in the coming months.