Stocks Rally as Cooler Inflation Eases Interest Rate Fears | Daily Market Analysis

Key events:

• UK - GDP (YoY) (Q3)
• UK - GDP (QoQ) (Q3)
• USA - CB Consumer Confidence (Dec)

US stocks surged on Friday, wrapping up the week on a positive note after two sluggish sessions, as a cooler-than-expected inflation report and dovish remarks from Federal Reserve officials eased concerns about future interest rate hikes.

The Dow Jones Industrial Average climbed 498.82 points, or 1.18%, to close at 42,841.06. The S&P 500 added 63.82 points, or 1.09%, finishing at 5,930.90, while the Nasdaq Composite advanced 199.83 points, or 1.03%, to 19,572.60. Despite Friday’s rally, the indices logged weekly declines: the S&P 500 fell 1.99%, the Nasdaq dropped 1.78%, and the Dow slid 2.25%. The Nasdaq ended a four-week winning streak, while the S&P 500 posted its steepest weekly loss in six weeks. The Dow recorded its third consecutive weekly decline.

The Australian Dollar steadied on Monday after two days of gains as the US Dollar remained subdued following Friday’s release of the Personal Consumption Expenditures Price Index (PCE). Softer inflation data for November bolstered expectations that the Federal Reserve might maintain its easing stance in 2025. According to the CME FedWatch Tool, there is now a 90% likelihood that the Fed will keep rates unchanged in January, maintaining the current range of 4.25%–4.50%.

In Australia, markets are anticipating the Reserve Bank of Australia could begin cutting rates as early as February, citing signs of an economic slowdown. Attention is now focused on the RBA's Meeting Minutes, set for release on Tuesday, following its decision to hold rates steady at 4.35% for the ninth straight session.

The Japanese Yen slipped against the US Dollar on Monday, erasing some of Friday’s recovery from a five-month low. Market skepticism about the Bank of Japan’s willingness to continue raising rates weighed on the Yen, alongside a widening US-Japan yield gap driven by the Fed's hawkish outlook. However, strong inflation data from Japan last week left room for a potential BoJ rate hike in early 2025. Ongoing geopolitical tensions and speculation about Japanese government intervention in currency markets may limit Yen’s downside in the near term.

USD/CAD fell for the third consecutive session, trading near 1.4360 in Asian markets on Monday. The Canadian Dollar gained momentum from rising crude oil prices, fueled by optimism over cooling US inflation and its potential impact on global economic recovery. As Canada is a major oil exporter, higher crude prices support the CAD's upward trajectory.

In Canada’s political arena, Prime Minister Justin Trudeau rejected rumors of a holiday resignation despite pressure from opposition parties. Trudeau's minority government faces a no-confidence motion when Parliament reconvenes in six weeks, potentially triggering an election.

Meanwhile, NZD/USD extended its rally for a second day, trading around 0.5660. The pair benefited from a subdued US Dollar, but weaker-than-expected GDP data for Q3, which revealed New Zealand’s deepest recession since the COVID-19 pandemic, capped gains. Analysts now anticipate a 50-basis-point rate cut by the Reserve Bank of New Zealand in February as the economy contracts further. GDP fell 1.0% in Q3, following a 1.1% decline in Q2, missing forecasts for a smaller 0.4% drop.

The GBP/USD pair traded within a narrow range above mid-1.2500s on Monday. The British Pound remains under pressure due to the Bank of England’s dovish stance after three Monetary Policy Committee members voted to cut rates last week.

Traders now await the BoE's Quarterly Bulletin and the US Consumer Confidence Index for further direction. Despite Friday's recovery from a multi-month low near 1.2475, the pair's short-term outlook remains cautious amid the weaker economic forecast for Q4.