08 Jan 2025

Markets have been tempted in the past couple of days to believe there is some truth behind the Washington Post’s report – quickly rebuked by Trump – that US tariffs will be only on selected products. Markets are also looking with interest at the timeline for the US Congress’ plan to pass a three-in-one bill for taxes, border and energy. Speaker Mike Johnson has set a rather ambitious April deadline, and that could suggest the new administration will have to focus efforts on domestic policies and at least delay a large-scale protectionism program, ING’s FX analyst Francesco notes

DXY to consolidate just below the 109.0 mark

Currently, the markets remain uncertain regarding tariffs, which has allowed the macroeconomic narrative of the United States to dominate and provide significant support to the US Dollar (USD). Recent data releases from the US were perceived as hawkish for the Federal Reserve, resulting in a decrease in the implied probability of a rate cut in March to below 40%. Treasuries experienced another lackluster session yesterday, while stock prices declined, further bolstering the appeal of the safe-haven USD.

In addition to the unexpectedly robust JOLTS job openings and the headline ISM services index, the most noteworthy figure was the ISM prices paid subcomponent, which surged to its highest level since January 2023. If the Federal Reserve had already factored in a generally resilient economy during their December meeting, a renewed focus on inflation concerns could lead to an even more hawkish stance in their policy communications.

The minutes from December’s Federal Open Market Committee (FOMC) meeting will be released today, potentially providing additional support for the USD. There may also be a reaction to the ADP payroll figures, although they are rarely accurate predictors of official payroll statistics. More significantly, Chris Waller is scheduled to deliver a speech at 1400 CET; it will be interesting to see if he aligns with other committee members in highlighting ongoing inflation risks. Today, we may witness conflicting influences on the USD, as the technical and positioning landscape suggests a risk of correction, while the Fed's macroeconomic outlook may continue to attract USD bulls. A consolidation just below the 109.0 level in the DXY could be anticipated.