In the aftermath of heightened expectations that the Federal Reserve will implement interest rate cuts, Asian and European markets predominantly experienced gains. Traders, reacting to a surprising decline in U.S. producer prices on Friday, further solidified their beliefs that the Fed will opt for lower borrowing costs in the coming months.
As the new week commenced, the dollar and Treasury futures exhibited minimal changes during the Asian session, with overall trading volumes appearing subdued, partly due to the public holiday in the U.S. on Monday. Swaps traders are currently assigning an approximately 80% probability to the initiation of the Fed’s easing cycle in March, marking an increase from around 62% recorded earlier in the previous week.
The upcoming economic data releases in the U.S. hold the potential to either temper or validate the market’s expectations of an aggressive Fed funds rate cut. Given the prevailing extreme market positioning, there is a belief that the downside for the dollar is constrained, with risks tending toward an upside move. Investors, in addition to monitoring more U.S. earnings reports, will closely watch inflation readings from Germany and the UK. The annual World Economic Forum at Davos, Switzerland, will feature prominent political leaders and officials. The speech by Federal Reserve Governor Christopher Waller will be of particular interest, especially following last week’s attempts by officials to temper expectations of an imminent rate cut.
In the realm of commodities, oil exhibited steadiness as the potential risk of U.S. and allied airstrikes against the Houthis igniting a broader conflict and disrupting crude flows from the Middle East was counterbalanced by underlying soft fundamentals.