Date: 12th February 2025.


Financial Markets Await Key Inflation Data Amid Fed's Steady Stance.


Market activity remained largely uneventful despite Federal Reserve Chair Jerome Powell’s testimony and the commencement of the Treasury’s February refunding. Investors stayed on the sidelines, with little market-moving news to provide direction. Ongoing concerns over tariffs added an element of uncertainty, while Treasury yields remained under pressure throughout the session.


Powell Reaffirms Cautious Approach to Interest Rates


In his Senate testimony, Powell reiterated that the Federal Open Market Committee (FOMC) is in no rush to adjust interest rates. He highlighted the resilience of the US economy and labour market, noting that while inflation has moderated over the past two years, it remains elevated. Powell also suggested that the neutral rate might be slightly higher than previously estimated, though this is not a new stance among policymakers. He avoided discussing fiscal policies or tariffs but explicitly stated that the Federal Reserve has no plans to issue a central bank digital currency. However, he confirmed the Fed’s support for stablecoin regulations.


Bond Market Reaction and Treasury Yield Movements


Treasury markets remained under pressure, with the upcoming Consumer Price Index (CPI) report keeping buyers on the sidelines. Even a strong 3-year auction failed to provide a significant boost. Short-term yields saw slight increases, with the 2-year yield closing at 4.287% and the 3-year yield at 4.305%, both just below their session highs. Longer-term yields also edged higher, with the 10-year note at 4.533% and the 30-year bond at 4.743%.


Wall Street Mixed as Dollar Weakens


US equity markets closed mixed after recovering from early losses. The Dow Jones Industrial Average climbed 0.28%, while the S&P 500 inched up 0.03%. The tech-heavy Nasdaq Composite dipped 0.36%, weighed down by sector-specific pressures. The US Dollar Index (DXY) retreated from a session high of 108.463 to settle at 107.944 as Powell’s remarks reassured investors, overshadowing concerns over tariffs and rising yields.


Asian and European Markets React


Ahead of the inflation data release, equity index futures showed mixed movements, while Treasury yields edged lower following Tuesday’s declines. In Asia, Japanese 5-year bond yields reached 1% for the first time since 2008, and the yen weakened for a third consecutive session on tariff-related worries. Meanwhile, China and Hong Kong stocks saw tech-driven gains, with Alibaba Group rising 8.6% on reports of a partnership with Apple to integrate AI into its products. DeepSeek’s AI developments also boosted Chinese stocks, with analysts suggesting the rally has further upside potential.


In Europe, ABN Amro Bank NV reported lower-than-expected profits, while Heineken NV exceeded expectations on beer volumes. The UK’s fiscal watchdog revised its growth forecasts downward, posing fresh challenges for Chancellor Rachel Reeves, who may face potential spending cuts.


Inflation Data in Focus


Investors are eagerly awaiting key US inflation data, set for release later today. Market forecasts indicate that the core CPI, excluding food and energy, likely rose 0.3% in January—the fifth such increase in the past six months. The strong labour market continues to support economic growth, reinforcing the Fed’s cautious approach to monetary policy.


Money markets are currently pricing in a single quarter-point rate cut by the Fed this year, expected by September. Earlier projections included two additional cuts in 2025, but a strong January jobs report has prompted a reassessment of the policy outlook.


Currency and Commodity Market Highlights


The Yen remained under pressure as investors worried about Japan’s potential inclusion in the latest round of US tariffs. The Rupee extended its rally following suspected central bank intervention, while Vietnam’s Dong fell to a record low against the dollar.


EURUSD Faces Downside Risks Amid Tariff and Fed Policy Concerns


EURUSD remains steady around 1.0360 during Wednesday’s Asian session but could face depreciation as the US advances a plan for reciprocal tariffs. President Trump’s administration is considering executive action to match or exceed tariffs imposed on US exports, potentially targeting the EU, Japan, and China.


The Eurozone is particularly vulnerable, as it currently imposes a 10% duty on US automobile imports while benefiting from lower tariffs on its own exports. Additional trade tensions could weigh on the Euro.


Meanwhile, the US Dollar may strengthen after Fed Chair Powell signalled no urgency to cut interest rates, reinforcing a risk-off sentiment alongside Trump’s 25% tariff hike. These factors could add pressure on EURUSD in the near term.


In the commodities market, oil prices edged lower amid reports of a large increase in US crude stockpiles. Brent crude traded below $77 per barrel, while West Texas Intermediate hovered around $73. The American Petroleum Institute (API) reported a 9-million-barrel increase in US inventories, marking the largest build in a year if confirmed by official data.


Gold prices declined for a second consecutive session after briefly surging above $2,942 per ounce in volatile trading.


Market Outlook


As the global markets brace for inflation data and further Fed guidance, investors remain cautious. Powell’s testimony reaffirmed the Fed’s patient stance on rate adjustments, while geopolitical and economic uncertainties—ranging from trade tariffs to currency fluctuations—continue to influence market sentiment. Traders will be closely monitoring upcoming economic indicators for further direction on interest rates and inflation trends.
Always trade with strict risk management. Your capital is the single most important aspect of your trading business.


Please note that times displayed based on local time zone and are from time of writing this report.


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Andria Pichidi
HFMarkets


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