USD Declines with Softened China Tariff Stance

CURRENCY FUTURES

The U.S. dollar index declined after President Donald Trump softened his China tariff stance, saying he would rather not put tariffs on China.

A double bottom at the 107.545 level was taken out today on the  daily March U.S. dollar index chart. However, futures have partially recovered and are now trading above the breakout level. Could today’s penetration of the  double bottom be a false signal?

While current price volatility is due to the uncertainties of tariff issues, the long term fundamentals and technicals remain supportive to the U.S. dollar.

The European Central Bank is widely expected to implement another 25 basis point reduction to the key deposit rate next week following four cuts in 2024.

The long term fundamentals and technicals remain bearish for the euro currency and the British pound, and lower prices are likely.

The Japanese yen temporarily strengthened against the U.S. dollar after the Bank of Japan increased interest rates for the first time since July, and Governor Kazuo Ueda left options open for the timing of the next hike.

The central bank raised interest rates by 25 basis points to 0.5%, which was in line with expectations. This move marks the highest short-term borrowing costs in 16 years.

STOCK INDEX FUTURES

Stock index futures are mixed.

The 8:45 central time January PMI manufacturing index is expected to be 48.9.

The 9:00 January consumer sentiment index is anticipated to be 73.2, and the 9:00 December existing home sales report is estimated to be 4.160 million.

The bullish influence of prospects of a strengthening U.S. economy appears to be more than offsetting the bearish influence of fears that the Federal Reserve will be slow to ease credit conditions.

INTEREST RATE MARKET FUTURES

Futures are narrowly mixed.

There is a 99.5% probability that the Federal Open Market Committee will keep its fed funds rate unchanged at 4.25% – 4.50% at its January 29, 2025 policy meeting, and there is a .5% chance of a 25 basis point reduction.

Financial futures markets suggest the FOMC will lower its fed funds rate by 25 basis points at is June 18, 2025 policy meeting.

The U.S. economy is likely to perform better than the consensus view, which may cause the FOMC to be slow to add accommodation in 2025.

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