The Morning Update

The USD extends gains, oil prices slip, equity markets are down, and US yields rise ahead of US data. The USD index and US yields extend gains as markets await a flurry of US data and the Fed minutes to show if bets on interest-rate cuts in 2024 are justified. Tuesday saw global equities and bonds have their weakest first full trading day since 1999 as markets temper their enthusiasm on the extent of Fed easing in 2024. Elsewhere, oil prices slipped as markets undercut concern about an escalating conflict in the Red Sea, while Bitcoin extended gains for a 5th trading session. In focus today, US FOMC Minutes, ISM Manufacturing PMI, and the Jolts Jobs Opening will help provide intraday direction to currency markets.

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In other news. Gaza war extends into Beirut with the killing of a Hamas leader. Apple shares slide near 4%, hitting a 7-week low after Barclays downgrade on demand concerns. Maersk's Red Sea shipping pause highlights challenges for US-led efforts to protect trade. Ukraine attacked the Russian city of Belgorod and occupied Crimea overnight as retaliatory strikes intensified. The EU puts Russian state diamond miners on the sanctions list in a bid to cut Moscow's revenues. Japan investigates aircraft communication moments before the Haneda crash.

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In currency markets. The USD index extends gains ahead of today's Fed minutes. China's Yuan weakens to a 3-week low as trades bet on imminent monetary easing. ZAR continues to weaken, down 2.4% in January as risk-on sentiment eases. CNY and Asian currencies are down 0.1% on average vs USD. Trading currencies remain under pressure, with NZD flat, SEK dipping 0.1%, MXN falling 0.2%, AUD, NOK & CHF slipping 0.3%, JPY weakening 0.5%, and ZAR tumbling 0.9% vs USD.

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In commodity markets. Oil, Wheat, and Gold prices slipped by 0.5%, Natural Gas and Copper prices dropped by 0.6%, Silver prices tumbled by 1.3%, and Soybean prices eased by 0.4%.

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CAD weakens on the combination of falling commodity prices, easing risk-on sentiment supporting the USD, and softer CAD factory data, which caused the CAD to fall the most in 3 months vs. USD. CAD dropped nearly 1% month-to-date, its weakest level since Dec 21st, retesting the critical 75 cents (1.3333) level; if breached, it opens the door for a re-test of 1.3450 next. Domestically, Canada's factory PMI fell to its lowest levels since May 2020, its steepest pace since the early months of the COVID-19 pandemic. Intraday, the US data, and the Fed minutes will drive the direction for the loonie today.

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EURCAD holds steady as both currencies remain under pressure heading into the US Fed minutes.

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EUR sees the bearish momentum continue as the single currency slips from 1.1130 to test 1.0925 over the last four trading days. Risk-off sentiment continues to drive the Euro lower as investors switch back to the greenback as investors unwind bets that the Fed would aggressively lower interest rates in 2024. The focus will be on the US ISM & Jolts Jobs data and the critical US Fed minutes for confirmation that officials discussed the timing of a policy pivot. Beyond today's US data, investors are focused on Thursday's German key inflation report.

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GBPEUR extends gains on euro weakness vs GBP ahead of key US data releases.

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GBP sees flatline trading vs USD, holding within the 1.2650-1.2610 trading range. The pound suffered its worst trading session on Tuesday, having its sharpest daily fall in nearly three months as investors aggressively reverted to the USD. The bearish momentum remains in place if we see a break of 1.2610, two-week low, the pound will be vulnerable to 1.2497 (Dec 13th) next. Investors will scrutinize the Fed's December meeting minutes for hints about how many rate cuts the Fed may carry out in 2024.