ForexLive European FX news wrap: Dollar gains dispelled, ECB reinforces rate cut path

Headlines:

• Dollar pares gains on the day in European morning trade
• Trump making sure that Wall Street stays more upbeat in general
• ECB’s Lagarde: No US tariff is what I expected
• ECB’s Lagarde: We’re not overly concerned about export of inflation to Europe
• ECB’s Knot sees little obstacle to another rate cut next week
• ECB’s Stournaras says rates should be close to 2% by end of the year
• ECB’s Villeroy: Disinflation process is still on track
• ECB’s Escriva: a 25 bps cut next week is a likely scenario
• ECB’s Nagel says confident inflation will return to 2% target by mid-year
• ECB’s Rehn: We are aconfident inflation will stabilise at the target as predicted
• SNB’s Schlegel: We cannot exclude negative interest rates
• US MBA mortgage applications w.e. 17 January +0.1% vs +33.3% prior

Markets:

• AUD leads, JPY lags on the day
• European equities higher; S&P 500 futures up 0.5%
• US 10-year yields flat at 4.576%
• Gold up 0.4% to $2,756.59
• WTI crude down 0.1% to $75.77
• Bitcoin down 1.3% to $105,392

It was a slower session with no major economic releases in Europe. But there were still some decent moves in FX with the dollar pulling back, following the gains from earlier in the day.

Trump’s tariff threats inspired the dollar in Asia but the vibes dissipated in European morning trade, with the greenback surrendering almost all of its early advance.

EUR/USD moved up from 1.0395 to 1.0450 levels before easing back a little to 1.0435 currently. Meanwhile, GBP/USD nudged up from 1.2320 to 1.2350 and is keeping flattish on the day now. USD/CAD also recovered from its earlier low of 1.4300 to near 1.4350 and AUD/USD is also up from 0.6260 to 0.6275 at the moment.

The changes are not too drastic but it shows that traders are sensing Trump’s bark might be worse than his bite, at least on tariffs.

In terms of headlines, we had the ECB come out in droves to fortify rate cut expectations for January and March. That fits with market pricing of roughly 46 bps of rate cuts for the next two meetings.

In the equities space, US futures continue to drive optimism as European indices also shrugged off a more tentative start earlier. The DAX is up over 1% to fresh record highs with the CAC 40 also up over 1% to its highest since June last year. Tech shares continue to drive gains in Wall Street with Nasdaq futures seen up 0.9% and S&P 500 futures up 0.5%. Up, up, and away.

In other markets, Treasury yields remain more tepid while gold is continuing its hot start in January again with another round of gains. The high earlier touched $2,763 as buyers are now taking aim at the October high of $2,790 next.

This article was written by Justin Low at www.forexlive.com.