The Morning Update

The USD holds steady, oil prices rally, equity markets are up, and US yields rise amid inflation and geopolitical concerns. Currency markets are steady, while oil prices spiked after a joint US/UK strike against Houthi rebels in Yemen could increase the threat of a broader war in the Middle East. Equity markets traded higher as investors stuck to their expectations of US interest cuts in Q2/24 despite the US inflation levels increasing in December. Elsewhere, in China, consumer prices fell for a third straight month in December, increasing concern that its economy is facing growing deflationary pressures. Bitcoin prices slipped, as more than $4 billion of shares were traded between the 11 US spot bitcoin EFTs on Thursday following the SEC's approval for the funds. In focus today, the US Producer Price Index, Fed Kashkari, and ECB's Lane speeches alongside JPMorgan, BofA, Citigroup, and Wells Fargo to report results will all help provide intraday direction to currency markets.

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In other news. The UK will increase Ukraine funding to GBP 2.5 billion as Sunak visits Kyiv. Argentina's annual inflation tops 200% as Milei confronts crisis. ECB President says Trump represents 'a threat' to Europe. Russia prepares legal battle to stall seizure of frozen reserves. China's consumer prices marked their longest streak of declines since 2009, while exports posted their first annual decline in seven years. Taiwan parties to make a final push for support in the critical election; China's defense minister warned it would "smash any Taiwan independence plots."

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In currency markets. The USD holds steady, supported by high US inflation and escalating Mideast tensions. GBP tests 5-month highs as growth beats expectations. CNY holds steady as soft domestic data keeps stimulus hope alive. Petro-currencies advance on surging oil prices. CNY is flat, while Asian currencies slip 0.1% on average vs USD. Trading currencies are mixed, with CHF& SEK weakening by 0.2%, while ZAR is flat, MXN, AUD, NZD & JPY are up 0.1%, and NOK strengthens by 0.3% vs USD.

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In commodity markets. Oil prices surged by 4%, Natural Gas and Wheat prices are up by 0.7%, Gold Prices strengthened by 1.5%, Silver prices rallied by 2%, Copper prices firmed by 0.2%, and Soybean prices gained by 0.5%.

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CAD strengthened in early trading after the US and UK struck at Houthi rebels in Yemen, triggering a rally in oil and precious metal prices. We expect the loonie to steady around current levels ahead of the US Producer Price Index ex Food & Energy y/y December which is expected at 1.9% vs 2% in November. If the PPI follows the US CPI results yesterday and prints higher than expected, we could see an increase in volatility with the potential of another USD rally.

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EURCAD weakened after increasing tensions in the Middle East rallied commodity prices, which provided additional support to the loonie.

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EUR weakens towards 1.0950 amid increasing geopolitical tensions. Euro is under pressure as investors shift to the safe-haven USD and petro-currencies amid increasing tensions in the Middle East. Domestically, ECB president Christine Lagarde said that once the bank's 2% inflation goal comes into view, she's "very confident that rates will start to decline." In 2024, Euros declined 0.8% after rallying 3% in 2023. Investors will be focused on the US PPI to help provide intraday direction to the single currency today.

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GBPEUR holds steady ahead of the US PPI data and increasing uncertainties in the Middle East, Poland, and Ecuador.

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GBP slips off 5-month highs as investors favor the USD as risk-on sentiment eases. The pound slipped off its 5-month highs after the US/UK attacks in Yemen saw investors shift toward the safe-haven USD. Domestically, the pound found support after data showed British growth beat expectations in November while remaining subdued over the last three months. In recent months, the pound has also benefited from stubbornly high inflation levels supporting expectations that the BoE will maintain its higher interest rate levels for longer. Intraday, the US PPI will help provide direction to the pound.