Dollar Strengthens on Higher Yields, Eurozone PMI Beats Forecasts, Pound Faces Recession Concerns

The dollar approached a two-week high, bolstered by a combination of factors including higher US Treasury yields and a shift towards caution in risk sentiment that negatively impacted Wall Street. Trading activity in Asia was subdued due to a holiday in Japan, leading to the dollar trimming some of its earlier gains during the region's trading day. A spike in risk appetite at the end of the previous year, spurred by the Federal Reserve's dovish stance in December, had previously weakened the dollar and triggered rallies in both Treasuries and stocks.

In the Eurozone, the HCOB Manufacturing PMI for December 2023 rose to 44.4, up from November's 44.2, surpassing forecasts. The German Manufacturing PMI also exceeded expectations, increasing to 43.3 in December from 43.1. Upcoming data releases include German employment figures and the Eurozone HCOB Composite PMI, Services PMI, and December Consumer Price Index (CPI).

In the United Kingdom, recession concerns and a weakening manufacturing sector are reducing the appeal of the Pound Sterling. Growing economic pessimism and the cost of living crisis could prompt Bank of England policymakers to rethink their strategy of maintaining high interest rates.

The market reaction to the recent 7.6 magnitude earthquake in Japan was short-lived and the Bank of Japan was expected to take a hawkish turn in policy. The BoJ is expected to exit its ultra-loose policy in April after the annual wage negotiations in March, although an earlier move in January is not off the table.

Uncertainty over the Federal Reserve's timetable for rate cuts has led to a sudden rise in US Treasury bond yields, posing a challenge to non-yielding gold prices. The upcoming FOMC meeting minutes are eagerly awaited as they will provide clues on future policy direction, which will impact both the USD and gold prices.

Oil prices initially surged earlier in the week following attacks on vessels in the Red Sea by Houthi rebels and the reported presence of an Iranian warship. These events raised concerns about potential disruptions in crucial oil transportation waterways. However, optimism regarding aggressive US interest rate cuts diminished, leading to a downturn in oil markets ahead of the Federal Reserve meeting minutes and employment data release.