Markets Face Diverging Monetary Paths and Political Uncertainty (01.21.2025)

The euro hovers near late 2022 lows at $1.03, pressured by cautious ECB rate-cut signals and inflation risks tied to potential Trump tariffs. 

Meanwhile, the yen rallies on growing expectations of a BOJ rate hike, and gold edges above $2,720 amid ongoing trade war fears. The pound struggles under weak UK economic data and concerns over public debt, while silver climbs on hopes of Fed rate cuts and easing tariff tension. Investors look to upcoming central bank decisions and geopolitical shifts for clearer market direction.

Euro Struggles as ECB Signals Caution on Rate Cuts

The euro hovered near $1.03, close to late 2022 lows, as dollar strength persisted amid expectations of fewer Fed rate cuts and inflation concerns tied to Trump’s policies. ECB officials urged caution on further rate cuts, with Robert Holzmann doubting a January cut and Joachim Nagel warning against hasty action due to high inflation and uncertainty. Eurozone inflation rose to 2.4% in December, driven by base effects, aligning with expectations. The ECB, after four rate cuts since June, is expected to ease further, with markets anticipating a 25bps cut next week.

From a technical perspective, the first resistance level is at 1.0430, with further resistance levels at 1.0460 and 1.0515 if the price breaks above. On the downside, the initial support is at 1.0355, followed by additional support levels at 1.0270 and 1.0225. 

Yen Strengthens Past 155 on BOJ Rate Hike Expectations

The Japanese yen strengthened past 155 per dollar on Tuesday, hitting a one-month high on expectations of a BOJ rate hike to 0.5%, the highest since 2008. The BOJ is also likely to raise its inflation forecast, supported by optimism over wage growth meeting the 2% inflation target. Finance Minister Katsunobu Kato's reaffirmation of action to support the yen added further strength. Meanwhile, traders analyzed President Trump’s first day in office, marked by executive orders and tariff discussions.

The key resistance level appears to be 158.60, with a break above it potentially targeting 160.00 and 161.00. On the downside, 154.90 is the first major support, followed by 153.40 and 152.40 if the price moves lower.  

Gold Rises on Trade War Risks and Geopolitical Uncertainty

Gold rose above $2,720 per ounce on Tuesday, driven by concerns over President Trump’s potential 25% tariffs on Mexico and Canada, which could spark a trade war and increase safe-haven demand. Investors also weighed inflation risks tied to Trump’s tax cuts and spending plans, which may limit the Fed's ability to ease monetary policy, reducing gold's appeal. On the geopolitical front, markets monitored the impact of a delayed Israel-Hamas ceasefire.

Technically, the first resistance level will be 2750 level. In case of this level’s breach, the next levels to watch would be 2780 and 2800 consequently. On the downside 2660 will be the first support level. 2630 and 2600 are the next levels to monitor if the first support level is breached. 

Pound Falls to $1.22 Amid Stagflation and Fiscal Worries

The British pound weakened to $1.22, near late 2023 lows, as traders evaluated economic data and stagflation risks. GDP grew by only 0.1% in November, missing forecasts, with stagnation likely unless December growth reaches 0.07%, per the ONS. Inflation fell to 2.5% in December, aligning with the BoE's forecast but below market expectations of 2.6%. Markets are pricing in one BoE rate cut this year. UK financial and bond markets remain pressured by concerns over debt levels and the government’s ability to manage public finances.

The first resistance level for the pair will be 1.2350. In the event of this level's breach, the next levels to watch would be 1.2430 and 1.2460. On the downside 1.2265 will be the first support level. 1.2100 and 1.2080 are the next levels to monitor if the first support level is breached.

Silver Rises on Fed Rate Cut Hopes and Eased Tariff Fears

Silver rose to $30.34 per ounce on Monday, driven by supply concerns and narrowing price gaps between New York and London markets. Initial tariff fears following President Trump's inauguration increased silver premiums, but reports of delayed tariffs eased pressure. Silver remains elevated due to supply fears, strong industrial demand, and expectations of Fed rate cuts, which could weaken the dollar and support commodities. Reduced US-China tensions after a positive Trump-Xi call further enhance silver's appeal.

Technically, the first resistance level will be 31.00 level. In case of this level’s breach, the next levels to watch would be 31.80 and 32.50 consequently. On the downside 29.85 will be the first support level. 28.80 and 28.50 are the next levels to monitor if the first support level is breached.