Economic Force - Klarity FX Market Briefing

• Global bond yields rallied led by UK gilts hitting 2008 levels, GBP falls.
• Strong US jobs report sends US yields higher and equities lower
• Fed minutes raise concerns on inflation and Trump policy unknowns
• Beleaguered Canadian PM Trudeau resigns, adding to CAD uncertainty
• Market readies for US CPI release, sticky prices may hit equities
• Trump suggests land grab by economic force, little market reaction
• Oil rallies on Russia sanctions, as well as higher demand outlook

Last week, global markets processed mixed economic data and political developments, further refining expectations for 2025. In the US, Friday’s employment report surpassed forecasts, with non-farm payrolls increasing by 265k and average hourly earnings up 0.3%. Treasury yields climbed, briefly boosting the dollar. However, the rise in yields weighed on equities, limiting USD gains against the JPY. The yen remains weak but approaches a potential bottom amid intervention risks and constrained upside in US yields. US markets now anticipate only one Fed rate cut this year. Inflation expectations remain elevated, with the University of Michigan’s 5-year median reaching 3.3%, the highest since 2008.

EUR/USD slipped near 1.02 despite yield spreads favoring the euro, as USD strength and Europe’s fragile political landscape persisted. Meanwhile, GBP softened on cautious BoE rate cut expectations. Markets are questioning whether the recent rise in UK gilts reflects a technical liquidity issue or deeper concerns about the UK economy's vulnerability, drawing parallels to the 2022 Truss administration.

The Australian dollar remains under pressure, weighed down by global trade concerns and USD strength. The Canadian dollar briefly rallied on speculation of a softer stance on Trump-era tariffs, but these hopes were quashed, shifting focus to upcoming Canadian elections in the spring. The potential for a conservative win could reshape the economic dialogue with the US. Despite a strong December jobs report adding 91k positions, it had little impact on BoC rate cut expectations or the wide US-Canada yield spread. The Loonie narrowly avoided a seventh consecutive week of losses.

Looking ahead, US CPI is projected to rise 0.4%, with core CPI at 0.3%, likely supporting USD strength heading into Trump’s inauguration. Markets are closely monitoring incoming administration rhetoric on leveraging economic policy for national security, a factor shaping market dynamics as January 20 approaches. UK CPI data may show easing core inflation, pressuring GBP further. Japanese trade balance and PPI, ECB minutes, and German GDP will be key to shaping global sentiment. EUR/USD could see selective recovery, while GBP remains vulnerable to additional downside risks.

Disclaimer: The details expressed in this transmission and accompanying documents are for information purposes only and are not intended as a solicitation for funds or a recommendation to trade.