Let’s focus on the good for a few more days

Last week was chaotic. The Federal Reserve’s (Fed) hawkish 25bp cut, the hint from the dot plot that there would be only two rate cuts next year instead of four – because the US economy is too strong to continue the cuts as previously predicted - and the US debt limit shenanigans even before Trump took office gave a negative jolt to the US stock markets. But happily, things got better from Friday on as a set of US PCE data came in softer than expected, and got some investors hoping that maybe – but just maybe – the Fed’s got too hawkish on inflation. Second, the US averted a government shutdown and politicians disregarded Trump / Musk’s demand for suspending the debt limit. The US government will continue to run until mid March, then we will see what happens to that debt limit under the Trump administration. My best guess is that the US will regularly continue to push the debt limit higher – or Trump will scrap something that didn’t make sense anyway. In practice, nothing will change. The US debt will continue to grow, and as per inflation, I think that those who got their hopes up with one set of inflation data will be disappointed.

As a result, the US yields should continue to push higher regardless of how dovish the Fed tries to be. Note that the US 10-year yield advanced up to 100bp since the Fed started cutting the interest rates – and cut 100bp in three meetings. At least half of the cuts were unnecessary, and that’s why, not only did yields continue climbing as the Fed cut rates, but the possibility of a further rise in the 10-year yield toward 5% remains on the table—and that’s not necessarily good news for risk assets.

But anyway, Friday’s session saw a certain relief – at least in the US – because the mood in Europe was not great at all after Novo Nordisk slumped more than 20% at the open as their latest weight loss drug made patients lose less weight than the company had predicted. But across the Atlantic, the S&P500 rebounded more than 1% on Friday, while Nasdaq added 0.85%. The US yields were little changed but the US dollar retreated from more than 2-year highs.

In the absence of major economic data, this Xmas-shortened week could see a further rebound in the US equities – no one wants to miss the Santa rally – and a further retreat in the US dollar in favour of its major counterparts. Yet, beyond tactical trades based on last week’s softer-than-expected PCE measures, the story remains unchanged. The core PCE in the US has been moving up since the summer dip and settled at 2.8% for the second consecutive month, and – I can never repeat this enough but – Trump’s pro-growth policies, tariffs, mass deportations hint that the US inflation risks are tilted toward the upside.

As such, the US Dollar pullbacks could be interesting opportunities to buy the dips. The EURUSD could see resistance between 1.05/1.0545 area – a psychological level and the minor 23.6% Fibonacci retracement on September to December rally. Cable should see limited upside potential within 1.27/1.2720 area. The USDJPY’s way is cleared for a further advance to 160, until the yen bears get scared that the Japanese authorities will intervene directly in the FX markets to stop bleeding. The Bank of Japan (BoJ) will unlikely to make any changes to their policy until March, April next year. This is when the policymakers think that they will have a clearer view on the potential and the impact of Trump’s international policies. In Canada, the Loonie takes a breather on the back of a broadly softer US dollar but the political shenanigans keep the risks tilted toward the upside in the USDCAD as calls for Trudeau to step down are mounting. And finally, the AUDUSD forms support near the 62 cents level. The pair is oversold, but buying the Aussie looks similar to try to catch a falling knife since September.

In commodities, US crude is better bid above the 50-DMA – few cents below the $70pb level – but without a strong conviction to extend this rebound, the price rallies will likely see resistance into the 100-DMA – near $71.40pb and declining – and into $72.85pb, the major 38.2% Fibonacci retracement on late summer slump that should distinguish between the negative trend since then, and a medium term bullish reversal. The ongoing narrative of weak – and weakening - global demand and ample global supply should maintain oil prices in the bearish consolidation zone for now, with however a limited downside potential near the $67pb level.

In precious metals, gold is better bid this morning. Lately, the yellow metal has been pressured by the rising US yields that increase the opportunity cost of holding the non-interest-bearing gold - but an accelerated selloff in global equities could drive capital into the safe-haven metal regardless of the upswing in yields.