Traders Scale Back Rate-Cut Expectations; A Risk-Averse Mood Pushes the Dollar Higher

The enthusiasm for pricing in rate cuts by major central banks appears to have reached its peak. The greenback is surging on Tuesday, fueled by headlines of former US President Donald Trump dominating the first Republican Presidential Candidate runoff for Iowa, solidifying his position as the frontrunner in the Republican primary. The risk-averse atmosphere is evident as investors apparently scale back their rate-cut bets with the Fed, influenced by geopolitical tensions in the Middle East. This trend is particularly impacting the Euro, despite ECB Governor Francois Villeroy’s attempts to downplay rate-cut expectations. The hawkish remarks from Villeroy, coupled with warnings from the President of the Bundesbank, Joachim Nagel, against premature monetary policy easing, are causing investors to recalibrate expectations, diminishing risk appetite, and bolstering the US Dollar. German economic indicators have provided a mixed bag of signals. While the final estimate of the German Consumer Prices Index (CPI) for December reveals year-on-year growth of 3.7%, indicating an uptick from November, it underscores the challenge of achieving the ECB's inflation target of 2%. The German ZEW Economic Sentiment Index exceeded expectations in January but failed to sway the Euro, which continues to grapple with a risk-averse market. Looking ahead, the US Federal Reserve Bank of New York Empire State Manufacturing Index and comments from Fed Governor Christopher Waller later today are expected to introduce volatility to the US Dollar. Investors are keenly awaiting Wednesday's Retail Sales figures in the US, anticipating a moderate increase in December.On the Eurozone front, Eurostat is poised to confirm an acceleration in the Consumer Price Index (CPI) to 2.9% year-on-year in December, up from 2.4% in November. However, core inflation is anticipated to ease to a 3.4% yearly pace from the previous 3.6% rate.In the currency markets, the EUR/USD pair is under pressure, having breached the trendline support from early November lows at 1.0910. The pair is now edging closer to a critical support level at 1.0875, a zone that proved resilient against bearish pressure in early January and mid-December.As we navigate these global dynamics, market participants should brace for potential shifts in currency valuations, with geopolitical events and central bank policies continuing to drive market sentiment. Stay tuned for updates as the week unfolds, particularly with Wednesday's crucial economic releases on both sides of the Atlantic.