The “ King Dollar” is back in the spotlight, bolstered by a sharp uptick in the ISM services prices paid sub-index for December, sparking whispers of renewed inflation fears. This data point could pivot the Federal Reserve’s gaze onto inflation, fueling another leg up for the greenback amidst higher Treasury yields.

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Today’s financial stage is set for more economic drama ahead of Friday’s NFP print. The release of the FOMC minutes, the ADP payroll data, and a keenly anticipated speech by Fed Governor Chris Waller, who can always influence the rate discourse, are poised to send ripples through the currency markets. Investors are bracing for these events, ready to decode any signals on the Fed’s next moves in this high-stakes monetary chess game.

Unless the next run of data, more so the Non-Farm Payroll print, produces significant clunkers, traders anticipate that the Federal Reserve will continue to err on the cautious side. This prudence is partly influenced by policy uncertainties from the new U.S. administration and the most recent economic indicators, which have surpassed expectations, suggesting a more robust economic landscape than previously thought. This complex backdrop may prompt the Fed to take a measured approach to its upcoming decisions.

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The tariff dilemma remains a pivotal topic among FX traders as they navigate the uncertainties surrounding President-elect Trump’s potential for imposing heavy-handed tariffs. Amidst rampant speculation, these tariff concerns have momentarily receded, overshadowed by pressing macroeconomic factors currently steering market dynamics. Nevertheless, uncertainty persists and, to a degree, influences trading strategies. The Washington Post report caused the recent tariff stir—quickly refuted by Trump—hinting that the anticipated U.S. tariffs might target only selected products. While this report was dismissed, it momentarily shifted market perceptions, suggesting a milder tariff approach that could reverse the dollar’s rise. This fleeting sentiment shift highlights the delicate balance traders must maintain in response to evolving news. Without the WaPo headlines, the dollar would surge past 110 on the DXY.

The Euro

The markets have largely dismissed the higher inflation in Europe, attributing it to base effects that are already factored into models. As a result, rate markets are still anticipating four ECB .25 % rate cuts this year, reflecting a broad consensus to overlook these inflation figures. However, market participants will not ignore the rising energy prices in Europe. This surge in energy costs is becoming a significant stagflation concern. It presents a complex challenge for traders as they assess the potential impact on currency fair values and monetary policy.

Energy market tremors are rippling through Europe as winter deepens, heightening concerns over energy supplies following the closure of a Soviet-era pipeline that once ferried Russian gas to Europe via Ukraine. The shuttering of this key conduit, upon the expiration of a five-year transit agreement, leaves many European countries scrambling for alternative energy sources like LNG imports. This supply shift comes just as natural gas prices in Europe soar to peaks not seen since the autumn of 2023, registering a staggering 105% increase from last year’s lows in February. This surge poses a severe challenge to the inflation landscape across the eurozone, threatening to escalate costs and economic strain as countries grapple with this new stagflation reality.

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The technical setup for staying short on EURUSD may not be the most appealing right now. Still, the overarching narrative of Trump’s protectionist policies could be the game-changer that drives the pair toward parity.

The Yuan

The CNY continues its downtrend as investors brace for a rapid tariff escalation after the January 20th inauguration. Amid these tensions, Chinese authorities have ramped up their efforts to curb further depreciation. Today’s PBoC USD/CNY fixing was notably more potent than Reuters daily estimate, marking the widest divergence since last April.

The People’s Bank of China (PBoC) is strategically tightening offshore CNH liquidity, keeping short Yuan swap rates high. Today, the overnight rate remains elevated at 7.82%, albeit slightly reduced from 8.1% the previous day. This move makes it more expensive and less attractive for fast money traders to short the Yuan. Consequently, traders are shifting their focus and looking for opportunities to short other Asian currencies, navigating the tighter controls imposed by the PBoC.

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If President Trump fully enforces tariffs, the USDCNH will likely breach the 7.60 level.