The DXY Index returned to the year’s low of around 108 overnight, mirroring the optimism seen earlier on January 7, when markets briefly speculated that US President Donald Trump might adopt a more measured approach to tariffs. In both cases, Trump was quick to reaffirm his commitment to pursue his original plan of imposing tariffs on imports from Canada, Mexico, and China – this time with a date set on February 1. We won’t be surprised if the DXY starts edging higher again now that its 14-day RSI has fallen from overbought levels above 70 to around the neutral 50 mark.
Markets also tended to overlook the influence of US economic data on the greenback. For instance, a stronger-than-expected nonfarm payrolls report pushed the DXY to 110 on January 10, while a CPI release that aligned with expectations kept it near 109. At its FOMC meeting a week away, the Fed will maintain its cautious approach to rate cuts. Before this week’s blackout period, several Fed officials voiced concerns about Trump’s mix of policies – tax cuts, tariffs, and immigration – complicating efforts to return inflation to the 2% target. The University of Michigan consumer survey also noted a tariff-driven increase in inflation expectations. The PCE inflation data release scheduled for January 31 should affirm a slowing in the pace of disinflation and support the Fed’s expected decision to keep rates unchanged after the three rate cuts totalling 100 bps in September-December. More importantly, markets see the Fed delaying rate cuts to mid-2025 and other central banks proceeding with multiple cuts before that. In contrast to the Fed, these central banks viewed tariffs as a greater risk to growth than inflation. 
Quote of the Day
“Under capitalism, man exploits man. Under communism, it's just the opposite.”
John Kenneth Galbraith
January 22 in history
In 2013, the Bank of Japan doubled its inflation target to 2% and announced open-ended asset purchases for 2014 in the hope of ending deflation.
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