The Morning Update

The USD is firm, oil prices strengthen, equity markets are up, and US yields ease on improved risk sentiment. The USD index edged higher as better-than-expected US data continues to highlight the strength of the US economy. Meanwhile, the pound continues to be under pressure in the UK, dropping near its weakest level since 2023 following the surprise drop in UK retail sales. European equities were boosted by China's growth and a further drop in global bond yields. UK's FTSE 100 hits record high on further BoE rate cuts expectations. Chinese stocks had their best week in over three months as risk sentiment improved due to easing tensions and improving domestic demand. However, Apple suffered its worst day since August, falling 4% on Thursday, following reports from China and AI struggles. China's GDP hit the 5% target, but markets remain cautious about Trump's tariff threat, which could impact further growth. Investors will be focused on President-elect Trump's inauguration on Monday to see if he will follow through on tariff hikes and tax cuts. Elsewhere, oil prices are set for their fourth week of gains as markets assess the impact of US sanctions on Russia. Bitcoin holds above $100k as investors remain bullish ahead of President Trump's inauguration. In focus today, US building permits, Housing starts, and Industrial production will help provide intraday direction to currency markets today.

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In other news. Hamas set to release first hostages under Gaza ceasefire deal, Israel says. China's GDP growth hits the 5% target for 2024. Trump's Treasury pick warns unwinding tax cuts would spark 'economic calamity.' Mark Carney launches his bid to replace Trudeau as Canada's prime minister. Ukraine's air force says it downed 33 Russian drones launched overnight. China's population falls for a third consecutive year. Russia says it retook 63.2% of the territory captured by Ukraine in its Kursk region. UK Retail Sales fall in a setback to its struggling economy. Investors strap in for prolonged pain in debt-scarred UK markets.

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In currency markets. UBS is forecasting the USD will continue to gain against its G10 peers in H1/25; the Euro will test below parity in 2025, while the CAD will remain under pressure against the USD but has room to strengthen against its other G10 peers. CNY firms 0.3% on GDP results, while Asian currencies are up 0.1% on average against the USD. Trading currencies are mixed, with JPY & MXN falling 0.3%, NOK easing 0.2%, SEK down 0.1%, CHF flat, AUD & NZD up 0.1%, and ZAR strengthening 0.4% against the USD.

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In commodity markets. Oil & Soybean prices strengthen 0.5%. Natural Gas prices tumbled by 3%. Gold prices eased 0.7%. Silver prices weaken by 1.35%. Copper prices are flat, and Wheat prices are down 0.25%.

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CAD continues under pressure, holding above 1.44 as investors braced for expected US tariffs following the President-elect's inauguration on Monday. Elsewhere, the Bank of Canada said that it would soon end its quantitative tightening program, making the BoC one of the first central banks to stop unwinding pandemic-era asset purchases. Intraday, with the lack of high-tier economic data releases, we expect the loonie to remain under pressure ahead of possible US tariffs as soon as Monday.

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EURCAD strengthens in early trading with the threat of 25% tariffs from the US on Canada, keeping pressure on the loonie.

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EUR holds steady, straddling 1.0300 as the USD firms as investors focus on Monday's inauguration. Euro holds steady, but investors are turning pessimistic with expectations for strengthening in USD on expectations the Fed will keep rates steady in H1/25, while the ECB is expected to maintain its easing policy in Q1/25. ECB Luis de Guindos confirmed that further rate cuts would depend on inflation easing as expected, stressing the importance of caution, citing uncertainties such as global trade tensions, fiscal policy shifts and geopolitical risks. We remain bearish Euro, looking for a retest of 1.0200, possibly as soon as next week.

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GBPEUR weakened following the disappointing UK retail sales, which increased the prospect of more BoE rate easing.

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GBP slides back towards 1.2200 amid weak UK Retail Sales. The pound faces fresh headwinds following the unexpected decline in UK Retail Sales in December, which fell to 3.6% y/y, down from 4.2% in November. The surprise fall in the UK retail sales report during the crucial Christmas period is seen as a fresh setback for the Labour government's hopes of reviving economic growth. The softer retail sales reading is expected to allow the Bank of England room to cut interest rates at its next meeting in February. With the lack of any high-tier US economic data releases, we expect to see the pound hold within its current trading range ahead of the US inauguration on Monday.

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