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December’s 0.4% monthly core PCE print highlights that price pressures remain sticky on a near-term basis, reinforcing the case for a patient Federal Reserve, while uncertainty over US trade policy is likely to cloud certainty for US business and weigh on sentiment.

STOCK INDEX FUTURES

Equity index futures edged modestly higher after Monday’s sharp selloff, which saw the Dow drop more than 800 points, as lingering uncertainty around US trade policy continues to weigh on broader risk sentiment.

On the corporate front, AMD surged 10% following reports of a deal with Meta to supply GPUs, offering support to semiconductor shares. Attention now turns to Anthropic’s event this morning, where the AI start-up is expected to unveil updates to its Claude chatbot and enterprise tools. Recent product announcements from the company have pressured software and consulting names, with IBM among those facing headwinds amid intensifying AI competition.

Watch point: With existing trade deals in limbo and recent data supporting a pause from the Fed until the summer, focus will center around the Trump administration’s response to last week’s tariff ruling.

CURRENCY FUTURES

US DOLLAR: The USD Index is higher, recovering some losses from Monday to trade above 97.91 as traders continue to assess the US trade outlook in response to the Supreme Court’s ruling against President Trump’s IEEPA tariffs. Continued uncertainty around the administration’s trade strategy will likely contribute to near-term volatility. The dollar’s pullback on Monday reflected reduced tariff leverage and uncertainty around the scope of future policy actions, though the administration subsequently announced a 15% blanket tariff on imports. Renewed military tensions between the US and Iran have added another layer of geopolitical uncertainty, supporting defensive positioning across markets.

From a macro standpoint, resilient domestic demand and persistent services inflation continue to provide modest support to the dollar, though tariff-related uncertainty is likely to provide headwinds. With markets still pricing easing later in the year rather than imminently, DXY is likely to remain rangebound.

Watch point: Clarity on the scope and durability of new US tariff measures will be critical, as sustained trade escalation could reintroduce scrutiny regarding dollar safe-haven demand, as policy confusion is likely to remain.

EURO: The euro remains little changed against the dollar at $1.1773 as markets continue to weigh uncertainty surrounding US trade policy. President Trump’s decision to lift a temporary import tariff from 10% to 15%, following last week’s Supreme Court ruling against broader tariff measures, has left investors seeking clarity on the direction of US–EU trade relations. EU Trade Commissioner Maroš Šefčovič remains engaged with US officials, while debate continues in Brussels over the timing of legislation tied to the bloc’s side of the agreement.

Providing some offset, German business sentiment improved, with the Ifo index reaching a six-month high, reinforcing tentative signs of stabilization in Europe’s largest economy. Focus now shifts to inflation data from Germany, France, and Spain later this week, which will help determine whether recent euro strength is feeding into price pressures and influencing the European Central Bank’s policy outlook.

Watch point: Upcoming euro-area inflation data is likely to reinforce the ECB’s patient stance, while any upside surprise may revive rate-differential support for the dollar and pressure EUR/USD lower.

BRITISH POUND: The Sterling is little changed against the dollar at $1.3484 as traders awaited testimony from Bank of England Governor Andrew Bailey and monitored potential fallout from new US tariffs. Bailey is expected to address parliament’s Treasury committee later in the day, where he may offer more insight into his decision to vote to leave rates unchanged at the BoE’s meeting earlier this month. Investors modestly increased rate-cut expectations despite strong January retail sales and firm February PMI data. Labor last week continued to reflect gradually softening conditions, with the unemployment rate rising to 5.2% in Q4, its highest level outside the pandemic since 2015, while wage growth continued to cool. Flash PMI data pointed to improving activity, with the UK S&P Global Composite PMI rising to 53.9 from 53.7, above expectations. However, employment continued to decline as firms cited rising labor costs, as output price inflation accelerated to a ten-month high, reflecting higher wage and commodity expenses.

Markets currently price roughly a 75% probability of a 25 bps cut at the March meeting and roughly 50 bps of easing by year-end.

Watch point: A March rate cut is increasingly in consideration given disinflationary trends, though still-firm services inflation could present a hurdle to further easing.

JAPANESE YEN: The yen weakened to 156.04 after reports that Japanese Prime Minister Sanae Takaichi conveyed reservations about further interest-rate increases to Bank of Japan Governor Kazuo Ueda, stoking doubts over the central bank’s policy trajectory and independence. According to local media, Takaichi expressed reluctance toward additional rate hikes during a recent meeting, a dynamic that undermined expectations for near-term monetary tightening and pressured the currency lower. Markets interpreted the report as potential friction between Japan’s government and the BoJ on future tightening.

Recent domestic inflation figures showed price pressures eased to their lowest level since March 2022. Annual inflation slowed to 1.5% in January from 2.1% in December, as food inflation declined to a 15-month low, driven in part by a moderation in rice prices. The outcome was broadly in line with Bank of Japan projections that inflation would temporarily dip below its 2% target.

Money markets continue to price a potential rate hike by June, with the January inflation report having only a muted impact on expectations. However, a sustained slowdown in food-price growth could push back the timing of further policy normalization if broader price momentum weakens.

Watch point: Improving sentiment toward Japan’s growth outlook should lend near-term support to the yen, though concerns over expanded fiscal spending may act as a headwind to further appreciation.

AUSTRALIAN DOLLAR: The Aussie fell alongside a drop in gold prices but remained above $0.70 as risk sentiment remain subdued amid the fallout over the SCOTUS decision on Friday. Focus for AUD will be on January’s CPI report due Wednesday, after stronger-than-expected labor data last week lifted market pricing for another Reserve Bank of Australia rate hike in May to around 70%.

Consensus forecasts point to a 0.3% monthly rise in the trimmed mean measure of inflation, which would leave the annual rate steady at 3.3%, still above the RBA’s 2%–3% target band. A firm print would reinforce concerns that underlying price pressures remain persistent, strengthening the case for further policy tightening.

RBA Governor Michele Bullock is scheduled to speak in Melbourne shortly after the release, and any hawkish commentary that validates elevated inflation risks could further support the Australian dollar.

Money markets currently price roughly a 70% probability of a 25 bps rate hike in May, while June and August are favorable to a hike. The combination of resilient labor conditions and still-elevated price pressures keeps the Reserve Bank of Australia biased toward further tightening despite signs of moderating activity.

Watch point: Evidence of sustained moderation in core inflation or a clearer slowdown in household demand would likely temper tightening expectations, while continued strength in price and spending data could keep policy bias firm.

INTEREST RATE MARKET FUTURES

Treasury yields are little changed, with the 10-year hitting its lowest level since early December at 4.04% as renewed uncertainty over US trade policy drove safe-haven demand to start the week. Market concerns are centered around the prospect that that existing trade agreements could face renewed strain, even as senior US officials sought to reassure markets that current deals remain intact. Uncertainty over the administration’s next steps has clouded the outlook, dampening risk sentiment and supporting bonds.

Fed Governor Waller offered hawkish comments on Monday, saying he has recalibrated the case he made for rate cuts at the Fed’s January meeting. Waller said he still believes inflation, stripped of tariffs, is running close to the Fed’s 2% target, but that it would take a clear deterioration in the job market to justify a rate cut. The change in tone marks a significant shift after he dissented multiple times in favor of easier policy. Waller noted that if February’s jobs numbers confirm a stable labor market, holding rates steady would be appropriate.

December core PCE increased 0.4% on the month, holding at 3.0% year-over-year, underscoring persistent services inflation that remains above the Fed’s 2% target. Together, the combination of steady domestic demand and sticky core price pressures reinforces expectations that the Fed will remain patient, keeping rates steady into the summer while awaiting clearer evidence of sustained disinflation.

Market-priced odds remain favorable to a cut July, with markets pricing 56 bps of total easing by year-end.

Watch point: With labor data pointing to continued stability and inflation remaining sticky, even as the year-over-year pace eased slightly, a summer rate cut remains the base case rather than an imminent move.

The spread between the two- and 10-year yields is 57.50 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.467%.

 

 

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