US Equity Markets
Major US equity benchmarks ended the previous session flat, while Asian markets showed some recovery. Notably, Japan's Nikkei 225 index broke a four-day losing streak, gaining 1.0% to close at 57,143.
Foreign Exchange Market
The US dollar (USD) experienced slight gains against most currencies during the early European session but pulled back to close flat during US trading. Federal Reserve officials, including Governor Michael Barr and San Francisco Fed President Mary Daly, indicated that AI-driven output could potentially raise the Fed's neutral rate, contrasting with former President Trump's view that AI would enhance the economy without causing inflation or necessitating additional hiring.
New Zealand Dollar (NZD) Reaction to RBNZ Decision
The NZD faced downward pressure following the Reserve Bank of New Zealand's (RBNZ) decision to maintain the official cash rate at 2.25%. This decision aligned with market expectations but came after three consecutive rate cuts. The RBNZ's projections indicated a shallower tightening cycle than previously anticipated, leading to a dovish repricing of rate hike expectations, which were reduced from 38 basis points to around 25 basis points.
UK Inflation Data and Bank of England Rate Cut Expectations
In the UK, softer job data prompted investors to price in a 75% chance of a Bank of England (BoE) rate cut next month. The January Consumer Price Index (CPI) report showed headline year-on-year inflation easing to 3.0% from 3.4% in December, primarily due to declines in transport, food, and education costs. Core inflation slightly decreased to 3.1%, while services inflation remained elevated at 4.4%. This data reinforced expectations for a BoE rate cut, with an 86% probability now assigned to a reduction of 22 basis points.
Upcoming Focus: Federal Reserve Minutes
Investors are keenly awaiting the release of the January FOMC meeting minutes, where the Fed voted 10-2 to maintain the target rate at 3.50–3.75%. The minutes are expected to provide insights into the Fed's balancing act between a solid economic outlook and inflationary pressures, as well as the potential for future rate adjustments. Any indications of a higher terminal rate or concerns about inflation could influence yields and support the USD.