USD Gains, Bitcoin Rebounds, Gold Slides: Key Market Trends Ahead of US CPI Data

Whether the USD flows are Trump 2.0 related is debatable, as it’s the US bond market that has driven the USD to the best levels since July, with all maturities through the US Treasury curve higher (in yield) on the day. The sell-off taking the yield premium demanded to hold US 2yr Treasuries over German 2yr bonds out 9bp on the day to 220bp, with EURUSD following this differentially closely, with the spot rate trading to a session low of 1.0595, before shorts have part covered.

There are pockets of brave buyers stepping in and defending the April lows (1.0601), however, a future daily close below 1.0601 would be technically significant and given the downside momentum that’s in play, backed by clearly ever-divergent policy paths expected from Fed and ECB policy, as well as incoming tariff risk, it takes a brave soul to bet against the USD trend at present.

German political developments are also a consideration, with an election slated for February. Chancellor Scholz will lay down a confidence vote in December, which he will lose, and we will then look at this as the next big election that could consume the EUR and EU equity markets. The question for markets is focused on the fiscal channels, and whether we see a softer fiscal stance from the SPD party, which could offer some tailwinds to German growth in 2025.

A factor that could impact the trading considerations for many trading the DAX, even EUR, although, for now, we navigate relative central bank policy paths and the prospect of an ugly tariff negations between Trump/Lighthizer (should he be confirmed as Trump’s Trade Representative) and the EU trade representatives.

The role of USDCNH in G10 FX can’t be underestimated

With tariffs very much in mind, USDCNH needs to be closely monitored, as the pair's influence on G10 FX pricing is real. The PBoCs CNY daily fixing (set at 12:15 AEDT) is getting increasing focus, as it tells us a lot about the PBoCs appetite to allow the yuan to depreciate. Yesterday’s CNY mid-point fix came in at 7.1927 - in line with analysts’ expectations, and the highest level since September 2023 - offering a belief that the PBoC will allow a steady appreciation of USDCNY – a green light for traders to run long USDCNH trades.

Positioning for higher levels in USDCNH should become a consensus expression among macro funds, and a break of 7.2500 would likely feed into downside risk in EURUSD and AUDUSD. A trending USDCNH may also increase the implied volatility in G10 FX markets.

Gold trends lower but holds big levels

Higher US Treasury yields, and a strong USD may be weighing again on gold, but so too is positioning, with the market still heavily long of the yellow metal. Technical’s matter to positioning, as so many of the big hitters are guided by trend and momentum, and if the short-term trend is lower then the rules-based funds will first reduce longs, before eventually flipping to outright shorts

The set-up in gold looks heavy, but for now the bulls are defending the 10 Oct swing low of $2601.78, but a close through here may result in accelerated selling. Gold has lost form, and rallies are likely to be sold.

US CPI set to influence December Fed meeting pricing

We look ahead to US CPI in the session ahead and traders will be running the scenarios on how US rates and by extension the USD, gold and equity could fare on an upside/downside inflation surprise. The consensus is for a 0.3% m/m increase in core inflation, which would result in the year-on-year clip remaining unchanged at 3.3%, while headline inflation is expected to lift 20bp to 2.6% y/y. Simplistically, a core CPI print that rounds up to 0.4% m/m will likely see US interest rate swaps imply a December 25bp cut at 30% (currently 46%), which would promote a further USD rally. Conversely, a core CPI print that rounds down to 0.2% m/m may see a 25bp cut implied at 55-60% and lift risky parts of the market (equity higher, USD lower).

The potential influence from Trump’s pick of US Treasury Secretary

Another factor that is getting increasing airtime is Trump’s potential pick of US Treasury Secretary. With John Paulson pulling himself out of contention, the prospect of Scott Bessent or Howard Lutnick getting the gig increase – an outcome which will likely be known by the end of the month. Scott Bessent is seen as the front-runner, and he has some strong views on the Fed and Jay Powell and has recently opined of a desire to create a shadow Fed Chair role, essentially, reducing the relevance of Jay Powell in the 12 months before his term expires in May 2026. Markets do not like government involvement in monetary policy one bit, and any sign of reduced independence would likely see a higher risk premium priced across markets and increased volatility – one to monitor.

Asia equity markets eyeing downside on open

On the equity front, we look for a weaker open in Asia, with the ASX200 eyed -0.9% lower and the HK50 -1.3%. The leads from the US aren’t terrible – where at an index level, the S&P500 rallied well off session lows of 5960 and now hovers just below the flatline. Digging into the sector leads, once again it’s the China-related plays that have been shunned, and we see the S&P500 materials under pressure. Tech has held up well, with Nvidia +2.1% and Microsoft +1.3%, and that will support the NKY225 to a greater extent.

Tesla has succumbed to profit taking and we see shares -5.9%, so we’ll see if this dip is supported in the new session ahead, or whether profit-taking morphs into something more protracted. Bitcoin also followed Tesla and US small caps (the Russell 2k is -1.83%) on the profit-taking route, with price falling to 85,133 in early US trade – however, the buyers have stepped in, and Bitcoin is back above $89k and those calling for $100k would be compelled by the intraday support and the failure to attract widespread covering of profitable longs.

Good luck to all.