Forex Today: Choppy action to extend amid holiday-thinned trading

Here is what you need to know on Monday, January 15:

After a mixed Asian trading, cautious optimism appears to extend into the European morning on Monday, as investors remain rather cautious starting out a fresh week. Also, it’s a US market holiday, in observance of Martin Luther King Jr. Day, justifying the subdued market action.

Further, they assess a slew of the latest fundamental factors and their implications on the financial markets, leaving the US Dollar (USD) scouting for a clear direction against its major peers. At the time of writing, the US Dollar Index is moving back and forth in a tight band, having slipped from higher levels on Friday after the US Producer Price Index (PPI) unexpectedly fell in December, ramping up Fed March rate cut bets that dragged US Treasury bond yields lower.

Markets are now pricing about a 75% chance that the US Federal Reserve (Fed) will begin cutting rates in March, as compared to a 68% probability a week ago, according to the CME Group’s FedWatch tool. The US Treasury bond yields are consolidating the previous week’s decline, checking the upside attempts in the US Dollar.  

However, the US Dollar manages to find some support from safe-haven flows amid escalating Middle East geopolitical risks and simmering China-Taiwan tensions. Reuters reported that Iran-backed Houthi militants launched an anti-ship cruise missile at a US Navy ship.

Over the weekend, Taiwan’s ruling Democratic Progressive Party (DPP) won the presidential election while losing its legislative majority. US Secretary of State Antony Blinken sent Taiwanese president-elect William Lai a message of congratulations following the result. China's Foreign Ministry responded, saying that "China firmly opposes the US having any form of official interaction with Taiwan and interfering in Taiwan affairs in any way or under any pretext."

Additionally, investors refrain from placing fresh bets on major currency pairs ahead of the crucial Gross Domestic Product (GDP) from China, especially after the People’s Bank of China (PBOC) surprised markets with no reduction to the Medium-Term Lending Facility (MLF) rate.

Against this backdrop, the optimism surrounding the Antipodeans remains checked, with AUD/USD defending small gains just below 0.6700 while the NZD/USD pair is pressured toward 0.6200 after facing rejection at 0.6250. The US S&P 500 futures, a risk barometer, are trading flat on the day.

The Japanese Yen seems to be weakest against the US Dollar so far, as USD/JPY has recaptured the 145.00 level. US Senate Democratic leader Schumer said congressional leaders have agreed to a stopgap funding measure, preventing a government shutdown until March. This political headline has also acted as a tailwind for the US Dollar. Meanwhile, Japan's 2-year yield dropped back under zero for the first time since July 2023, weighing on the Yen.

EUR/USD is posting small gains above 1.0950, underpinned by European Central Bank’s (ECB) Chief Economist Philip Lane’s comments, which helped push back against the market expectations for an ECB April rate cut. Lane said that the ECB will have key data by June to decide on the first of a likely series of rate cuts. Focus shifts to the German 2023 GDP report and Eurozone Industrial Production data due later in the European session.

GBP/USD is trading better bid at around 1.2750, struggling amid sluggish markets. Data published by the Office for National Statistics (ONS) showed on Friday, Britain's economy grew 0.3%, slightly more strongly than expected in November but remains at risk of slipping into a mild recession.

USD/CAD is battling 1.3400 even though the WTI oil price is on the defensive just shy of $73 early Monday. The geopolitical developments surrounding the West and Houthis in the Red Sea will be closely followed.

Gold price is looking to build on the previous’s week recovery above $2,050, underpinned by the dovish Fed expectations and the Middle East geopolitical risks.