First Light News – Dollar Drops and Stocks Rally: The Week of Reckoning for US Economic Data

The tech-heavy Nasdaq 100 rallied nearly 200 points to 25,268 on Monday (0.8%), whilst the S&P 500 also managed to eke out a moderate gain, driving price to within striking distance of all-time highs of around 7,000.

Overnight in Asia, Japan’s Nikkei 225 continued to pencil in solid upside – refreshing all-time highs of 57,960 (2.3%) – following Japanese Prime Minister Sanae Takaichi’s landslide election victory on Sunday. The win essentially gave her the keys to open the fiscal taps and push ahead with her pro-business agenda, which, as I noted yesterday, includes an aggressive expansionary fiscal plan of around US$135 billion (¥20 trillion) and tax cuts.

Dollar Under Pressure as Major Currencies Gain Ground

In the FX space, the USD took a hit yesterday. Per the USD Index, the dollar shed 0.8%, marking its second consecutive daily loss. Versus the USD, the EUR, GBP, and AUD gained 0.9%, 0.6%, and 1.1%, respectively. The JPY received a bid against the USD, currently trading around ¥155.00, pushing the pair outside the BoJ intervention zone between ¥162.00 and ¥158.00.

Technically, the USD Index is in a concerning position; the monthly price continues to hold the south channel support, with scope for further underperformance to at least the daily support at 96.38. However, while this support could provide a floor for buyers to work with, longer-term headwinds are pushing the pendulum toward further underperformance in the USD, including the ongoing confidence crisis, Trump’s increasingly unpredictable policies, and expectations of Fed easing.

That said, I do see some potential support factors for the USD. The Fed’s current ‘no rush’ stance provides near-term stability, and there is the possibility of a hawkish Fed Chair in Kevin Warsh, who has been selected to replace Chairman Jerome Powell this May. Additionally, if inflation remains elevated and employment data stabilises, the Fed might postpone the anticipated cuts, given its focus on both sides of the dual mandate at this time. Conversely, if both jobs and inflation deteriorate simultaneously, we could see more aggressive easing materialise, which is unlikely to bode well for USD bulls.

UK Politics in the Spotlight

Here in the UK, Prime Minister Keir Starmer fends off calls to resign amid rising political tensions. His position undoubtedly remains under pressure, and while he may have kept the keys to Downing Street for now, his position looks increasingly precarious.

The recent departures of Morgan McSweeney (Chief of Staff) and Tim Allan (Director of Communications) from the Labour Party, as well as calls from the Scottish Labour leader to resign, have added to the pressure, as the government has been engulfed in a scandal involving Lord Peter Mandelson and his past links to the late Jeffrey Epstein.

Polymarket odds show a 63% chance that Starmer could be out by June, with around a 30% probability that he could be looking for the exit as soon as March. However, this will largely be dependent on the release of the Mandelson documents, the Gorton and Denton byelection this month, UK Chancellor Rachel Reeves’s Spring Statement in March, and, of course, the Scottish and Welsh elections in May.

Macro Calendar – Eyes on Tomorrow’s US Jobs Report

On the macro front, we have the delayed December US retail sales numbers out today at 1:30 pm GMT. But frankly, I do not see this moving the market’s needle today, as attention remains squarely on the slightly overdue US January jobs report tomorrow at 1:30 pm.

The headline payroll number is forecast to show a gain of 70,000, up from 50,000 recorded in December, with the unemployment rate expected to remain unchanged at 4.4%. The annual benchmark revision will be one to watch and could prove more market-moving than the headline number itself, particularly if a substantial downward adjustment is seen to last year’s payroll figures. I will have a more detailed preview out later today.

Friday then brings the January CPI report. Between these two releases, the Fed will get a clearer picture of whether the economy can handle rates remaining higher for longer or whether it needs to start easing again.

Markets currently price in one or two cuts this year, though that could change depending on the data.

Written by FP Markets Chief Market Analyst Aaron Hill