Trump Treasury Pick Bessent Backs Fed Independence, Dollar, Sanctions on Russian OIL

The US Dollar Index (DXY), which tracks the US Dollar’s (USD) performance against six major currencies, halts its four-day losing streak, trading near 109.10 during the Asian hours on Friday. However, the Greenback encountered difficulties as weaker US Retail Sales and persistent inflation data bolstered market expectations that the Fed will reduce interest rates twice this year.

US Retail Sales rose by 0.4% MoM in December, reaching $729.2 billion. This reading was weaker than the market expectations of a 0.6% rise and lower than the previous reading of a 0.8% increase (revised from 0.7%).

US core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose by 3.2% year-over-year (YoY) in December, slightly below both the previous month's 3.3% increase and market forecasts of 3.3%. Monthly, the core CPI grew by 0.2%, compared to a 0.3% rise in the prior month.

The increasing dovish sentiment surrounding the Fed led to a drop in US Treasury bond yields, with the 2-year and 10-year notes now at 4.23% and 4.60%, respectively. Both yields are set to experience a weekly decline of more than 3%.

Chicago Federal Reserve Bank President Austan Goolsbee stated on Thursday that he has grown increasingly confident over the past several months that the job market is stabilizing at a level resembling full employment, rather than deteriorating into something worse, according to Reuters.

Source: FXSTREET

US President-elect Donald Trump, who takes office Monday, has proposed a 10% tariff on global imports, a 25% punitive duty on imports from Canada and Mexico until they clamp down on drugs and migrants crossing borders into the US, and a 60% tariff on Chinese goods. Some countries including Canada have already vowed to retaliate.

The World Bank said simulations using a global macroeconomic model showed a 10-percentage-point increase in US tariffs on all trading partners in 2025 would reduce global growth by 0.2 percentage point for the year, and proportional retaliation by other countries could worsen the hit to growth.

It said those estimates were consistent with outside studies which showed a 10-point increase in US tariffs could "reduce the level of US GDP by 0.4%, while retaliation from trading partners would increase the total negative impact to 0.9%."

But it noted that US growth could also increase by 0.4 percentage point in 2026 if US tax cuts were extended, it said, with only small global spillovers.

The Bank for International Settlements on Thursday also chimed in, warning of increased "frictions and fragmentation" in global trade and calling a broad-based trade war between Washington and other countries "a tangible risk scenario."

The World Bank's latest Global Economic Prospect report, issued twice yearly, forecast flat global economic growth of 2.7% in 2025 and 2026, the same as in 2024, and warned that developing economies now faced their weakest long-term growth outlook since 2000.

The multilateral development bank said foreign direct investment into developing economies was now about half the level seen in the early 2000s and global trade restrictions were five times higher than the 2010-2019 average.

It said growth in developing countries is expected to reach 4% in 2025 and 2026, well below pre-pandemic estimates due to high debt burdens, weak investment and sluggish productivity growth, along with rising costs of climate change.

Overall output in emerging markets and development economies was expected to remain more than 5% below its pre-pandemic trend by 2026, due to the pandemic and subsequent shocks, it said.

"The next 25 years will be a tougher slog for developing economies than the last 25," World Bank chief economist Indermit Gil said in a statement, urging countries to adopt domestic reforms to encourage investment and deepen trade relations.

Economic growth in developing countries dropped from nearly 6% in the 2000s to 5.1% in the 2010s and was averaging about 3.5% in the 2020s, the bank said.

It said the gap between rich and poor countries was also widening, with average per capita growth rates in developing countries, excluding China and India, averaging half a percentage point below those in wealth economies since 2014.

The sombre outlook echoed comments made last week by the managing director of the International Monetary Fund, Kristalina Georgieva, ahead of the global lender's own new forecast, to be released on Friday.

"Over the next two years, developing economies could face serious headwinds," the World Bank report said.

"High global policy uncertainty could undercut investor confidence and constrain financing flows. Rising trade tensions could reduce global growth. Persistent inflation could delay expected cuts in interest rates."

The World Bank said it saw more downside risks for the global economy, citing a surge in trade-distorting measures implemented mainly by advanced economies and uncertainty about future policies that was dampening investment and growth.

Global trade in goods and services, which expanded by 2.7% in 2024, is expected to reach an average of about 3.1% in 2025-2026, but to remain below pre-pandemic averages.

Source: Theedgemarkets

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Oil headed for a fourth weekly gain ahead of President-elect Donald Trump’s second term, with traders seeking clarity on far-reaching sanctions and trade policies.

West Texas Intermediate traded below $79 a barrel, up more than 2% this week, while Brent closed above $81. Trump’s advisers are crafting a wide-ranging sanctions strategy to try to facilitate a Russia-Ukraine diplomatic accord, while also squeezing Iran and Venezuela, according to people familiar with the matter. Fresh trade tariffs may also disrupt global flows.

A week ago, the Biden administration released its harshest ever curbs on Russian oil. The impact of the move is still reverberating through the global crude market, with freight costs rocketing and traditional buyers of Russian oil including China and India looking elsewhere for supplies.

Prices:

WTI for February delivery rose 0.1% to $78.78 a barrel at 7:26 a.m. in Singapore.

Brent for March settlement closed 0.9% lower at $81.29 a barrel on Thursday.

Source: Theedgemarkets

The Indian Rupee trades flat in Friday’s Asian session.

USD demand from foreign banks might weigh on the INR, but the RBI’s intervention could help limit its losses. 

The US housing data and Industrial Production for December are due later on Friday. 

The Indian Rupee (INR) steadies on Friday. The likely intervention from the Reserve Bank of India (RBI) to sell the US Dollar (USD) via state-run banks helps contain excess losses. Nonetheless, the USD bids from importers and foreign banks, particularly oil companies, could weigh on the local currency. Additionally, the geopolitical uncertainties and potential US trade tariffs by US President-elect Donald Trump could undermine the INR in the near term. Looking ahead, traders brace for the US housing data for December later on Friday, including Building Permits and Housing Starts. Also, the US Industrial Production will be published. 

Indian Rupee holds steady amid importer demand

"Most foreign banks were buying dollars, while the RBI sold dollars to cap depreciation near 86.50/$1 levels, after which some more depreciation was seen up to 86.55/$1," said Anil Bhansali, head of treasury at Finrex Treasury Advisors.

India's trade deficit narrowed to $21.94 billion in December from $37.84 billion in November, owing to a significant decline in gold and oil import bills, according to the Ministry of Commerce and Industry on Wednesday.

US Retail Sales rose by 0.4% MoM in December versus a 0.8% increase prior (revised from 0.7%), according to the US Census Bureau on Thursday. This reading was weaker than the market expectations of a 0.6% rise. 

The US Initial Jobless Claims rose to 217K for the week ending January 10, compared to the previous week's tally of 203K (revised from 201K). This reading came in above the market consensus of 210K. 

Fed Governor Christopher Waller said on Thursday that the US central bank could cut the interest rates multiple times this year if inflation eases as he is expecting. 

Fed Chicago President Austan Goolsbee noted that he becomes more comfortable that the labor market is stabilising, per Reuters.  

USD/INR keeps the constructive bias, overbought RSI warrants caution for bulls in the short term

The Indian Rupee trades on a flat note on the day. The path of least resistance is to the upside as the USD/INR pair has formed higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, the 14-day Relative Strength Index (RSI) reaches overbought territory beyond the 70.00 mark, potentially signalling a temporary weakness or further consolidation in the near term. In the bullish case, the immediate resistance level emerges at an all-time high of 86.69. A decisive break above the mentioned level potentially draws in some buyers to the 87.00 psychological level. If bearish momentum continues, the pair might see a drop to 86.30, the low of January 15. Further south, the next downside target to watch is 85.85, the low of January 10, followed by 85.65, the low of January 7. 

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.

Source: FXSTREET