US Issues Fresh Round of Sanctions Against Russia Ahead of Trump's Return to White House

WTI price loses ground to near $78.85 in Thursday’s Asian session.

Israel and Hamas agreed to a ceasefire deal, weighing on the WTI price.

US crude oil inventories declined by 1.962 million barrels last week, according to the EIA. 

West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $78.85 on Thursday. The WTI price edges lower as improved prospects for a ceasefire between Hamas and Israel could ease geopolitical tensions in the Middle East, which weigh on the WTI price.

 According to an official, Israel and Hamas agreed to a deal to halt fighting in Gaza and exchange Israeli hostages for Palestinian prisoners. 

An ending of conflicts between Israel and Hamas will ease tensions in the Middle East and reduce the threats of disruption to crude supplies in the region. This, in turn, could undermine the black gold price. 

However, US crude oil stockpiles extend decline, which might cap the downside for the WTI price. The US Energy Information Administration weekly report showed crude oil stockpiles in the United States for the week ending January 10 decreased by 1.962 million barrels, compared to a decline of 959K barrels in the previous week. The market consensus estimated that stocks would fall by 1.6 million barrels. 

Oil traders await the release of US Retail Sales for December and weekly Initial Jobless Claims for fresh impetus, which are due later on Thursday. In case of a weaker-than-expected outcome, this could drag the Greenback lower and lift the USD-denominated commodity price. 

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

Source: FXSTREET

EUR/USD trades flat around 1.0295 in Thursday’s early Asian session. 

The softer US core CPI data revives Fed easing expectations, which cap the upside for the USD. 

Traders see the ECB delivering three or four rate cuts this year. 

The EUR/USD pair holds steady around 1.0295 during the early Asian session on Thursday. The cooler-than-expected US Consumer Price Index (CPI) inflation data for December raises the bet that the US Federal Reserve (Fed) could cut interest rates twice this year, which weighs on the Greenback.

However, rising concerns over Eurozone economic growth might cap the upside for the major pair. The US Dollar (USD) declined after the US core CPI data came in softer than estimated, triggering expectations that the Fed's easing cycle may not be over yet.

Markets now expect the US central bank to deliver 40 basis points (bps) of rate cuts by year-end, compared with about 31 bps before the inflation data.Across the pond, the European Central Bank (ECB) delivered rate cuts four times last year, and traders expect three or four moves this year due to the concerns about the Eurozone's weak economic outlook.

The rising bets of further interest rate reductions from the ECB could undermine the Euro (EUR) against the USD in the near term. Later on Thursday, investors will keep an eye on Germany’s Harmonized Index of Consumer Prices (HICP) for December and the ECB Monetary Policy Meeting Accounts. On the US docket, the Retail Sales for December and weekly Initial Jobless Claims will be the highlights. 

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Source: FXSTREET

Canada could impose countermeasures on up to C$150 billion (US$105 billion, or RM471.8 billion) worth of US imports if President-elect Donald Trump puts tariffs on Canadian goods and services, a source familiar with the matter said on Wednesday.

Canada has drawn up a list of targets but would hold public consultations before acting, said the source, adding that the extent of any potential reaction would depend on what Trump does.

The Toronto Star was the first to report the proposed countermeasures.

Canadian Prime Minister Justin Trudeau earlier met the premiers of Canada's 10 provinces to discuss how to react to any US tariffs and the list of tariff targets, said the source, who requested anonymity because they were not authorised to speak to the media.

Trump says he wants to impose a 25% tariff to push Canada to tighten border security, to stem the flow of illegal migrants and cut fentanyl smuggling, a move that would appear to violate a free-trade deal.

Such a move would be crippling, given that Canada sends 75% of all goods and services exports to the United States.

The source said the proposed countermeasures would be divided into three groups. If Trump does make good on his threat, Canada would immediately target a small group of goods, including orange juice from Florida, where he lives.

"Nothing can be off the table if the US continues to choose to move forward with these punishing tariffs," Trudeau said after meeting the premiers.

Trudeau said any push back would be forceful and robust but declined to give details, given it was not yet clear what exactly Trump would do.

"I support the principle of a proportional dollar-for-dollar response," he said.

Earlier on Wednesday, federal Immigration Minister Marc Miller said the flow of migrants and drugs coming from Canada is minute, compared to the volumes entering the United States from Mexico.

Although Trudeau and the premiers in the room said the two levels of government were united, the energy-producing province of Alberta did not sign the final joint declaration released at the end of the meeting.

Alberta premier Danielle Smith, who dialled into the meeting, said she was opposed to the idea of curbing Canadian oil exports, an option that federal officials have raised as an option that would drive up US gasoline prices.

The final declaration said if Ottawa did impose retaliatory measures, it would quickly provide money to Canadian workers and businesses to help offset the damage done by Trump's tariffs.

Trudeau announced this month that he would be stepping down, in the wake of a dispute with former finance minister Chrystia Freeland, who quit in opposition to his proposals for more spending. She said Canada needed to maintain financial reserves to help offset the impact of US tariffs.

Trudeau told reporters that he would not be running again the next election, which must be held by Oct 20.

Source: Theedgemarkets

The People’s Bank of China (PBoC) set the USD/CNY central rate for the trading session ahead on Thursday at 7.1881 as compared to the previous day's fix of 7.1883 and 7.3247 Reuters estimates.

PBOC FAQs

What does the People's Bank of China do?

The primary monetary policy objectives of the People's Bank of China (PBoC) are to safeguard price stability, including exchange rate stability, and promote economic growth. China’s central bank also aims to implement financial reforms, such as opening and developing the financial market.

Who owns the PBoC?

The PBoC is owned by the state of the People's Republic of China (PRC), so it is not considered an autonomous institution. The Chinese Communist Party (CCP) Committee Secretary, nominated by the Chairman of the State Council, has a key influence on the PBoC’s management and direction, not the governor. However, Mr. Pan Gongsheng currently holds both of these posts.

What are the main policy tools used by the PBoC?

Unlike the Western economies, the PBoC uses a broader set of monetary policy instruments to achieve its objectives. The primary tools include a seven-day Reverse Repo Rate (RRR), Medium-term Lending Facility (MLF), foreign exchange interventions and Reserve Requirement Ratio (RRR). However, The Loan Prime Rate (LPR) is China’s benchmark interest rate. Changes to the LPR directly influence the rates that need to be paid in the market for loans and mortgages and the interest paid on savings. By changing the LPR, China’s central bank can also influence the exchange rates of the Chinese Renminbi.

Are private banks allowed in China?

Yes, China has 19 private banks – a small fraction of the financial system. The largest private banks are digital lenders WeBank and MYbank, which are backed by tech giants Tencent and Ant Group, per The Straits Times. In 2014, China allowed domestic lenders fully capitalized by private funds to operate in the state-dominated financial sector.

Source: FXSTREET

Scott Bessent, Donald Trump’s nominee for Treasury secretary, said on Wednesday that maintaining the US Dollar (USD) as the world’s reserve asset is important to US economic health and the nation’s future, per Bloomberg.  

Key quotes

“We must secure supply chains that are vulnerable to strategic competitors, and we must carefully deploy sanctions as part of a whole-of-government approach to address our national security requirements,”“And critically, we must ensure that the US dollar remains the world’s reserve currency.”“Trump was the first president in modern times to recognize the need to change our trade policy and stand up for American workers,”  “Productive investment that grows the economy must be prioritized over wasteful spending that drives inflation.” 

Market reaction

The US Dollar Index (DXY) is trading 0.04% lower on the day at 109.06, as of writing.

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Source: FXSTREET