China's Industrial Output Surges to a 22-Month High, GDP Growth Slightly Below Estimates

Central Bank

Economic

Summary:

China's industrial production surged by 6.8% YoY in December 2023, beating expectations and fueled by robust mining and manufacturing activities. Despite this positive trend, Q4 GDP growth slightly missed estimates at 5.2%, signaling economic challenges

China's Industrial Output Surges to a 22-Month High, GDP Growth Slightly Below Estimates_1

China's industrial production experienced a robust surge in December 2023, marking the most significant expansion in 22 months. According to official data, industrial output grew by 6.8% year-on-year, surpassing market expectations and outpacing the 6.6% gain recorded in the previous month. The acceleration was primarily driven by strong performances in mining (4.7% compared to 3.9% in November) and manufacturing (7.1% compared to 6.7%), with utilities output also contributing positively (7.3% compared to 9.9%).

A breakdown by industries reveals notable accelerations in coal mining, oil and natural gas extraction, non-ferrous metals, chemicals, and general equipment production. However, some sectors, such as electrical machinery, computer and communications, cars, and other transport equipment, witnessed marginal declines in growth. For the entire year, China's industrial output expanded by 4.6% from the previous year.

China's Industrial Output Surges to a 22-Month High, GDP Growth Slightly Below Estimates_2

In contrast to the positive industrial output data, China's Q4 GDP growth slightly missed estimates, expanding at a rate of 5.2% year-on-year, compared to market forecasts of 5.3%. Despite this, the fourth-quarter growth was an improvement from the 4.9% recorded in Q3. The data for December indicated a notable increase in industrial production but also highlighted weaker retail sales and a rise in the surveyed jobless rate. The full-year growth of 5.2% exceeded the official target of around 5.0% and represented an acceleration from the 3.0% growth in 2022. However, it marked the slowest annual rise since 1989, emphasizing the impact of a prolonged property crisis, weak consumption, and global uncertainties.

China's Industrial Output Surges to a 22-Month High, GDP Growth Slightly Below Estimates_3

As a response to the economic challenges, oil prices experienced a decline on Wednesday. Global benchmark Brent crude futures fell by 0.7% to $77.77 a barrel, and U.S. West Texas Intermediate crude futures (WTI) dropped by 0.8% to $71.85 a barrel. The underwhelming Chinese economic growth figures have raised concerns about future demand, prompting a sell-off in the oil market.

Despite the disappointing economic growth, China's oil refinery throughput in 2023 surged by 9.3% from the previous year, reaching a record high. This suggests that while the pace of demand may not meet some analysts' expectations, China's oil demand remains elevated. Signs of steady demand are evident as Chinese refiners actively book oil cargoes for delivery in March and April to replenish stockpiles and lock in relatively lower prices, anticipating stronger demand in the second half of 2024.

Moreover, the strengthening U.S. dollar, nearing a one-month high, has added to the downward pressure on oil prices. Comments from U.S. Federal Reserve officials dampened expectations for aggressive interest rate cuts, reducing demand for dollar-denominated oil for buyers using other currencies.

While geopolitical tensions in the Red Sea have led to oil tanker diversions and fresh strikes against Iran-aligned Houthi militants in Yemen, the market appears to be downplaying the immediate threat of supply disruptions. Analysts suggest that even though oil benchmarks may not fully reflect the Red Sea attacks, the realized price for oil and oil products has increased due to disruptions in trade flows through the Red Sea and Suez Canal.

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Samantha Luan

Economic

Forex

Prevailing mood of risk aversion was evident in Asian session today. Hong Kong stocks led the region lower, reflecting investors' dissatisfaction with the latest batch of Chinese economic data. While China's Q4 GDP growth wasn't far off from analysts' expectations, it still fell short for some, contributing to the market's cautious stance. Additionally, concerns were heightened by the weak retail sales growth and China's continuing population shrinkage, underscoring deeper economic challenges. Japan's Nikkei index stood out as the only exception, remaining relatively stable.

In the currency markets, Dollar is standing out as the best performer for the week so far. The prevailing risk-off sentiment is providing sustained boost to the greenback. Concurrently, reports have surfaced, mentioning an "extreme scenario" where no major central bank might cut interest rates this year. This perspective, highlighted by a Bank of America FX strategist, brings into question the potential scenario where central banks remain on hold due to persistent inflation and ongoing robust economic growth. That's a stark contrast to current market pricing that suggests six Fed cuts this year, which is also "unrealistic" at the other end.

Australian and New Zealand Dollars are facing considerable pressure, primarily due to their economic linkages with China. Japanese Yen, too, is among the weaker currencies at the moment. On the flip side, Canadian Dollar and Euro are showing some resilience, with Canadian Dollar being the second strongest. Sterling and Swiss Franc are showing mixed performances, with the Pound particularly focused on the upcoming UK CPI data, which could provide further direction.

Market Trepidation Over Chinese Data, Dollar Marches On_1

Technically, focus is now on 0.6083 support after this week's decline in NZD/USD. Firm break there will argue that rebound from 0.5771 has completed at 0.6368 already. More importantly that would argue that whole corrective pattern from 0.6537 is still in progress. Deeper fall would be seen towards 0.5771 support. On other hand, stronger rebound from 0.6083, followed by break of 0.6277 resistance, will retain near term bullishness for a test on 0.6537 high next.

In Asia, Nikkei closed down -0.22%. Hong Kong HSI is down -3.31%. China Shanghai SSE is down -0.98%. Singapore Strait Times is down -1.06%. Japan 10-year JGB yield is up 0.0123 at 0.610. Overnight, DOW fell -0.62%. S&P 500 fell -0.37%. NASDAQ fell -0.19%. 10-year yield rose 0.0116 to 4.066.

Fed's Waller anticipates rate cuts this year, stresses upcoming CPI revisions

Fed Governor Christopher Waller expressed growing confidence bring inflation down to target. He noted in a speech overnight that Fed is "within striking distance of achieving a sustainable level of 2 percent PCE inflation". However, he also emphasized the need for more data in the coming months to confirm or challenge the notion that inflation is moving sustainably toward Fed's goal.

Waller also mentioned that he perceives the risks to employment and inflation mandates as "more closely balanced" now. His focus is on watching for sustained progress on inflation and a modest cooling in the labor market.

Regarding interest rate cuts, Waller expressed that "as long as inflation doesn't rebound and stay elevated", he believes Fed will be able to lower the target range for the federal funds rate "this year". But he also clarified, "Clearly, the timing of cuts and the actual number of cuts in 2024 will depend on the incoming data."

Waller also highlighted the importance of the upcoming revisions to CPI inflation scheduled for next month. He recalled that last year's annual update to the seasonal factors reversed what initially appeared to be a decline in inflation. The January CPI report and revisions for 2023, due in mid-February, are anticipated to potentially alter the current understanding of inflation. Waller expressed hope that these revisions would confirm the progress observed so far but emphasized that good policy must be based on data rather than hope.

ECB's Simkus and Müller urge caution over aggressive rate cut expectations

ECB Governing Council Gediminas Simkus expressed a conditional optimism about rate reductions within the year, stating, "If we don't see any surprises that would change the data and the thinking, I'm positive about rate cuts this year."

However, Simkus tempered his outlook with a dose of realism regarding the timing of these cuts. He clarified, "I'm far less optimistic than markets about rate cuts in March or April."

Separately, another Governing Council member Madis Müller commented on the aggressiveness of market expectations for ECB rate cuts in 2024. He observed that these expectations do not align with the current data available to the central bank.

Müller further emphasized that wage growth in Eurozone remains out of sync with the ECB's current inflation targets. He noted that ECB cannot proceed with cutting rates until data reflects the desired price growth conditions.

China's 2023 economic growth at 5.2%, population shrinks for second year

China's GDP grew 5.2% yoy in Q4, an uptick from Q3's 4.9% yoy. For the full year of 2023, the economy also recorded a growth rate of 5.2%. On a quarter-by-quarter basis, GDP growth rate was 1.0% qoq, matched expectation, though this marked a slowdown from the previous quarter's revised 1.5% qoq gain.

In the industrial sector, production rose by 6.8% yoy in December, slightly higher than the previous month's 6.6%, meeting market forecasts. However, retail sales growth decelerated to 7.4% yoy, a drop from November's 10.1% yoy and below the expected 8.1% yoy.

Investment patterns showed a mixed trend. Overall fixed asset investment in 2023 grew by 3.0%, slightly exceeding the 2.9% expectation. Within this category, real estate investment saw a significant drop of -9.6%. Conversely, investment in infrastructure and manufacturing rose by 5.9% and 6.5%, respectively, signaling growth in these areas.

Amidst these economic developments, China faces a demographic challenge as its population fell for the second consecutive year in 2023. Total population decreased by -2.75m to 1.409B, a more rapid decline than in 2022.

Looking ahead

UK CPI data is the main focus in European session while Eurozone will publish CPI final too. Later in the day, US retail sales will catch most attention. US import price, industrial production, business inventories and NAHB housing index will also be released. Fed will release Beige Book economic report too.

AUD/USD Daily Report

AUD/USD's fall from 0.6870 continues today and intraday bias stays on the downside. Deeper fall would be seen to 61.8% retracement of 0.6269 to 0.6870 at 0.6497. Sustained break there will argue that whole rebound from 0.6269 has completed, and bring deeper fall to this support. On the upside, above 0.6632 minor resistance will turn intraday bias neutral first. Market Trepidation Over Chinese Data, Dollar Marches On_2

Market Trepidation Over Chinese Data, Dollar Marches On_2

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Sideway trading could continue in range of 0.6169/7156 for some more time. But as long as 0.7156 holds, an eventual downside breakout would be mildly in favor. Market Trepidation Over Chinese Data, Dollar Marches On_3

Market Trepidation Over Chinese Data, Dollar Marches On_3

Source: ActionForex

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Market Recap

A whipsaw session on Wall Street eventually saw major US indices closing in the red (DJIA -0.62%; S&P 500 -0.37%; Nasdaq -0.19%), with gains in Treasury yields and a stronger US dollar keeping risk sentiments in check. The US two-year yields gained 8 basis point (bp), while the 10-year yields crossed back above its key 4% level – a reaction to some pushback against dovish rate expectations from Federal Reserve (Fed) Governor Christopher Waller's comments. The Fed official acknowledged rate cuts this year, but "see no reason to move as quickly or cut as rapidly as in the past".

On the earnings front, US banks' results were a story of divergence. Morgan Stanley's share price closed lower (-4.2%), with a disappointing guidance for its margins masking the rebound in investment banking activities, while investors took slight comfort in Goldman Sachs (+0.7%) on a more positive management's outlook.

Ahead, US retail sales will be in focus today. Expectations are for US consumer strength to continue with a 0.4% month-on-month growth in December (0.3% in November), displaying some resilience in the year-end holiday spending. A more lukewarm figure may be what markets are hoping to get in justifying dovish rate views, with any significant upside surprise in consumer strength potentially triggering worries of high-for-longer rate, given the higher-than-expected US consumer inflation seen just last week.

The US dollar will be on watch, having pushed above its 102.30 level of resistance this week to register a one-month high and breaking above a downward trendline resistance. Its daily relative strength index (RSI) has also edged above the key 50 level for the first time since November 2023. Further upside may see the US dollar retest the 103.80 level, where a resistance confluence resides with the upper edge of its daily Ichimoku cloud and its 100-day moving average (MA). China's Mixed Economic Data Reflects Challenging Environment Ahead_1

China's Mixed Economic Data Reflects Challenging Environment Ahead_1

Asia Open

Asian stocks look set for a mixed open, with Nikkei+0.55%, ASX -0.20% and KOSPI -1.59% at the time of writing. Nikkei's rally has seemingly called for a near-term breather on overextended technical conditions, although there are no strong bearish catalysts to challenge its prevailing upward trend just yet. Chinese equities remain the underperformer, with the 16,000 level for the Hang Seng Index caving in yesterday, which unlocks a continuation of fresh selling pressures into today's session.

Market focus will be on a series of economic data out of China and subdued growth conditions in the world's second largest economy remain the key story once again. China's full-year gross domestic product (GDP) at 5.2% met the authorities' target of 5% for 2023, but 4Q read of 1% quarter-on-quarter still reflect a weak growth environment, easing from the 1.3% in 3Q.

Other economic data were more mixed as well, with fixed asset investment and industrial production coming in slightly above consensus, but retail sales disappoint. Overall, the trend of weak economic data suggests that the accommodative policy environment has yet to translate to a sustained turnaround in economic conditions, which may call for more supportive intervention by authorities in the first half of 2024.

Chinese equities struggled to see any pick-up on these numbers. The Hang Seng Index seems on the verge of breaking below the lower trendline of a descending wedge pattern, sticking to its broader downward trend. Its daily moving average convergence/divergence (MACD) continues to struggle to move back into positive territory as well. With the 16,000 level giving way, a retest of its October 2022 bottom at the 14,600 level may potentially be in sight over the coming weeks. On the upside, the 16,000 level will stand as immediate resistance to overcome.

On the watchlist: EUR/JPY edged back above daily Ichimoku cloud

Subdued wage growth data and easing Tokyo's inflation last week have ignited fresh weakness in the Japanese yen, as the data was perceived to offer more room for the Bank of Japan (BoJ) to keep its ultra-accommodative policies for longer. Combined with European Central Bank (ECB) members sticking to their 'higher for longer' message on rates, the EUR/JPY has managed to overcome its 200-day MA and edge back above its daily Ichimoku cloud for the first time since March 2023.

A push above the 50% retracement level (from November 2023 peak to Dec 2023 low) may invalidate a potential bearish flag formation. Momentum has been positive as well, with its daily MACD heading back above the zero level. One may watch for a consistent drift higher within a near-term rising channel pattern, with a key support confluence at the 157.20 level. China's Mixed Economic Data Reflects Challenging Environment Ahead_3

China's Mixed Economic Data Reflects Challenging Environment Ahead_3

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CMC

Economic

Forex

It was another poor day for European markets yesterday, with the return of US markets unable to lift the mood, as they too finished lower, due to a continuation of the hawkish rhetoric employed by central bankers this week as they pushed back on rate cut expectations which in turn helped to push yields as well as the US dollar sharply higher.

The weak finish in the US looks set to see European markets open lower in the wake of a softer Asia session after China Q4 GDP came in slightly short of expectations at 1%. The other metrics for industrial production were slightly better for December, rising 6.8% while retail sales slowed from 10.1% to 7.4%, falling short of forecasts of 8%.

The last few days have seen several ECB policymakers pour cold water on the idea of early rate cuts even in the face of a European economy that is on its knees. Even the head of the German Bundesbank, Joachim Nagel was in no mood to compromise despite a German economy that contracted by -0.3% last year and is predicted to struggle again this year.

With the Federal Reserve set to meet in 2 weeks' time there was some hope that Fed Governor Christopher Waller would echo the tone of Powell's post December meeting press conference in talking up the idea of US rate cuts.

This had all the hallmarks of being a triumph of hope over expectation and so it proved with Waller pushing back on market pricing of 6 rate cuts this year, as if he was going to do anything else with the Fed dots showing 3 rate cuts.

His comments that rate cuts ought to be done methodically and carefully, and in a calibrated fashion, spoke to a central bank that is no rush, and that rapid cuts are not necessary. This approach tends to push back on the idea of a March cut, and that the central bank will be very much data dependant.

The fact is that whatever the market may like to think about a Fed cut in March, the pricing risk is very much to the downside, and them not cutting, which suggests the risk of a further squeeze higher in yields.

This caution from the likes of the ECB as well as the Fed this week is likely to be echoed by the Bank of England when it looks at this week's economic data, after the latest UK wages data slowed to 6.6% in November.

While this was in line with forecasts there were some who suggested it supported the idea of an early rate cut. This seems unlikely with today's December inflation numbers unlikely to show a significant enough slowdown to support the idea of a rate cut much before the end of Q2, although that's unlikely to stop markets trying to go down that rabbit hole.

It is true that headline inflation in the UK has more than halved since March last year slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced.

While a further slowdown in inflation is to be welcomed and today, we can expect to see 3.8% for December, most of it has been driven by the falls in petrol prices over the past few weeks. Inflation elsewhere in the UK economy is still much higher although even in these areas it has been slowing.

Food price inflation for example is still much higher, slowing to 6.6% in December, while wages as we saw yesterday are still over 3 times the Bank of England inflation target.

Services inflation is also higher at 6.3%, and expected to slow to 6.1% in December, while core prices rose at 5.1% in the 3-months to November and may slow to 4.9% today.

It's also worth keeping an eye on PPI as we could see a modest pickup in today's numbers.

While the economic data this week is likely to be a key bellwether for the timing of when the Bank of England might look at starting to reduce the base rate, the key test for markets won't be on whether we see a further slowdown in inflation at the end of last year, but how much of a rebound we see in the January numbers.

Whatever markets might look to price as far as rate cuts are concerned the fact that wages are still trending above 6% is likely to stay the Bank of England's hand when it comes to looking at rate cuts when they meet in just over a fortnight.

It's also important to remember that at the last rate meeting 3 members voted for a further 25bps rate hike.

While a further slowdown in the headline rate is likely to prompt a change of heart when it comes to calling for a rate hike, it will take more than a further slowdown in the headline rate for these 3 MPC members to do a complete 180 about turn and push for a rate cut.

EUR/USD – currently looking soft with the failure to move through 1.1000 risking the prospect of a move back to the 200-day SMA at 1.0830. This is the next key support with a break of 1.0800 targeting 1.0720. The main resistance remains at 1.1000.

GBP/USD – needs to get above the highs last week at 1.2800 to maintain upside momentum. Currently looking soft with the main support at 1.2590/1.2600, and below that at the 200-day SMA at 1.2540. We need to hold above here to keep upside momentum intact or risk a slide to 1.2250.

EUR/GBP – currently holding above trend line support just above the 0.8570/80 area, while we have resistance at the 0.8620/25 area last week. Need to see break either side to signal the next move, with further resistance at 0.8670 and the main support at the December lows at 0.8545.

USD/JPY – pushed above the 50-day SMA and the highs last week at 146.40 and looks set for a move towards 148.50. Support now comes in at the 146.30/40 area.

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Alex

Commodity

Australian nickel producers, hit by a sharp jump in supply from rival Indonesia, are starting to buckle under low prices that analysts expect will force a rethink by top global miner BHP Group on its nickel strategy this year.

The metal has long been feted as a key battery material for electric vehicles because it improves energy density so cars can run further on a single charge.

BHP has promoted nickel as core to its green strategy. It signed a deal to supply Australian nickel to Tesla in 2021, touting the country's rich geology and strong financial and environmental regulations.

But Australia's producers have been squeezed by Indonesia's emergence as a supply powerhouse and on the demand side by innovations away from using nickel in batteries, which have led to a 40% price slump over the past year to around $16,000 a ton.

"The challenges facing many nickel producers are unlikely to ease near term. We are bearish on the commodity and quite cautious on assets and producers," said UBS analyst Lachlan Shaw.

Lithium iron phosphate (LFP), which does not use nickel, has been gaining ground as the EV battery chemistry of choice, especially in China, because LFP batteries can be produced more cheaply, making EVs more affordable.

However, BHP has placed a big bet that nickel sulphide deposits in low-risk jurisdictions will attract a premium because they use less energy to extract nickel than laterite deposits found in Indonesia.

It is not alone.

Wyloo Metals, which last year bought nickel miner Mincor for $504 million, still believes in the long-term fundamentals for Australian nickel, said CEO Luca Giacovazzi.

"The industry needs a more appropriate and transparent pricing mechanism, that distinguishes between clean and dirty nickel, so consumers can be confident their EV really is a better choice for the environment," Wyloo's Giacovazzi told Reuters.

But for now, weak prices have forced Australia's high cost producers to announce a swathe of writedowns and restructures, with Canada's First Quantum the latest to cut production.

Shelving projects?

Earnings tanked at BHP's nickel business in the 2023 financial year, sliding 61% from a year earlier to just $164 million. The division accounts for less than 1% of its earnings.

"We are working hard to remain globally competitive in a very tough operating environment. Costs have risen sharply and continue to go up while prices have fallen as new supply comes into the market," said BHP Nickel West Asset President Jessica Farrell.

She said the company is working to "take action to address these challenges", without elaborating.

At its Western Australian nickel operations, BHP is assessing options for a major smelter renewal and a mine expansion while it sets out to build the West Musgrave mine that it acquired with its $6.4 billion takeover of Oz Minerals.

One option for BHP could be for it to delay West Musgrave until the market recovers, said Barrenjoey analyst Glyn Lawcock.

"Clearly right now nickel is challenged," he said. "(But) I think to write nickel off today for forever is a big call."

Even with the growing use of LFP batteries, they won't capture 100% of the market. As consumers go for cheaper cars, governments could mandate greener sourcing policies, he noted.

"It's going to be a big decision point for BHP this year," Lawcock said.

Source: Reuters

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Zi Cheng

Traders' Opinions

Economic

Forex

Fundamental Analysis

The anticipated growth of the UK Consumer Price Index (CPI) by 3.8% in December, a slight deceleration from the 3.9% increase in November, is expected to be a focal point influencing the Bank of England's policy outlook and, consequently, the trajectory of Pound Sterling. Although this reading would mark its lowest point since September 2021, it still remains nearly double the BoE's 2.0% target.

The Core CPI inflation is forecasted to decrease further to 4.9% year-on-year (YoY) in December, compared to the 5.1% growth recorded in November. Simultaneously, the British monthly CPI is projected to rebound by 0.2% following a 0.2% decline in November.

Analysts at TD Securities (TDS) highlighted key factors contributing to the anticipated easing in headline inflation, emphasizing a lack of rebound from the weak November report. They anticipate continued weakness in December, with a rise in tobacco duty exerting some upside pressure on the headline. However, softness in leisure and travel sectors is expected to support a substantial fall in services to 6.0% YoY, a notable 0.9 percentage points below the Monetary Policy Committee's (MPC) expectations. TDS suggests that this could prompt a dovish pivot from the MPC in February, although actual rate cuts may not materialize until May.

BoE Governor Andrew Bailey, speaking at a Treasury committee hearing earlier in the month, expressed hope for the continued decrease in mortgage costs. While refraining from commenting on the monetary policy outlook, he acknowledged the impact of market dynamics on mortgage expenses. After holding the policy rate at 5.25% in December, Bailey dismissed speculation in financial markets about imminent interest rate reductions, emphasizing the challenges in achieving the 2% inflation target.

Although a surprise fall in inflation in November fueled expectations of earlier rate cuts, attributed in part to declining petrol prices, the BoE remains cautious. UK wages grew at the slowest pace in nearly a year in the quarter to November, indicating easing inflationary pressures. Furthermore, GDP expansion in November and concerns about the economy slipping into recession due to high energy bills and borrowing costs underscore the complex landscape.

Given these circumstances, the upcoming UK inflation data assumes significance in estimating the pace and timing of potential interest rate cuts by the central bank throughout the year, thereby influencing the value of Pound Sterling.

Technical Analysis

GBP/USD has been moving in a bullish market structure of forming higher highs and higher lows generating higher prices since last year. However, GBP/USD didnt start off the year very well as USD started strengthening as rate cut probability is lowering for the US which is giving strength to USD temporarily.

GBP/USD has been retracing continously to a key zone of support and support trend zone as well. This is a very important zone to hold GBP/USD, the upcoming UK CPI release could either break this support easily or reverse sharply towards the upside.

Will GBP End Its Downside Correction With The Release Of UK CPI?_2

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Zi Cheng

Forex

Traders' Opinions

Economic

According to CME's FedWatch Tool, markets are currently factoring in a 65.2% probability of a rate cut of at least 25 basis points (bps) from the U.S. Federal Reserve in March. This is a slight reduction from the 81% expectation in the previous session. The dollar index, tracking the U.S. currency against a basket of major trading partner currencies, saw a 0.73% increase to reach 103.38, hitting its highest level since December 13, with the potential for the most significant one-day percentage gain since January 2.

Source: CME FedWatch Tool

The dollar continued to strengthen during the session, particularly following comments by Waller, who stated that the U.S. is close to the Federal Reserve's 2% inflation target. However, he cautioned against hastening rate cuts until there is certainty about the sustainability of lower inflation. Waller's perspective, as a noted hawk, affirmed the consensus at the Fed that a peak has been reached, emphasizing the need for a deliberate and cautious approach to rate adjustments, as mentioned by Marc Chandler, Chief Market Strategist at Bannockburn Global Forex in New York.

Chandler highlighted the dollar's recent sideways trading pattern, noting that the oversold and technical conditions observed at the end of the previous year are now easing. Goldman Sachs, while maintaining its expectation of the Fed implementing three consecutive cuts starting in March, acknowledged that Waller's remarks increase the possibility of a later adjustment or a preference for quarterly cuts.

Despite the overall strength of the dollar in the session, it briefly pared gains following a subpar report on the manufacturing sector in the New York region.

The euro experienced a decline of 0.72% to $1.0869, positioning itself for the most significant one-day percentage drop in two weeks. This downturn followed remarks from European Central Bank policymaker Joachim Nagel on Monday, aiming to temper expectations of early rate cuts. On Tuesday, several ECB policymakers continued to introduce an element of uncertainty regarding the timing of potential moves, even though it is anticipated that interest rates will decrease later this year.

The U.S. dollar found support in the ascent of U.S. bond yields on Tuesday, rebounding from the holiday on Monday, with the 10-year yield rising by 11.9 basis points to reach 4.0695%. An ECB survey on the same day indicated a decrease in consumer expectations of euro zone inflation three years ahead, dropping from 2.5% to 2.2% in a November poll.

Sterling exhibited a 0.79% decline to $1.262 after data revealed a significant deceleration in British wage growth during the three months through November. This data reinforced the notion that the Bank of England might implement substantial rate cuts throughout the year.

Against the Japanese yen, the dollar strengthened by 1.04%, reaching 147.26, and hitting 147.31, matching its highest level since December 7. Data showed that Japan's wholesale price index remained unchanged in December compared to a year ago, marking the 12th consecutive month of a slowing rate of change. This development alleviated pressure on the Bank of Japan to swiftly withdraw from its monetary stimulus measures.

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