The latest Market Talks covering FX and Fixed Income. Published exclusively on Dow Jones Newswires throughout the day.

1110 ET - The looming spectre of stagflation won't deter the European Central Bank from cutting rates this month, ING macro chief Carsten Brzeski writes in a note to clients. German inflation sped up more than expected last month, figures showed Monday, in a development likely to drag price rises higher in the wider eurozone. That increases the currency area's risk of stagflation, or the unwanted combination of rapid price increases and a sputtering economy, Brzeski says. But the ECB will likely overlook concerns around rising inflation and bring rates to a less restrictive level at its January meeting, he says. "The desire to stay ahead of the curve remains a compelling reason to return interest rates to neutral as swiftly as possible," Brzeski says. (joshua.kirby@wsj.com; @joshualeokirby)

1109 ET - German inflation data is a clear warning that existing inflation risks shouldn't be played down prematurely, DWS economist Ulrike Kastens says in a note. Headline inflation rose unexpectedly sharply to 2.6% in December from 2.2% in November. Germany's situation is particularly challenging due to shortages in the labor force, she says. The driver of rising price pressures was once again services inflation, which rose to 4.1%, mainly due to wage costs, she comments. German inflation will therefore stay higher than the eurozone this year, Kastens says, penciling in an average of 2.3% for Germany but 2.0% for the eurozone. (edward.frankl@wsj.com)

1104 ET - The dollar could fall sharply if the U.S. nonfarm payrolls report on Friday misses expectations, Ebury economist Enrique Diaz-Alvarez says in a note. The dollar looks "extremely expensive" as markets are pricing in just one-and-a-half interest-rate cuts from the Federal Reserve this year, considerable U.S. economic strength and inflation pressures, he says. This leaves the currency vulnerable to a significant pullback if the data miss expectations. The DXY dollar index falls 0.6% to 108.244 after reaching a two-year high of 109.533 on Thursday. (renae.dyer@wsj.com)

1102 ET - Sterling could remain little changed against the euro in coming months given uncertainties facing the U.K. and eurozone, Rabobank's Jane Foley says in a note. "We expect EUR/GBP to continue bouncing around the 0.83 area in the months ahead as the market looks for more clarity the U.K.'s growth and inflation predicament and as more certainty is awaited in Germany and France political outlooks." The downward revision to U.K. third quarter economic growth to zero sparked comments about recession risks while the government's October budget could lead to higher inflation, she says. In the eurozone, it remains unclear whether a French 2025 budget will be passed and Germany faces fresh elections next month. EUR/GBP rises 0.2% to 0.8312.(renae.dyer@wsj.com)

1101 ET - The prospect of an early election in Canada and shift in power to a Conservative government would benefit the local currency, Macquarie strategists Thierry Wizman and Gareth Berry say. The pair are more bullish CAD, arguing a resignation by Prime Minister Justin Trudeau would help move things along. Already CAD has made moves higher after reports Trudeau will soon announce he is stepping down and after polls continue to show the Conservatives carry sizeable support with voters. Macquarie says that if things pan out as expected, USD/CAD and EUR/CAD will lower by roughly 3%-4% respectively by end-1Q, and it no longer believes that 1.44 is the "center of gravity" for USD/CAD in 2025. (robb.stewart@wsj.com)

1052 ET - Commodity futures are mostly higher in reaction to a story from the Washington Post that said that potential tariff measures from the incoming Trump Administration may be more narrow than initially expected. This prompted Trump to respond via his Truth Social account, where he said that "the story in the Washington Post, quoting so-called anonymous sources, which don't exist, incorrectly states that my tariff policy will be pared back… that is wrong." The U.S. dollar index remains down for the day since Trump's rebuke, although it's bounced back from initial selling -- with the index now down 0.5%. A lower dollar tends to support commodity futures, making export sales more competitive. (kirk.maltais@wsj.com)

1046 ET - Trump denies on social-media that tariffs will be pared back, which gives some strength to the U.S. dollar. The greenback remains weaker versus most major currencies, but is off early lows. The Washington Post reported that tariffs could be limited to critical imports, citing people familiar with the matter. Trump, on Truth Social, denied the report. The WSJ Dollar Index, which was down nearly 1% on the Post article, recovered after Trump's response and now falls 0.4%. The greenback weakens around 0.7% versus the euro and the pound and rises 0.2% versus the yen.(paulo.trevisani@wsj.com; @ptrevisani)

1046 ET - Germany's inflation problem has not yet been solved, Commerzbank economist Joerg Kraemer says in a note. December inflation came in markedly higher than expected at 2.6%, versus consensus of 2.4%. January inflation is likely to be almost as high, as a result of higher carbon pricing for transport and heating, which could increase consumer prices by 0.1 percentage points on its own, Kraemer says. Inflation in the eurozone as a whole, with data due Tuesday, is now also likely to be higher than the 2.4% expected by consensus. But German inflation is likely to move back toward the European Central Bank's 2% target in 2025, as the moribund economy weakens employee bargaining power and slows wage growth, he says. (edward.frankl@wsj.com)

1031 ET - In 2024, a household earning the median U.S. income of $83,782 would have needed to allocate 41.8% of their income for the mortgage on a $429,734 median-priced home, according to Redfin. This is a minor improvement from 42.2% in 2023 but far above the 30% affordability benchmark of the 2010s. Home affordability should remain elusive in 2025, with home prices expected to rise due to low inventory, pushing more toward renting. The required income to keep housing costs at 30% hit $116,782, a record high, with median monthly payments at $2,920, up 4.3% from 2023. Despite a slight drop in mortgage rates from 6.81% to 6.72%, affordability continues to decline. (chris.wack@wsj.com)

0957 ET - The rise in German inflation was much bigger than expected and suggests any expectations for a half-point European Central Bank interest-rate cut this month look shaky, Capital Economics' Franziska Palmas says in a note. An increase in energy inflation looks like the main driver of the jump in the headline rate to 2.6% in December, but more worrying for the ECB, services inflation rose to 4.1% from 4.0%, she says. "If confirmed in the eurozone data [due Tuesday], ECB officials will be disappointed about the uptick in services inflation." However, inflation will still most likely fall in 2025, as energy base effects turn more favorable, and the weak economy feeds into lower services inflation, she says.(edward.frankl@wsj.com)

0953 ET - Sterling is at risk of falling in the near-term after the Bank of England's latest policy decision signalled a less cautious approach to cutting interest rates, Ebury economist Enrique Diaz-Alvarez says in a note. The BOE left rates unchanged in December but three members unexpectedly voted for a rate cut, creating a "near-term downside risk" for sterling, he says. The outlook for sterling remains positive in the longer run, however. "A decent macroeconomic performance, the likelihood of better relations with the EU under the U.K. Labour government and a still very attractive valuation, historically speaking, should continue to support sterling." (renae.dyer@wsj.com)

0922 ET - The dollar weakens, apparently because of indications that tariffs promised by Trump could be more limited, according to a BBH analysis. This week, a bevy of U.S. labor data is expected to corroborate the narrative that employment conditions are easing, but not too fast. In that case, the Fed wouldn't need to hurry to cut interest rates and Treasury yields would remain elevated, bolstering the greenback. Both the WSJ Dollar Index and the ICE's DXY gauge fall nearly 1%. The dollar weakens 1% against the euro and the pound and 0.4% versus the yen. (paulo.trevisani@wsj.com; @ptrevisani)

(END) Dow Jones Newswires

January 06, 2025 11:10 ET (16:10 GMT)

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