Strong dollar, rising yields hog the spotlight

A look at the day ahead in European and global markets

By Ankur Banerjee, Asia Finance & Markets Breaking News Correspondent

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The dollar stood tall on Wednesday boosted by elevated Treasury yields after strong U.S. data rekindled worries of a rebound in inflation, leaving European stocks staring at a weak open as traders brace for diverging policy paths.

While traders are getting used to the idea of a measured interest rate cutting cycle from the U.S. Federal Reserve, they expect deep cuts from the European Central Bank even after data on Tuesday showed euro zone inflation accelerated in December.

U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

Markets are pricing in 99 basis points of easing from the ECB this year, while they expect the Fed to lower borrowing costs by 37.5 bps by the end of 2025, with the first cut fully priced in only in July.

Benchmark 10-year Treasury yields hit an eight-month high on Tuesday after data pointed to a U.S. economy that remained resilient with a stable labour market but showed signs of inflation risk re-emerging.

That has left the euro pinned close to the two-year low it touched on the first trading day of 2025. The single currency sank 6% last year as weak economic conditions in the region and political turmoil in France and Germany weighed.

Speculators are sitting on bearish positions in euros worth $9 billion, below the four-year-high of $10 billion they were sitting on in early December, showed weekly data from the U.S. markets regulator.

Graphics are produced by Reuters.

A Reuters poll of market strategists last month showed the euro will remain weak in the near term but will likely not fall to parity with the U.S. dollar in the coming months, though the spectre of tariffs from the U.S. looms large.

Europe's premier index will hope to shake off a muted open, having made a steady start to 2025 after rising 6% in 2024. Bond yields, though, may weigh on tech stocks after they touched a more than five-month high on Tuesday.

In corporate news, Meta Platforms on Tuesday scrapped its U.S. fact-checking program and reduced curbs on discussion around contentious topics, its biggest overhaul of its approach to managing political content in recent memory. The change comes as CEO Mark Zuckerberg has been signalling a desire to mend political fences ahead of the administration of President-elect Donald Trump.

The changes will affect Facebook, Instagram and Threads, three of the world's biggest social media platforms with more than 3 billion users globally.

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