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MARKETS

Tech stocks sputtered, pulling down U.S. indices as Wall Street rethinks the AI gold rush, rattled by DeepSeek—a Chinese upstart claiming it can deliver major AI breakthroughs on a shoestring budget. With the Lunar New Year sidelining key Asian players, all eyes are on Japan's Nikkei 225, which has been riding the wild waves of Wall Street's drama, responding moment-to-moment to the seismic shifts unleashed by this new challenger in the tech arena.

The AI sector is still feeling the heat with bears circling, ready to pounce on any signs of weakness. The skepticism around tech valuations, already a popular spiel before Monday's wipeout, has only intensified. The argument that tech stocks are perilously overpriced now resonates even more on trading floors, fueling a bearish outlook and gaining followers by the minute.

Adding to the tension, the Federal Open Market Committee wrapped up its latest session with a hawkish hold, pouring cold water on any hopes for imminent rate cuts. This firm stance sent a clear signal: don't bank on loosened monetary policy to buoy stocks anytime soon. The S&P 500 and Nasdaq dipped following the announcement, reflecting growing unease about the Fed's cautious path forward amidst mounting inflation concerns.

Wednesday's market movements underscored this new reality. The S&P 500 dipped 0.8%, while the Dow dropped 205 points, reacting nervously to the Fed's reluctance to cut rates against a backdrop of the administration's inflation-stoking tariff and immigration policies. Fed Chair Jerome Powell’s post-meeting comments emphasized a prudent pause, opting to wait out the economic impact of Trump’s trade tactics before further monetary policy tweaks.

In the bond markets, yields nudged up modestly, reflecting a pre-empted consensus that rate cuts weren't on the table, aligning with the subdued forex market reactions where traders had already priced in the Fed's cautious stance.

The after-hours brought another layer of drama as earnings from tech giants like META, Microsoft (MSFT), and Tesla (TSLA) were dissected for any hints of scaling back AI investments in light of DeepSeek’s cost-cutting revelations.

This week, Wall Street is navigating through a tempest of market recalibrations and standing at a pivotal crossroads amid these evolving market dynamics. As tech valuations oscillate and tariff talks intensify, the financial markets are on high alert, parsing every piece of data that could sway the delicate balance. The unfolding narrative is straightforward: brace for a surge in volatility. With AI advancements and trade policy shifts at the helm, the market's journey is anything but smooth, steering through a storm of uncertainty and strategic reevaluations. Gear up; this rollercoaster is just getting started.

TRUMP WON’T BE A HAPPY CAMPER

The Federal Reserve, under the watchful eye of Chair Jay Powell, whose tenure concludes next year, is treading treacherous Trump waters. At the recent Davos World Economic Forum, President Trump loudly declared his expectation for an immediate and global drop in interest rates driven by falling oil prices. However, the Fed, steadfast in its commitment to its dual mandate, signals a more cautious path forward. Despite December’s projections hinting at possible rate cuts this year, the backdrop is complicated by Trump’s aggressive fiscal policies—tax cuts and deregulation aimed at boosting growth, juxtaposed against tariffs and immigration controls that threaten to stoke inflation.

Imminent GDP figures are expected to confirm last year's growth at 2.8%, with unemployment slightly above 4% and core inflation hovering around 3%. In this complex scenario, Powell's message is clear and deliberate: "We do not need to be in a hurry to adjust our policy stance." This statement, amid Trump’s fiery economic directives, positions the Fed in a high-stakes balancing act, carefully navigating the stormy intersection of aggressive fiscal aspirations and the pragmatic monetary policy required to stabilize and steer the economy through an uncertain time.

FOREX MARKETS

The Fed’s latest meeting left more questions than answers in the FX trading world, mostly about inflation. Traders are speculating whether the Fed has already peeked at the upcoming PCE report. If so, that could spell trouble, signalling a potentially even more hawkish Fed lurking beneath their current guidance.

The ECB is expected to trim rates by 25 basis points, dropping the policy rate to 2.75%. Market whispers suggest the ECB’s terminal rate could bottom out at 1.75% by summer. If the ECB's guidance “waxes dovish,” this could widen the EUR-USD swap rate, put more pressure on the Euro, and align with those market whispers.

On the other hand, tariffs remain the enigmatic joker in the pack. They are a complex puzzle for traders to parse, with too many moving parts to predict how they might influence future Fed and ECB policy. Obviously, in divergent fashion, but to what degree remains the million-dollar question.

After the FOMC meeting, EUR/USD didn't hit the 1.0350 level I was eyeing, leading me to cash in when it crossed back above 1.04—a prudent move to manage risk. I'm evaluating potential re-entry points for shorting EURUSD, pondering whether the window for easy profits has closed or if there's still money on the table amidst the ongoing dance of central bank policies and global political shifts. I'm leaning toward the latter. Meanwhile, I'm closely monitoring US tech stocks, as their performance could sway the dollar significantly, tapping into the narrative of US exceptionalism that's been a key driver this week. Additionally, the yen draws attention as a prime risk-off currency hedge, providing a strategic counterbalance in the current market environment.

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