In December, Canada’s Core Consumer Price Index (CPI) fell by 0.4% compared to the previous month, which had a smaller drop of 0.1%. This change points to shifts in how consumers are spending and may influence inflation and monetary policy choices. Gold prices hit an all-time high of nearly $4,700 per troy ounce amid fears of a US-EU trade war. This spike in commodity prices usually reflects market reactions to global tensions or currency changes.

Currency Market Reactions

The US dollar showed uneven results and remained weak due to worries about tariffs from President Trump, affecting several currency pairs. For example, exchange rates for EUR/USD and GBP/USD changed because of these geopolitical concerns. Meme coins such as Dogecoin, Shiba Inu, and Pepe saw a 3% drop, mirroring trends in the broader cryptocurrency market. These digital assets are highly reactive to market feelings and can quickly rise or fall in value. As the week started, financial markets saw stocks retreat while treasuries gained strength and the dollar weakened. This fluctuation was driven by outside factors rather than direct economic news, leading to changes in investment strategies. With renewed threats of a US-EU trade war, market volatility appears undervalued. The CBOE Volatility Index (VIX) is currently around 22 and might spike to the 30-35 range seen during earlier trade disputes in 2019. We should consider purchasing March VIX call options or setting up long straddles on the SPX to benefit from anticipated increased price fluctuations.

Gold And Currency Trends

Gold’s rise to nearly $4,700 is a typical safe-haven response to uncertainties in the economy and geopolitics. The momentum is strong, with little sign of slowing down as long as tariff discussions continue. We recommend using call option spreads on gold futures to efficiently maintain bullish exposure while managing risk at these peak prices. The weakness of the US dollar stems from these trade worries, pushing EUR/USD closer to 1.17. We see this as a lasting trend, as the market adjusts for the potential negative effects of tariffs on the US economy. Buying out-of-the-money call options on EUR/USD offers a leveraged opportunity for further dollar decline in the upcoming weeks. We believe the current strength of the Canadian dollar is a temporary result of the weak US dollar. More significantly, Canada’s core CPI fell to -0.4%, indicating growing deflationary pressures. We expect the Bank of Canada, which has kept its key interest rate at 4.5% since last year, to shift to a more dovish stance. Therefore, USD/CAD call options may present an attractive contrarian position. The decline of the Dow Jones shows that equity markets are starting to take tariff threats more seriously. This cautious sentiment is likely to grow, increasing pressure on stocks that rely on international trade. We are purchasing put options on industrial and technology sector ETFs as a hedge and to prepare for a potential market downturn. Create your live VT Markets account and start trading now.

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