The US Producer Price Index (PPI), excluding food and energy, increased to 3.3% in December, surpassing the expected 2.9%. This indicates rising inflation, which could impact monetary policy and interest rate forecasts. The EUR/USD exchange rate has dropped below 1.1900 as the US Dollar gains strength due to Kevin Warsh’s nomination as Fed chair and higher-than-expected US Producer Prices. The GBP/USD pair is also facing selling pressure, nearing the 1.3700 mark as the USD rebounds.

Market Movements

Gold’s price is fluctuating, bouncing back above $5,000 due to profit-taking and a stronger US Dollar. In contrast, Stellar has reached a three-month low, trading below $0.20, driven by negative sentiment and weakening momentum indicators. Microsoft saw a market loss of $400 billion after a sell-off, which is the second-largest drop on record. In the cryptocurrency world, Bitcoin, Ethereum, and Ripple experienced corrections, with losses of 6%, 3%, and 5% weekly, respectively. Bitcoin is close to the November lows at $80,000, while Ethereum has dipped below $2,800. The unexpected producer price data from December 2025 supports our view that inflation is not decreasing as quickly as many hoped. Combined with Kevin Warsh’s nomination, seen as favoring stricter monetary policies, the Federal Reserve may adopt a more aggressive approach. This shift is boosting the US Dollar significantly.

Market Trends and Expectations

We expect the market to continue reducing anticipated rate cuts for 2026. The CME FedWatch Tool indicates that the chance of a rate cut by June has plummeted from over 70% to below 25% in just weeks. Investors should now consider strategies favoring higher rates, such as shorting Treasury note futures or buying put options on bond ETFs. The risk-off sentiment, highlighted by the large Microsoft sell-off, is likely to continue and spread. The CBOE Volatility Index (VIX) has jumped over 30% this month and is now trading above 20, suggesting increasing fear among investors. We think buying put options on the S&P 500 and Nasdaq 100 is a solid way to protect against further declines in the upcoming weeks. The dollar’s strength poses challenges for other assets, and we expect this trend to persist. Put options on the EUR/USD appear appealing, especially as the pair has already dropped below 1.1900. Furthermore, with gold unable to maintain its record highs and falling toward $5,000, we see additional downward pressure as higher interest rates make non-yielding assets less attractive. For more speculative assets like cryptocurrencies, conditions are particularly tough, which explains Bitcoin’s descent toward $80,000. Decreasing open interest and negative funding rates in the derivatives market indicate that professional traders are preparing for further losses. This mirrors the situation in 2022 when a hawkish Fed first drained liquidity from riskier market segments. Create your live VT Markets account and start trading now.

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