Euro's Strength Drives Down Bond Yields on Rate Cut Bets

Former U.S. President Donald Trump has outlined a dramatic shift in monetary policy, vowing to replace Federal Reserve Chairman Jerome Powell and pursue rapid interest rate cuts once Powell's term concludes. Speaking in Iowa, Trump's comments have sparked debate over the future of the Fed's leadership and its impact on the economy.

Market participants are now closely watching for a potential Fed Chair nomination, even as they prepare for an upcoming Federal Open Market Committee (FOMC) meeting.

Trump's Blueprint for a New Monetary Policy

Trump heavily criticized the Federal Reserve's current strategy, arguing that interest rates have been kept too high for too long. He advocates for a significant reduction in borrowing costs to energize key economic sectors like housing and investment. His remarks suggest he may accelerate the process of appointing a new Fed Chair to implement this vision.

Furthermore, Trump expressed no concern over a weakening U.S. dollar, suggesting it would create a more favorable environment for American exports. This perspective comes as the dollar index has recently fallen to levels around 96. His assertive stance points toward a future policy focused on loosening financial conditions.

Markets Watch as FOMC Meeting Approaches

While Trump's long-term plans create a new narrative, the market's immediate focus is on the next FOMC meeting. Current expectations are for the Fed to hold interest rates steady. According to CME FedWatch data, there is a 97% probability that the policy rate will remain in its current range of 3.5% to 3.75%, largely due to recent data showing cooling inflation.

However, the Fed remains cautious, citing ongoing risks from trade disputes and geopolitical instability.

The Race for the Next Fed Chair

Speculation is already growing about who might succeed Jerome Powell. Several names have emerged as potential candidates, including:

• Rick Rieder: A prominent figure from BlackRock.

• Kevin Warsh: A former Fed Governor.

• Kevin Hassett: A White House adviser.

• Chris Waller: A current Fed Governor.

Rick Rieder is reportedly the betting favorite, with 48% support. His proposed strategy is said to align closely with Trump's goal of monetary easing. Crypto analyst Anthony Pompliano noted, "Rick Rieder's proposed strategy could be a game-changer for the Federal Reserve's future direction."

How Markets Are Reacting to the News

The uncertainty surrounding future Fed policy has already sent ripples through financial markets. In response to the potential for lower rates and a weaker dollar, gold prices surged to a new record high above $5,200.

In contrast, the cryptocurrency market saw increased volatility, with Bitcoin’s price dropping to around $88,000. As the financial world digests Trump's comments, the focus will remain on the Fed's upcoming decisions and the potential for a fundamental reshaping of U.S. monetary policy.

The dollar selloff began in earnest when it was revealed last Friday that Japanese and U.S. authorities were apparently coordinating to bolster the yen and weaken the dollar in a trans-Pacific currency pact.

1: "A rotation trade from FX to precious."

2: "A rotation in FX reserve portfolios"

3: "U.S. curve steepening and Term premium"

Source: Poundsterlinglive

The arrest of Zhang Youxia, China's highest-ranking general, has sent a political earthquake through the Chinese Communist Party. Alongside fellow senior general Liu Zhenli, Zhang stands accused of "grave violations of discipline and the law"—a common euphemism for corruption.

This isn't just another takedown. Zhang is the most powerful figure purged during Xi Jinping's rule and, until recently, was considered one of the president's closest and most trusted allies.

A Shock Purge Hits Xi's Inner Circle

Xi appointed Zhang as the first-ranking vice chairman of the Central Military Commission (CMC) in 2022, making him the top operational commander of the armed forces, second only to Xi himself. Their connection was deeply personal; their fathers were comrades, and they had known each other since childhood.

While Xi has removed numerous generals in his long-running anti-corruption campaign, this move is different. The purge has shrunk the normally seven-member CMC leadership to just two: Xi and Zhang Shengmin, a political commissar who has led previous investigations.

The speed of the event was also unprecedented. Typically, months pass between an official's disappearance and a public announcement of charges. Yet, Zhang and Liu were absent from a senior officials' meeting on a Tuesday and publicly denounced just four days later. This rapid timeline suggests an urgent effort to preempt any potential unrest within the military.

Debunking the Rumors Behind the Arrests

The reasons for such a drastic move remain opaque, sparking widespread speculation. However, several popular theories seem unlikely.

• Armed Standoff: Rumors of a dramatic armed confrontation during the arrests are almost certainly false. Such stories are a common feature of the overseas Chinese rumor mill but rarely have a basis in reality.

• Doctrinal Disagreement: A simple policy dispute over military training or preparedness would not warrant such a high-profile purge. Xi could have easily pushed Zhang into retirement, especially since he had already granted him an exception to serve past the official retirement age.

• Passing Nuclear Secrets: A report that Zhang passed nuclear secrets to the United States also appears weak. This is likely a misunderstanding based on secondhand reports or flimsy evidence, such as discussions of nuclear policy in official meetings with American counterparts.

The Real Reason: A Deep-Rooted Corruption Crisis

The most plausible explanation points to the fallout from an investigation Xi launched into the People's Liberation Army (PLA) following Russia's 2022 invasion of Ukraine. The inquiry into PLA readiness uncovered two alarming problems: rampant corruption within the PLA Rocket Force and a systemic culture of graft tied to military promotions.

The findings reportedly shocked Xi, who believed his purges in the mid-2010s had already cleaned up the military. This was not merely an issue of discipline but of national security. Between 2007 and 2012, the CIA was discovered to have paid the "promotion fees" for its Chinese assets, effectively bribing their way up the PLA hierarchy.

Official editorials on this latest purge reinforce this theory, stressing the themes of entrenched corruption and the absolute necessity of party control over the army.

As disciplinary investigations ensnared one general after another, it's possible that the remaining leaders felt their positions becoming untenable. Some analysts suspect a desperate Zhang and Liu may have started asserting their own authority or even contemplated a move against Xi. This would have confirmed Xi's worst fears, convincing him that swift action was necessary for his own political survival and the PLA's future.

A Military in Turmoil: The Fallout from Xi's Crackdown

More purges are likely to follow, which does not bode well for China's military capabilities. Historically, purges leave armies ill-prepared for war.

While Zhang was not a military mastermind, he was a competent administrator and one of the very few PLA members with direct combat experience, having served as a commander in China's 1979 invasion of Vietnam. His removal is a tangible loss of experience.

The greater damage, however, is to the military's internal culture. Under Xi, state institutions have seen the mediocre and incompetent rise, while the talented and assertive have been sidelined or have left for the private sector. Anti-corruption drives accelerate this trend. In a system where nearly everyone is implicated in some way, the only defense is to attack others for disloyalty.

What This Means for Taiwan and Xi's Grip on Power

There is a silver lining to this internal turmoil: it makes Chinese military adventurism, including a potential invasion of Taiwan, less likely in the near term. Before Xi can trust the PLA to execute such a complex operation, he needs to be confident that its personnel and corruption-induced logistical nightmares have been resolved.

While a weakened officer corps may produce more yes-men, there is little to suggest Xi has succumbed to the kind of delusional nationalism that drove Vladimir Putin to invade Ukraine. Xi's rhetoric on "unstoppable reunification" with Taiwan has remained largely consistent with the positions of his predecessors for decades.

For Xi himself, purging men he personally appointed damages his credibility but simultaneously demonstrates his absolute power. In the long run, however, his legacy is already burdened. Many Chinese view him as a failed leader due to the disastrous zero-COVID policies, the collapse of the real estate sector, economic stagnation, and rising social discontent.

Pervasive Fear and the Prospect of a Coup

By breaking the unwritten rule against targeting those in his innermost circle, Xi has fostered even greater instability within the party's institutions. This may inadvertently create the conditions for a future coup.

However, the pervasive fear, mutual distrust, and sophisticated electronic surveillance that define modern China make the coordination required for such a move extraordinarily difficult. Any serious challenge to Xi's rule would likely only be possible if he appeared visibly weak, perhaps due to a severe illness.

For now, he remains China's sole strongman.

The European Union's foreign policy chief, Kaja Kallas, has declared that Europe must fundamentally increase its role within the NATO alliance, citing a deep-seated shift in its relationship with Washington following Donald Trump's return to the White House.

Speaking at the European Defense Agency's annual conference, Kallas argued that Trump has "shaken the transatlantic relationship to its foundation." While European leaders had initially tried to maintain positive relations to preserve US support for Ukraine, a turning point came after Trump's threats to take Greenland from Denmark, a key NATO ally.

A Structural Shift in Transatlantic Relations

Kallas was direct about the changing geopolitical landscape, insisting that while strong ties with the US remain a goal, Europe must confront a new reality.

"Let me be clear: we want strong transatlantic ties. The US will remain Europe's partner and ally," she stated. "But Europe needs to adapt to the new realities. Europe is no longer Washington's primary center of gravity."

EU foreign policy chief Kaja Kallas argues for greater European self-reliance at the European Defense Agency's annual conference.

She emphasized that this change is not temporary but a long-term structural development. To ensure its own security, Kallas warned that Europe must take decisive action. "No great power in history has outsourced its survival and survived," she said, adding that for NATO to remain strong, it "needs to become more European."

Kallas, the former prime minister of Estonia and a long-standing advocate for a firm stance against Russia, warned that the world is seeing a return to "coercive power politics" where "might makes right." She insisted that Europe must accept this "tectonic shift is here to stay."

A Divided Alliance: Can Europe Stand Alone?

However, Kallas's call for greater European self-reliance is not universally shared. Her comments stand in contrast to a recent warning from NATO Secretary General Mark Rutte, who argued that Europe cannot defend itself from Russian aggression without American support.

Speaking in the European Parliament, Rutte made the case that if the bloc wanted to replace the US nuclear umbrella, it would have to double its current defense spending targets of 5%.

He further cautioned that any European move to build up its own forces independent of US support is a strategy that "Putin will love." Instead of pursuing full autonomy, Rutte called for European nations to focus on expanding their own defense industries within the existing alliance structure.

Japan may be able to avoid direct currency intervention for now, thanks to a coordinated strategy with the United States that has successfully halted the yen's sharp decline. According to Atsushi Takeuchi, a former Bank of Japan official with experience in market operations, this joint effort has dramatically altered the landscape for yen traders.

Takeuchi highlighted that recent "rate checks" reportedly conducted by the New York Federal Reserve were an exceptionally rare move, signaling Washington's strong support for Tokyo's efforts to stabilize its currency.

"The presence of the U.S. made a huge difference as markets know they shouldn't fight the Fed," Takeuchi explained in a Wednesday interview.

US-Japan Cooperation Halts Yen's Slide

The primary objective for Japanese authorities was never to defend a specific currency level but to stop a "one-sided, sharp slide," said Takeuchi. The focus remains on the velocity of the yen's moves rather than its absolute value.

With the market now on high alert following the suspected rate checks, traders are more hesitant to push the yen lower. "Now with suspected rate checks keeping markets on edge and preventing yen bears from testing the currency's downside, Japan probably doesn't need to directly intervene," Takeuchi noted.

This strategic pressure was applied after the yen approached the psychologically critical 160 per dollar mark, a level widely seen as a trigger for intervention. In response to the joint signals, the yen surged over 1% on Tuesday to 152.10 per dollar, a three-month high.

The Risks of Direct Intervention

Stepping in to directly buy yen carries its own set of risks that Japanese officials are likely keen to avoid. Takeuchi pointed out that direct intervention could cause the currency to appreciate too quickly, which in turn could negatively impact stock prices.

This concern is particularly relevant as Prime Minister Sanae Takaichi approaches an election next month, making market stability a key priority.

A Successful Psychological Battle

Takeuchi views the recent spikes in the yen as a clear sign that Japanese authorities have won their psychological battle with the market. He believes the primary role of Japan's top currency diplomat is to maintain a credible threat of intervention, keeping traders constantly on guard.

"The biggest job of Japan's top currency diplomat is to heighten and keep alive market fears of intervention," he said. "So far, Japan has succeeded in doing so."

This approach marks a significant evolution in Japan's currency policy. Historically, Tokyo focused on preventing a strong yen from hurting its export-driven economy. Since 2022, however, the priority has shifted to defending the yen against excessive weakness, which drives up inflation and reduces consumer purchasing power.

Takeuchi, who is now chief research fellow at the Ricoh Institute of Sustainability and Business, was directly involved in several yen-selling interventions between 2010 and 2012.

Top computer chip equipment maker ASML (ASML.AS) logged record orders in the fourth quarter on Wednesday and boosted its 2026 outlook as demand surged from its AI-focused customers even as it trimmed 1,700 jobs.

The job cuts, a rare move and representing 3.8% of staff, would mostly impact leadership in R&D departments in the Netherlands and U.S., said Europe's largest company by market capitalisation, with the move needed for technical agility.

Fourth-quarter bookings, the most watched metric in the industry, leapt to a record 13.2 billion euros ($15.8 billion), from 7.1 billion euros a year ago. The orders well exceeded analyst expectations of 6.32 billion euros, according to researcher Visible Alpha.

Shares were up 4.2% in morning trading, after early jumping as much as 7.5% to a record high. The stock is up 38% this year so far.

'GOING OUT WITH A BANG,' AS QUARTERLY DATA TO BE DROPPED

"It will be the last time that ASML reports quarterly order intake and the company is going out with a bang," ING analyst Marc Hesselink said, referring to ASML's plans to discontinue revealing the bookings figure, arguing it causes unnecessary volatility in shares.

The company raised its 2026 sales guidance to 34 billion to 39 billion euros, beating analyst expectations of 35 billion euros, according to LSEG data. It previously forecast flat-to-higher sales than 32.7 billion euros in 2025.

Customers have in recent months been more optimistic "of the medium-term market situation, primarily based on more robust expectations of the sustainability of AI-related demand," ASML's Chief Executive Christophe Fouquet said in a statement.

Net profit in 2025 at the sole maker of the EUV lithography machines - used to print the world's most advanced chips - jumped 26.3% to 9.6 billion euros, from 7.6 billion euros a year earlier, on sales of 32.7 billion, up 15.5% from a year earlier.

ORDERS BEAT EXPECTATIONS AS AI CHIP DEMAND SURGES

The orders beat comes as ASML customers TSMC (2330.TW), Samsung (005930.KS), SK Hynix (000660.KS), and Micron (MU.O) boost investment plans amid demand for AI logic and memory chips needed by cloud computing giants such as Microsoft (MSFT.O), Amazon (AMZN.O), and Alphabet's Google (GOOGL.O).

South Korea's SK Hynix (000660.KS), also reported record quarterly earnings Wednesday amid the AI boom.

"Overall there is good fourth-quarter orders and 2026 outlook, driven by AI demand for EUV in both logic and DRAM," or memory chips, Mizuho analyst Kevin Wang said in an email.

ASML also said it would buy back 12 billion euros worth of shares through 2028.

JOB CUTS COME AFTER A LONG PERIOD OF EXPANSION

The cull in jobs was the largest at ASML in absolute numbers, following prolonged expansion in the 2010s and 2020s, CFO Roger Dassen said on a call with journalists.

"Job cuts amidst record bookings should make for fascinating talks with the labour unions," said analyst Michael Roeg of Degroof Petercam.

Analysts had expected the Dutch giant to benefit from stronger demand of top customer TSMC, which manufactures chips for Nvidia (NVDA.O), amid tight global supply of memory and AI-accelerator chips.

China is the world's largest buyer, of chipmaking equipment, and was ASML's single-largest market in 2025, representing 33% of sales, a figure that has dropped from 41% in 2024.

Dassen forecast that would fall further to 20% in 2026.

U.S.-led export restrictions prevent Chinese chipmakers from buying ASML's most advanced EUV tools and Nvidia's best chips.

ASML kept longer-term guidance to 2030 untouched, CEO Fouquet said, anticipating revenue of between 44 and 60 billion euros and a gross margin of 56% to 60% in 2030.

Source: Reuters