Interest rate developments in January 2026 saw initial market pricing for the Federal Reserve's interest rate cut trajectory for that year. The Fed maintained the benchmark rate unchanged at 3.50%-3.75% during its January FOMC meeting, pausing action after three consecutive 25-basis-point cuts, aligning with market expectations. Fed Chair candidate Waller supported a 25-basis-point cut, a stance consistent with that of Trump-appointed Governor Milan. The Fed's statement indicated preliminary signs of stabilization in the unemployment rate, while inflation remains relatively high and uncertainty regarding the economic outlook persists. Chair Powell stated during the press conference that rate hikes are not the base case assumption for the next move for anyone, he does not believe the Fed will lose its independence, and he will advise the next Fed Chair to remain apolitical. Following the January meeting, the market gradually digested expectations for a slower pace of rate cuts throughout 2026 compared to 2025. By month-end, the selection of the new Fed Chair was largely settled, with President Trump announcing the nomination of Governor Warsh to lead the Fed. Regarding policy direction, the market widely expects the new Chair to implement a dual-track policy of "rate cuts + balance sheet reduction": on one hand responding to Trump's demand for lower rates, while continuing to shrink the Fed's balance sheet. However, aggressive monetary easing is unlikely, which also aligns relatively well with the projected Fed monetary policy path for 2026.
On the inflation front in January 2026, the breakeven inflation rate, reflecting inflation expectations, changed by 0.11% to 2.36%. US CPI for December 2025 increased 2.70% year-on-year, unchanged from the previous reading. Core CPI rose 2.6% year-on-year, slightly below the expected 2.7% and matching the prior figure. Seasonally adjusted CPI increased 0.3% month-on-month, meeting expectations and exceeding the 12-month average of 0.2%; core CPI rose 0.2% month-on-month, below the expected 0.3% but matching its 12-month average. Overall, the US inflation center has shifted lower, yet inflationary resilience persists.
Regarding exchange rates in January 2026, the US Dollar Index changed by -1.18%. However, the dollar showed significant strengthening towards the end of the month, potentially linked to Warsh's monetary policy orientation: expectations for aggressive quantitative easing have largely dissipated. Although President Trump's comments about the dollar put pressure on the index late in the month, the dollar index had recovered substantially by month-end.
In terms of market risk pricing, the VIX index rose in mid-January. During the month, President Trump's statements on geopolitical issues were relatively assertive, with disputes over Greenland and geopolitical conflicts in the Middle East significantly intensifying; trading based on safe-haven premiums became one of the main themes for precious metals during the month.
Strategy Gold: Cautiously Bullish Gold prices fell sharply at the end of the month. Previously, due to excessive gains, gold had acquired some attributes of a "risk asset," creating strong inherent demand for a price correction. Furthermore, excessively crowded long positions made it susceptible to a cascade of selling during price declines, further pushing gold prices lower. However, from a long-term perspective, gold will remain a hard-to-replace asset for wealth preservation. Given the logic of substituting dollar-denominated assets and the persistence of safe-haven premiums, buying on dips is still recommended for gold. Nonetheless, the risk of further short-term corrections cannot be ruled out. Opportunities to buy on dips for the Au2604 contract around the 900-1100 yuan/gram level can be monitored.
Silver: Neutral Silver prices fell sharply at month-end, with the decline far exceeding that of gold. Previously, long positions were excessively crowded, and the preceding unilateral price increase had accumulated substantial unrealized profits in the market, easily triggering a cascade of selling during price declines and further driving silver prices lower. Therefore, a wait-and-see approach is temporarily advisable. However, enterprises with hedging needs can still consider buying the Ag2604 contract on dips around the 19,000-22,000 level for hedging purposes.
Arbitrage: Buy gold-silver ratio on dips Options: Pause Risks Profit-taking by long positions leading to exits. Sustained interest rate hikes triggering large-scale liquidity risks (Monitor the SOFR-OIS spread and ON RRP account balances).
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