The United States dollar index (DXY) lifted for the third straight week, despite intermittent support from firm U.S. economic data and cautious Federal Reserve rhetoric.
The DXY added 0.2% over the week to finish at 99.38 on Friday, with markets reluctant to add exposure ahead of a long holiday weekend in the United States, correcting from a six-week high near 99.49.
Dollar sentiment was briefly underpinned earlier in the week after Kansas City Fed President Jeffrey Schmid and Atlanta Fed President Raphael Bostic reiterated the need for a modestly restrictive monetary policy stance amid persistent inflation risks.
Schmid warned that premature rate cuts could aggravate price pressures, noting that inflation remained “too hot” to justify aggressive easing.
December U.S. consumer price index data last week showed price pressures holding steady, reinforcing expectations that the Federal Reserve will proceed cautiously.
Meanwhile, analysts at ING said the U.S. dollar’s recent firmness reflects a broader macro repricing, driven by resilient U.S. data, rising Treasury yields and strong foreign inflows into U.S. assets.
They added that meaningful dollar weakness would likely require lower U.S. rates or increased foreign hedging activity, with the DXY to continue grinding higher toward 100 if it sustains a break above the 99.45–99.50 zone.
Attention will also turn to global policy messaging next week, with Swiss National Bank President Martin Schlegel opening the World Economic Forum in Davos, European Central Bank President Christine Lagarde speaking on Wednesday and Friday, and U.S. President Donald Trump scheduled to address the forum mid-week.
Euro slips as US yields stay firm
The EUR/USD currency pair edged lower toward 1.1600 as solid U.S. labour market and factory inflation data continued to support Treasury yields and dampen expectations for early Fed rate cuts.
The pair ended the week modestly lower, despite some fading momentum in the DXY late in Friday’s session.
U.S. jobless claims, stronger industrial production and higher producer prices reinforced the perception that the U.S. economy remains resilient.
Political uncertainty surrounding the timing of the next Federal Reserve Chair nomination also contributed to higher yields and a firmer dollar backdrop.
In Europe, data remained light. German inflation reached the ECB’s 2% target in December, offering only limited support for the single currency.
Aussie pressured by resilient US data
The AUD/USD currency pair traded on the back foot near 0.6680 as firm U.S. economic releases and cautious Fed messaging continued to underpin the Greenback.
The pair struggled to attract buying interest as markets pushed back expectations for the first U.S. rate cut toward mid-year.
U.S. initial jobless claims fell to 198,000, while regional manufacturing surveys improved, reinforcing confidence in the labour market.
Meanwhile, the Reserve Bank of Australia is widely expected to remain on hold, with inflation still above target.
Some market participants continue to see the next move as more likely a hike than a cut.
Focus now shifts to Chinese GDP, activity data and the People’s Bank of China policy decision, all of which are key drivers for the Australian dollar.
Pound struggles to reclaim key resistance
The GBP/USD currency pair traded sideways near 1.3380 after failing to regain the 200-day moving average, as strong U.S. data capped Sterling’s upside.
The pair remains sensitive to shifts in Fed rate expectations, with markets now pricing roughly 44 basis points of easing by year-end, down sharply from earlier projections.
U.S. inflation stabilised at the consumer level but accelerated on the producer side, while labour market indicators remained firm.
In the UK, economic growth exceeded expectations in November, but markets continue to anticipate at least two 25-basis-point rate cuts from the Bank of England in 2026.
UK jobs, inflation and retail sales data releases will be critical for near-term direction.
Yen strengthens as intervention risks resurface
The USD/JPY pair fell toward 158.00 as the Japanese Yen regained ground amid renewed concerns over potential official intervention.
Japanese authorities stepped up warnings against what they described as excessive and speculative currency moves, prompting traders to pare back short Yen positions.
While U.S. fundamentals remain supportive, including strong retail sales and falling jobless claims, Japan-specific risks dominated price action.
Political uncertainty and repeated intervention rhetoric from Tokyo have increased volatility in the pair.
Markets are now focused on the upcoming Bank of Japan policy meeting, with the BoJ widely expected to keep rates unchanged at 0.75%, though officials have reiterated their readiness to tighten further if economic conditions allow.
Economic Calendar Week Ahead
On Monday, U.S. markets will be closed for the Martin Luther King Jr. holiday, while Japan releases machinery orders and industrial production data.
China publishes GDP growth, industrial production, retail sales and fixed asset investment figures, and the euro area reports inflation.
On Tuesday, UK data will include average earnings and the unemployment rate, while the euro area releases its current account and the ZEW economic sentiment index.
China announces its Loan Prime Rate, and Canada publishes inflation data alongside the Bank of Canada consumer expectations survey.
Wednesday brings U.S. ADP employment figures and mortgage data, alongside a heavy UK data slate including inflation, producer prices and business sentiment indicators.
On Thursday, attention turns to Australian employment data, South Korean GDP figures, Canadian producer prices and euro area monetary policy meeting accounts.
The U.S. also releases the Redbook, retail sales and pending home sales.
On Friday, markets will digest U.S. GDP growth, initial jobless claims, the PCE price index, personal income and spending figures, and the Fed balance sheet update.
Japan publishes inflation data and its Bank of Japan policy decision, while the euro area and the UK releases flash PMI surveys. Australia is also slated to report flash PMIs.
Over the weekend, Canada releases retail sales figures, while U.S. data includes flash PMIs and the University of Michigan consumer sentiment survey.
