The United States dollar index (DXY) eased 0.2% last week as a hotter-than-expected inflation print deepened concerns that price pressures remain sticky, complicating the Federal Reserve’s policy outlook and fuelling stagflation fears.
The DXY settled 0.1% lower on Friday at 97.646 after January’s producer price index (PPI) rose 0.5% month-on-month, well above the 0.3% consensus forecast.
The reading followed a downwardly revised 0.4% increase in December and left producer prices up 2.9% year-on-year.
Although much of the upside surprise was concentrated in trade services – a volatile category that does not always reflect real-time price shifts – the broader takeaway for markets was that wholesale inflation is not cooling as quickly as hoped.
The data feeds into the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) gauge, and is likely to reinforce the central bank’s cautious stance after it held rates at 3.50% to 3.75% in January.
Minutes from the Fed's most recent meeting showed policymakers divided, with some officials flagging the possibility of renewed tightening should inflation fail to moderate.
Money markets have since pushed the first fully priced rate cut to July at the earliest.
Geopolitical risks are adding another layer of uncertainty after the United States and Israel launched coordinated strikes targeting Iran’s senior leadership over the weekend.
The operation, referred to by the Pentagon as ‘Operation Epic Fury’, resulted in the reported death of Ali Khamenei.
Iranian outlets confirmed Khamenei’s death early on Sunday, following what officials described as one of the most extensive attacks on Iranian targets in decades.
A senior Israeli official told Reuters that the Iranian leader’s body had been recovered after the strike. U.S. President Donald Trump said Washington had worked closely with Israel in the operation targeting the leader who had ruled Iran since 1989.
Markets are also monitoring fresh tariff announcements from President Donald Trump after the Supreme Court struck down his earlier emergency tariff regime.
Despite these headwinds, the DXY posted a 0.5% monthly gain in February, marking its first positive month since October.
Euro rangebound above 1.1800
The EUR/USD continues to consolidate above the 1.1800 level following gains of 0.3% last week, with the Euro holding relatively firm despite stronger-than-expected U.S. inflation data.
Markets are increasingly pricing in no change in rates at the Fed’s March and April meetings. According to the CME Group FedWatch Tool, the probability of a June rate cut has dropped below 50%, while July easing odds stand near 68%.
The reduced likelihood of near-term cuts has lent underlying support to the Dollar, yet it has failed to generate a decisive breakout lower in EUR/USD.
In the Eurozone, softer German inflation data had only a muted impact. Germany’s Consumer Price Index rose 0.2% month-on-month in February, undershooting expectations of 0.5%, while annual CPI eased to 1.9% from 2.1%.
The preliminary Harmonised Index of Consumer Prices increased 0.4% on the month, slightly below forecasts, with the annual rate moderating to 2%.
RBA expectations underpin Aussie
The AUD/USD is trading near 0.7112, lifting 0.4% last week to fresh multi-year highs, even as U.S. producer inflation surprised to the upside.
While the stronger PPI print has tempered expectations for imminent U.S. rate cuts, broader uncertainty around U.S. trade policy and global growth is limiting sustained dollar strength.
In contrast, the Australian dollar remains supported by inflation running above the RBA’s 2–3% target band. Although policymakers may pause in March to assess the impact of February’s hike, major banks including CBA, Westpac, ANZ and NAB expect a further 25-basis-point increase in May, which would lift the cash rate to 4.10%.
In the week ahead, attention turns to Australia’s TD-MI Inflation Gauge on Monday, which could shape near-term rate expectations.
Sterling capped by Fed and BoE dynamics
The GBP/USD ticked up 0.1% last week despite firmer U.S. inflation data underpinned the Greenback and reduced expectations of aggressive Fed easing.
Core PPI rose sharply, reinforcing the narrative of higher-for-longer U.S. rates and weighing on risk sentiment. Heightened geopolitical tensions have also lent safe-haven support to the Dollar, limiting Sterling’s upside.
Domestically, political pressure on Prime Minister Keir Starmer following local election setbacks has so far had a limited impact on the Pound.
However, Bank of England Chief Economist Huw Pill warned that temporary declines in headline inflation should not create a false sense of security.
Despite the hawkish rhetoric, money markets continue to price an 84% probability of a 25-basis-point rate cut from the Bank of England in March.
The divergence between a cautious Fed and an easing-leaning BoE could keep GBP/USD rallies capped in the near term.
Yen supported by BoJ normalisation
The USD/JPY currency pair hovered around 156.00, with the Yen easing 0.6% last week following the strong U.S. PPI release.
While reduced expectations for U.S. rate cuts would typically favour the dollar, structural headwinds – including trade policy uncertainty and questions over central bank independence – are limiting upside momentum.
On the Japanese side, inflation in Tokyo moderated but remained elevated by historical standards. Tokyo CPI rose 1.6% year-on-year in February, while the core gauge excluding fresh food increased 1.8%, slipping below the Bank of Japan’s 2% target for the first time since 2024.
Nevertheless, BoJ Governor Kazuo Ueda reiterated that interest rates will continue to rise if economic and inflation projections are met, and board member Hajime Takata emphasised that tightening should proceed gradually.
These remarks sustain expectations of policy normalisation, supporting the Yen and constraining USD/JPY gains.
Economic calendar week ahead
On Monday, markets will digest final S&P Global Manufacturing PMI readings from Australia, Japan, the UK and the Eurozone, alongside Australia’s dwelling prices, business inventories and company gross profits. China will release Foreign Direct Investment data.
Tuesday brings Australia’s building permits and current account figures, Japan’s unemployment rate and capital spending data, Canada’s and the U.S. final Manufacturing PMIs, as well as the U.S. ISM manufacturing survey. The Eurozone will publish flash inflation data, while the UK releases spring economic sentiment indicators.
On Wednesday, Australia’s GDP growth rate and final composite and services PMIs are due. China will release official NBS manufacturing and non-manufacturing PMIs. The Eurozone reports producer prices and unemployment, while the U.S. publishes the MBA 30-year mortgage rate.
Thursday’s focus shifts to U.S. labour and services data, including ADP employment change, ISM services PMI and the Federal Reserve’s Beige Book. Australia will report trade balance figures and household spending, and the European Central Bank will release its latest monetary policy meeting accounts.
Friday features U.S. import and export price indexes, jobless claims, nonfarm productivity and the Fed balance sheet. The UK publishes the Halifax house price index, while the Eurozone releases employment change and a third estimate of GDP growth.
The week culminates on Saturday with a heavy U.S. data dump, including nonfarm payrolls, unemployment rate, average hourly earnings and retail sales, which could prove decisive for the Dollar’s next directional move.
