The United States dollar index (DXY) ticked up after two consecutive weeks of declines, finishing the week 0.6% higher despite softer labour market data reinforcing expectations of the Federal Reserve easing rates later this year.
While the Greenback attempted a brief recovery midweek, renewed dovish bets ultimately capped gains and kept the broader tone defensive.
Markets are now pricing in two rate cuts in 2026, beginning as early as June, as evidence of cooling employment conditions continues to accumulate.
According to the CME FedWatch Tool, traders see a 77.3% probability that the Fed will leave rates unchanged at its March meeting, before pivoting to easing in the middle of the year.
U.S. economic data painted a mixed but generally softer picture. Initial jobless claims rose to 231,000 in the week ending January 31, exceeding forecasts of 212,000 and the previous reading of 209,000. Meanwhile, ADP reported that private payrolls increased by just 22,000 in January, well below expectations of 48,000 and the prior 37,000.
Although the preliminary University of Michigan Consumer Sentiment Index improved to 57.3 in February from 56.4 in January, beating expectations of 55.0, the index remains roughly 20% below its January 2025 level.
Inflation expectations were mixed, and concerns over labour market stability and tariff-related price pressures persisted.
Despite the Dollar’s broader weakness, the DXY remains close to two-week highs as some Federal Reserve officials, including Governor Lisa Cook, stressed that further rate cuts would require clearer evidence of easing inflation. Traders also assessed the implications of Kevin Warsh’s nomination as Fed Chair, who is viewed as favouring a smaller balance sheet and a more measured pace of policy easing.
Euro steadies as dollar rally fades
The Euro recovered modestly against the U.S. dollar, with the EUR/USD currency pair rebounding towards 1.1820 after a short-lived two-day rally in the Greenback faded. The pair settled around 1.1814, up roughly 0.3% on Friday, although it posted a modest weekly loss of 0.3%.
A broader risk-on mood reduced demand for the dollar’s safe-haven appeal, helping the single currency stabilise. The European Central Bank left policy unchanged, and President Christine Lagarde reiterated that recent exchange rate volatility does not materially alter the inflation outlook.
She noted that since last summer, the Euro “has fluctuated within a range” and that the appreciation seen over the past year has already been incorporated into baseline projections.
German industrial production data disappointed in December, underscoring ongoing fragility in the Eurozone’s largest economy. Nevertheless, ECB officials downplayed concerns over currency strength.
Looking ahead, markets will closely monitor upcoming U.S. nonfarm payrolls, retail sales and consumer price index figures, alongside speeches from both ECB and Fed policymakers.
Aussie rallies on RBA tightening hopes
The Australian Dollar outperformed last week, with AUD/USD climbing 1.2% to settle near 0.7010, recovering from recent risk-driven losses. Improved sentiment and renewed expectations of further Reserve Bank of Australia tightening underpinned the move.
RBA Governor Michele Bullock stated that the Board raised the policy rate because the Australian economy is more capacity-constrained than previously assessed, requiring a more restrictive stance.
She also noted the need to curb demand growth unless supply capacity improves more rapidly, reviving market expectations of another rate hike as early as May.
Domestic data also lent support. Australia’s trade surplus widened to A$3.373 billion in December from $2.597 billion previously, according to data from the Australian Bureau of Statistics (ABS).
Exports rose 1.0% month-on-month, driven by metals and mineral ores, while imports fell 0.8%.
Services sector PMI data pointed to accelerating activity, reinforcing the view of underlying economic resilience.
On the U.S. side, softer labour market figures and continued rate cut pricing limited the dollar’s upside, allowing AUD/USD to hold firm as investors await fresh catalysts in the week ahead.
Sterling rebounds but weekly loss looms
Sterling rebounded alongside broader U.S. dollar weakness, with the GBP/USD pair rising 0.6% to around 1.3610 on Friday. However, the pair ended the week modestly lower, down around 0.5%.
The Bank of England left rates unchanged but maintained a dovish tone. Governor Andrew Bailey signalled that further rate reductions remain likely if disinflation continues.
Chief Economist Huw Pill acknowledged that inflation is moving towards the target, while noting subdued yet positive private sector growth.
In the U.S., soft employment indicators, including weaker job openings and rising jobless claims, strengthened expectations of Fed easing later this year.
While the Dollar initially absorbed the data, it ultimately retreated as markets reassessed the policy outlook.
Attention now turns to UK gross domestic product (GDP) data and a speech from Governor Bailey, while U.S. nonfarm payrolls, CPI and retail sales — some delayed by a short government shutdown — will be pivotal for GBP/USD direction.
Yen pressured ahead of elections
The USD/JPY currency pair consolidated near 157.00, holding onto weekly gains of 1.6%. The pair settled around 157.18 after rebounding from intraday lows near 156.45.
Japan’s conservative governing coalition has tightened its grip on power following a landslide victory in Sunday’s election, an outcome widely viewed as an early public endorsement of new Prime Minister Sanae Takaichi, with her Liberal Democratic Party projected to secure up to 328 of the 465 seats in the lower house of parliament.
Despite disappointing U.S. employment data, the Dollar retained relative strength against the Yen, reflecting divergent policy expectations and political uncertainty in Japan.
Economic Calendar Week Ahead
Monday will see Japan release average cash earnings, bank lending and current account figures, while Australia publishes household spending data.
On Tuesday, U.S. consumer inflation expectations and speeches from Federal Reserve officials Waller, Miran and Bostic will be in focus. The ECB’s Lagarde is also scheduled to speak.
The UK releases the BRC retail sales monitor, while Australia publishes Westpac consumer sentiment and NAB business confidence data. The U.S. will also report the NFIB business optimism index.
Wednesday brings U.S. ADP employment change data, the employment cost index, import and export price indices, retail sales, business inventories and remarks from Fed officials Hammack and Logan.
South Korea reports unemployment, Australia releases home loans and investment lending figures alongside an RBA speech, and China publishes inflation and producer price data.
Thursday will be pivotal, with U.S. average hourly earnings, delayed nonfarm payrolls, the unemployment rate and the monthly budget statement due.
Japan releases PPI and foreign bond investment data, while the UK publishes GDP, trade balance and industrial production figures.
On Friday, U.S. initial jobless claims and existing home sales are scheduled. The EU will release its second estimate of GDP growth and trade balance data.
Saturday concludes the week with U.S. CPI and China’s current account data, rounding off a data-heavy period likely to drive heightened FX volatility.
