The United States dollar index (DXY) ended the week on a softer footing after inflation data reinforced expectations that the Federal Reserve could begin easing policy later this year.
The DXY, which tracks the greenback against six major currencies, settled below the 97 mark after January’s consumer price data showed inflation easing more than expected.
The index, which had held positive territory for three straight sessions earlier in the week, lost momentum as Treasury yields extended their decline following the release.
Headline U.S. inflation slowed to 2.4% year-on-year in January, down from 2.7% previously and below expectations of 2.5%.
On a monthly basis, the consumer price index rose 0.2%, easing from December’s 0.3% pace.
Core inflation, which strips out food and energy, came in at 2.5% annually, the lowest level since April 2021 and in line with forecasts.
The data provided tentative evidence that price pressures continue to moderate, despite a resilient labour market. Markets are now pricing in two rate cuts in 2026, with the first likely in the second half of the year. According to the CME FedWatch Tool, traders see a roughly 91% probability that the Federal Reserve will leave rates unchanged at its next meeting.
Fed Governor Stephen Miran added to the dovish tone, stating that policy has effectively tightened passively and suggesting there is scope for lower rates.
He noted that inflation, when adjusted for distortions, is close to target and that some slack remains in the labour market.
Euro steadies as Fed-ECB divergence widens
The EUR/USD currency pair edged higher toward 1.1870, clawing back earlier losses as softer U.S. inflation pressured the greenback. The pair ended the week near 1.1867, posting modest weekly gains of 0.5%.
While the Federal Reserve is increasingly expected to ease later this year, the European Central Bank is widely seen holding rates steady through 2026. That growing policy divergence has lent underlying support to the single currency.
However, euro strength is drawing scrutiny. ECB policymaker Martins Kazaks said officials are “in monitoring mode on euro strength”, warning that a sizeable and rapid appreciation could weigh on the inflation outlook and potentially prompt a policy response.
For now, softer U.S. inflation and falling Treasury yields have tilted near-term risks slightly to the upside for EUR/USD, though further gains may depend on incoming eurozone data and ECB rhetoric.
Aussie rallies on hawkish RBA tone
The Australian Dollar outperformed during the week, with AUD/USD pair rising 0.8% to trade near three-year highs around 0.7069.
Support for the Aussie came from firm domestic policy signals. The Reserve Bank of Australia has maintained a cautious stance on inflation, with Assistant Governor Sarah Hunter noting that tight labour markets and capacity constraints could keep price pressures elevated.
Governor Michele Bullock reiterated that the Board stands ready to raise rates further if inflation proves persistent, emphasising that any inflation “with a three in front of it” would be unacceptable.
Australia’s consumer inflation expectations also rose to 5.0% in February from 4.6%, reinforcing the central bank’s vigilance.
With U.S. inflation easing and the RBA maintaining a comparatively hawkish tone, interest rate differentials have moved in favour of the Australian Dollar, at least in the near term.
Sterling supported by revived Fed cut bets
The GBP/USD currency pair finished the week near 1.3620 as softer U.S. CPI data revived expectations for a potential June rate cut from the Federal Reserve.
However, Sterling’s upside remains capped by domestic considerations. The Bank of England is facing increasing speculation that it may lower rates in coming meetings. For 19 March, markets are pricing roughly a 64% chance of a 25 basis point cut.
BoE official Huw Pill struck a relatively hawkish tone, stressing that while the disinflation process is intact, it is not yet complete and that policy must remain restrictive.
Meanwhile, recent UK GDP data and lingering political uncertainty surrounding Prime Minister Keir Starmer have injected an additional layer of caution.
Sterling bulls therefore face a balancing act between softer U.S. policy expectations and the prospect of easing from the BoE.
Yen rebounds on softer Dollar, policy signals
The USD/JPY pair retreated as the Yen strengthened, with the pair easing after the U.S. inflation release curbed dollar gains. The Japanese currency gained 2.9% during the week, reflecting both external and domestic drivers.
Renewed Yen demand followed Japan’s general election, in which Prime Minister Sanae Takaichi secured a decisive victory. Markets viewed the result as supportive of policy continuity and fiscal stimulus.
At the same time, the Bank of Japan signalled a cautious but steady path toward policy normalisation.
Board member Naoki Tamura said the BoJ expects to continue raising interest rates in line with improvements in the economy and prices, while avoiding premature tightening. He added that consumer inflation is stabilising but warned policymakers must remain vigilant, particularly given the Yen’s recent fluctuations.
The combination of softer U.S. data and gradual policy shifts in Japan has capped upside momentum in USD/JPY for now.
Economic Calendar Week Ahead
On Monday, Japan releases GDP growth, capacity utilisation and industrial production data, while China publishes foreign direct investment figures and the eurozone reports industrial production.
Meanwhile, stock markets in South Korea will remain closed through to Wednesday, while Mainland China markets are scheduled to be closed 16-23 February, reopening Tuesday 24 February.
Hong Kong has half-day trading on Monday, 16 February, is closed 17-19 February and reopens on Friday. The U.S. will also be closed on Monday for a public holiday.
Tuesday brings UK labour market data, including average earnings and unemployment, alongside the RBA meeting minutes in Australia and a speech from Fed Governor Bowman in the U.S. The eurozone’s ZEW economic sentiment index will also be in focus.
Wednesday’s highlights include UK inflation, Australia’s wage price index, Canadian CPI, and U.S. indicators such as the ADP employment report and the New York Empire State manufacturing index.
Thursday will centre on U.S. building permits, durable goods orders and the release of the FOMC minutes. Australia reports employment data, while the UK publishes CBI industrial trends orders.
Friday is particularly busy, with U.S. trade data, retail and wholesale inventories, and the Philadelphia Fed manufacturing index due. The eurozone releases flash consumer confidence and PMI data, while Australia, Japan and the UK also publish flash S&P Global PMI readings.
Japan’s inflation data and China’s loan prime rate decision will add to the mix.
On Saturday, U.S. GDP, the core PCE price index, personal income and spending, and final Michigan consumer sentiment are scheduled for release.
