The United States dollar index finished last week higher, up 0.3% at 98.72 on Friday, and snapped three consecutive weeks of declines.
Gains in the U.S. dollar index (DXY) were modest, as markets continued to digest signs that inflation pressures in the United States are easing faster than expected.
The latest consumer price index data briefly weighed on the Greenback after the U.S. Bureau of Labor Statistics reported that headline CPI slowed to 2.7% in November, below market expectations of 3.1%.
Core CPI, which strips out food and energy prices, rose 2.6%, also undershooting forecasts of 3.0% and marking the slowest pace of underlying inflation since 2021.
Some doubts about the durability of the inflation slowdown emerged on Friday, after New York Fed President John Williams said CPI figures “may have been pushed down a bit” in comments to CNBC.
Earlier last week, the Federal Reserve delivered a widely expected 25-basis-point interest rate cut, reinforcing expectations that policy is shifting gradually towards easier settings.
Labour market data sent mixed signals. Initial jobless claims fell to 224,000, better than expectations of 225,000, though broader indicators still point to a gradual cooling in employment momentum.
As a result, upside for the U.S. dollar may remain capped amid rising expectations of further Fed easing in 2026.
According to the CME Group FedWatch Tool, markets assign a 79% probability that rates will be held steady at the January meeting, while the chance of a 25-basis-point was at 21%.
Euro pressured by cautious ECB
The euro remained on the back foot, with the EUR/USD currency pair down 0.3% last week.
The pair hovered near weekly lows around 1.1707, retreating from three-month highs above 1.1800 reached earlier in the week, as the U.S. dollar firmed modestly.
Pressure on the single currency followed the European Central Bank’s decision to leave interest rates unchanged.
ECB President Christine Lagarde struck a cautious tone, stressing that the decision was unanimous and that policymakers had not discussed changing rates, pushing back against speculation of a near-term rate hike.
Aussie struggles to find support
The Australian dollar maintained a bearish tone, with the AUD/USD currency pair hovering just above the 0.6600 level after declines of 0.7% last week.
Australian data provided little support. Consumer inflation expectations rose to 4.7% in December from 4.5% in November, strengthening the case that the Reserve Bank of Australia could consider a rate hike in early 2026.
However, the currency reaction was muted, with broader U.S. dollar dynamics dominating price action.
Sterling weighed by weak data
Sterling drifted lower as disappointing UK economic data and cautious central bank messaging weighed on sentiment.
GBP/USD held within its recent trading range and traded around 1.3370, little changed on the week.
UK retail sales missed expectations, signalling softer consumer demand. Annual sales growth was unchanged at 0.6% in November, below forecasts of a 0.9% rise, while monthly sales fell 0.1% against expectations for an increase.
The data followed the Bank of England’s decision to cut rates on a narrow 5–4 vote, with Governor Andrew Bailey emphasising uncertainty around the inflation outlook.
Yen weakens after BoJ hike
The USD/JPY currency pair surged to a one-month high as the Japanese Yen weakened sharply following the Bank of Japan’s policy decision.
The BoJ raised its policy rate by 25 basis points to 0.75%, the highest level in around three decades, but signalled caution over further tightening.
While the central bank acknowledged that Japan’s economy continues to recover at a moderate pace, it stressed that real interest rates remain deeply negative and that accommodative financial conditions will continue.
Japanese government bond yields jumped in response, with the 10-year yield rising above 2.0% for the first time since 1999, reviving concerns over debt-servicing costs. Authorities reiterated that they remain vigilant over excessive currency moves.
Economic calendar week ahead:
On Monday, China releases its loan prime rate decision, while the UK publishes business investment, current account figures and final GDP growth data.
On Tuesday, attention turns to the U.S. Chicago Fed National Activity Index, Canadian producer prices, Australia’s RBA meeting minutes and EU new car registrations.
On Wednesday, Christmas Day public holidays will limit market activity, although the U.S. is scheduled to release ADP employment data, core PCE prices, corporate profits, durable goods orders and a second estimate of GDP growth.
Canada publishes GDP data and the Bank of Canada’s summary of deliberations, while Japan releases BoJ meeting minutes.
On Thursday, Boxing Day public holidays continue in several markets, with U.S. jobless claims and Japanese housing starts among the key releases.
On Friday, Japan takes centre stage with Tokyo CPI, unemployment, industrial production and retail sales data.
