The U.S. Consumer Price Index (CPI) is forecast to increase by 3.3% year-on-year in March, driven sharply higher by rising energy prices. Core CPI inflation is also expected to tick up slightly to 2.7% annually. Meanwhile, the EUR/USD technical outlook remains mildly bullish in the near term.
The U.S. Bureau of Labor Statistics (BLS) is scheduled to release March Consumer Price Index (CPI) data on Friday.
The report is widely expected to show an uptick in inflation, largely driven by the surge in crude oil prices following increased tensions after a joint U.S.–Israel strike on Iran.
The monthly CPI is projected to increase by 0.9%, up from a 0.3% rise in March, while the annual rate is expected to climb to 3.3%—its highest level since May 2024—from 2.4% in February. Core CPI, which excludes food and energy, is forecast to rise 0.3% on the month and 2.7% year-on-year.
Since the outbreak of conflict in the Middle East on February 28, West Texas Intermediate (WTI) crude has surged roughly 40%, even after easing following a recent two-week ceasefire announcement between the U.S. and Iran. In March alone, WTI jumped nearly 50%, rising from around $67 per barrel to close near $100.
According to TD Securities analysts, the spike in crude prices is expected to be the main driver behind the sharp 0.9% monthly CPI increase, pushing the annual reading up by nearly one percentage point to 3.3%, marking a two-year high. They also noted that core inflation is likely to remain relatively contained at 0.27% month-on-month, though goods prices may continue to rise due to tariff pass-through, with “supercore” inflation staying firm around 0.3%.
CPI data
The next CPI report is expected to be heavily influenced by recent volatility in oil prices, meaning the March inflation print will likely show a noticeable jump in headline CPI—something that markets have already largely anticipated.
Even if annual inflation rises to around 3.3% as forecast, investors may treat it as a temporary spike rather than a lasting inflation trend, assuming oil prices retreat if geopolitical tensions ease and a durable truce in the Middle East helps stabilize supply routes such as the Strait of Hormuz.
However, uncertainty around the durability of any ceasefire—and political conditions tied to control of key shipping lanes—adds risk to the outlook. This makes it harder to assume a sustained decline in oil prices, and therefore keeps inflation expectations sensitive to geopolitical developments rather than the CPI data alone.
On the policy side, the Federal Reserve’s recent meeting minutes suggest policymakers are becoming more cautious about cutting interest rates. Many are concerned that inflation could remain stickier than expected, especially if higher energy prices begin to feed into broader price pressures.
Still, some analysts, such as those at BBH, argue that if underlying (core) inflation stays contained, the Fed may be able to “look through” the temporary oil-driven inflation spike and avoid tightening further, even amid a mixed U.S. labor market.
What impact might the US Consumer Price Index (CPI) report have on EUR/USD?
Currently, markets are pricing in about a 75% probability that the Federal Reserve will keep its policy rate unchanged at 3.5%–3.75% by the end of the year, a sharp increase from just 17% on March 9, according to the CME FedWatch Tool.
A stronger-than-expected March CPI reading may have limited impact on reshaping expectations for the Federal Reserve’s interest rate path. However, if high inflation data coincides with renewed escalation in Middle East tensions and rising concerns that shipping activity in the Strait of Hormuz will not return to normal levels soon, markets could start pricing in a higher likelihood of a Fed response to persistent inflation pressures. In that case, the US dollar could strengthen, pushing EUR/USD lower.
On the other hand, the dollar may stay under pressure—and EUR/USD could extend its recovery—if oil prices keep declining steadily, even if the CPI report comes in hot.
Overall, March inflation data alone is unlikely to trigger a major market reaction, with investors remaining more focused on the US–Iran geopolitical situation and its implications for energy prices.
From a technical perspective, Eren Sengezer, FXStreet European Session Lead Analyst, notes that EUR/USD’s short-term outlook remains tilted to the upside. The RSI on the daily chart has moved above 50 for the first time since the US–Iran conflict began, and the pair has broken above a two-month descending trendline.
Key resistance levels are seen at 1.1730 (Fibonacci 50% retracement of the February–April move), followed by 1.1800 (61.8%) and 1.1900 (78.6%). On the downside, initial support lies at 1.1650 (38.2%). If that level breaks, sellers may target 1.1560 (23.6%) and then the psychological 1.1500 level.
Gold is once again being driven primarily by interest rates rather than risk sentiment, with US Treasury yields taking the lead as markets head into a heavy US data schedule.
The inverse relationship between gold and yields has strengthened notably, placing key inflation readings like CPI and core PCE at the center of attention. Prices are currently moving within a clear range, with support around $4700 and resistance between $4800 and $4850. The next directional move will likely depend on whether yields continue rising or begin to ease, while ongoing developments surrounding the US–Iran ceasefire remain a secondary influence.
This renewed sensitivity to yields signals a return to more traditional macro dynamics, following a period where gold traded more like a high-volatility risk asset.
Whether this rate-driven relationship will persist is still uncertain. However, with correlation coefficients currently sitting in the high negative 0.9 range across both short- and long-term Treasury yields, gold is now highly sensitive to movements in interest rates. This sharp linkage brings not only developments in the US–Iran ceasefire into focus, but also an upcoming wave of US economic data that is likely to challenge and validate the strength of this relationship in the near term.
Inflation data is set to put this relationship to the test.
While the Fed’s preferred inflation gauge, the core PCE deflator, is due later today, it may carry less weight as it reflects February data and predates the energy price shock linked to the Iran conflict. Instead, markets may focus more on income and spending figures for clues on consumption and broader economic momentum in the March quarter. Strong data could reignite concerns about rising inflation, while weaker numbers may ease pressure by signaling softer demand and hiring.
Following a weak 10-year Treasury auction midweek, attention may also turn to the 30-year bond auction for its impact on yields. Still, Friday’s release of March CPI is expected to be the key event. Headline inflation is likely to rise due to energy costs, but the critical question is whether those pressures spill into core inflation. Any reading above the 0.3% forecast could push markets to reconsider the possibility of Fed rate hikes rather than cuts this year.
Inflation expectations will also be in focus, with the University of Michigan’s 5-year outlook offering timely insight into consumer sentiment around future prices, wages, and spending.
If inflation surprises to the upside, Treasury yields are likely to climb—potentially weighing on gold given their strong inverse relationship. Conversely, softer inflation data could support bullion. Beyond economic data, developments surrounding the US–Iran ceasefire remain an important underlying risk factor.
Price action remains orderly and well-defined.
On the daily chart, the presence of a bearish pin bar reinforces the earlier signal that sellers are active in the $4800–$4850 zone, establishing it as a key overhead resistance area for traders.
A closer look at the H4 timeframe confirms both this resistance and the overall clarity of gold’s price action, especially given the broader macro volatility. The $4700 level, which previously acted as resistance, has now flipped into support and serves as the first downside level to watch. Below that, $4600 and $4550 emerge as additional support zones if the current range breaks.
On the upside, a sustained move above $4850 would open the door toward $4975, with the 50-day moving average sitting in between as a potential intermediate hurdle. Momentum indicators such as RSI (14) and MACD remain neutral, offering no strong directional bias and reinforcing the importance of reacting to price behavior around key levels.
From a short-term trading perspective, long positions could be considered above $4700 with tight risk control below that level, targeting a move back toward $4850 resistance. However, conviction in this setup is limited, and a confirmed bounce from $4700 would provide a more reliable entry signal.
Could markets be misjudging both oil and the war, as this analyst argues?
Possibly—but what about the relationship between oil and gold? The mainstream narrative suggests that surging oil prices are a bearish signal for gold, based on claims that “gold yields no interest” and that “the Fed might raise rates by a quarter point (though it’s unlikely), while real inflation runs near 15%,” leading to the conclusion that “gold should decline sharply against fiat currencies.”
Western analysis of oil, war, and gold is deeply troubling—arguably even reprehensible. It feels like something straight out of a Nineteen Eighty-Four… except it’s happening in reality.
A closer look at currency market dynamics suggests that as interest rates rise, the heavily indebted U.S. government faces increasing borrowing needs to sustain its finances. This pressure can lead to policies that shift the burden beyond its borders, affecting global economic stability.
History offers parallels—such as Ancient Rome—where excessive debt strained state behavior and credibility. Some argue that similar pressures are emerging in modern fiscal systems.
In simple terms, critics of fiat systems view government-issued currency as vulnerable to mismanagement, while seeing gold as a more reliable store of value for individuals worldwide.
What are the most attractive price levels for investors to accumulate more gold? Looking at the daily chart, the $4,400 range previously acted as a strong buying zone, while $4,100 represented a secondary level of support.
That said, investors may benefit more from focusing on time rather than precise price points. If gold trades within a range for the rest of the year, a disciplined accumulation strategy—such as monthly purchases (or weekly for more aggressive investors)—could be more effective.
Time-based buying helps reduce the emotional stress of trying to predict short-term price movements, which often leads to cycles of fear and greed.
Ultimately, steadily increasing gold holdings may matter more than timing the exact entry. Still, from a price perspective, the $5,600, $3,900, and $3,500 levels could all serve as attractive accumulation zones if the market pulls back.
If gold were to climb into the $6,500–$7,500 range, then $5,600 could become a particularly significant support level—potentially one of the most important in the market’s history. From there, some bullish scenarios suggest the possibility of a powerful rally toward $15,000–$20,000.
Such dramatic price action would likely require major catalysts—such as sustained inflation, escalating debt pressures, geopolitical instability, or a significant loss of confidence in fiat currencies.
The U.S. interest rate chart is drawing attention, with what appears to be a large inverse head-and-shoulders pattern suggesting a potential move toward the 7%–8% range.
At the same time, many argue that the real inflation experienced by average Americans may be closer to 8%–15%, higher than official figures. If that view gains traction, the prevailing institutional narrative—where rising rates are seen as negative for gold—could shift.
Instead, rising rates might come to be interpreted as a signal that inflation is persistent and that government financing pressures are intensifying. In that scenario, investors could increasingly turn to gold, viewing it as a hedge and continuing to accumulate it over time.
A long-term view of the 40-year U.S. inflation–deflation cycle suggests that policy shifts could have major consequences. If a future Fed leader—such as Kevin Warsh—were to scale back quantitative easing, government borrowing pressures would likely remain.
Even without aggressive rate hikes from the Federal Reserve, market forces themselves could push interest rates higher.
For investors, maintaining a focus on the broader macro picture is essential. Key factors shaping the landscape include inflation trends, tariffs, geopolitical tensions, elevated equity valuations, debt ceiling challenges, and potential shifts in global economic leadership.
Critics argue that instead of implementing significant spending cuts, policymakers have relied on measures like tariffs, which may contribute to inflationary pressure. At the same time, rising fiscal deficits and geopolitical risks could undermine confidence in government bonds, prompting central banks and institutional investors to reduce their holdings.
This dynamic may create a feedback loop: higher debt levels, rising borrowing costs, and declining bond demand reinforcing one another.
In that context, some bullish perspectives suggest that gold could see substantial long-term gains, while interest rates could continue trending higher—though projections as extreme as $20,000 gold or 20% rates remain highly speculative and dependent on extraordinary economic conditions.
And what about the miners? The GDX chart looks particularly impressive, with a clear inverse head-and-shoulders pattern forming. The head developed around the critical $85 support level, where the 14,7,7 Stochastics oscillator also signaled a bottom.
After a brief two-day pullback, price is now hovering near $92—potentially setting up as a springboard for the next upward move. At the same time, a broader buy signal from the 20,40,10 MACD indicator appears to be on the verge of triggering—possibly as soon as today.
The Federal Reserve is navigating one of its toughest policy backdrops in years as the conflict with Iran unsettles global energy markets and clouds the outlook for both inflation and growth.
Heightened geopolitical volatility is forcing policymakers into a difficult balancing act: tightening too much could push the economy into recession, while easing prematurely risks fueling inflation again. For now, the most prudent approach appears to be holding rates steady until incoming data provide clearer direction on policy.
Cleveland Fed President Beth Hammack reinforced this stance in a recent AP interview, indicating a preference to keep rates unchanged “for quite some time.” However, she acknowledged flexibility, noting that rate cuts could be warranted if the labor market weakens משמעותfully, while further hikes may be needed if inflation remains persistently above target.
Meanwhile, the Treasury market has shifted its expectations. After a prolonged period of dovish positioning, investors are now assigning a higher probability to near-term rate hikes. This shift is evident in the policy-sensitive 2-year Treasury yield—around 3.84% as of April 6—trading above the median effective Fed funds rate of 3.64%, signaling a renewed tilt toward a more hawkish outlook for the first time since 2022.
The outlook for inflation and economic growth remains uncertain, with rising concern that risks may tilt toward higher prices, slower growth—or both.
IMF Managing Director Kristalina Georgieva warned that “all roads now lead to higher prices and weaker growth,” highlighting a global environment marked by heightened uncertainty. Speaking to Reuters, she pointed to multiple risk factors—including geopolitical tensions, rapid technological change, climate disruptions, and shifting demographics—and stressed the need for vigilance even after the current shock passes.
Against this backdrop, the Federal Reserve’s policy stance remains slightly restrictive. Based on a basic model incorporating unemployment and year-over-year CPI changes, current settings still lean tight, giving the central bank room to remain patient. This supports a wait-and-see approach, allowing policymakers to assess incoming data before making any decisive shifts.
Chicago Fed President Austan Goolsbee signaled that an interest rate increase may be approaching. When asked to assess economic risks on a color scale—from crisis-level red to optimistic green—he described the outlook as “at least orange,” suggesting conditions are concerning and far from ideal. Recent movements in the Treasury market appear to reflect a similar level of caution.
However, because inflation and broader economic data tend to lag, the Federal Reserve is likely to remain patient while it evaluates how the economy responds to the conflict with Iran. The difficulty lies in not delaying too long, as inflation or slowing growth could outpace policy actions, forcing the Fed into a reactive stance. This scenario echoes its delayed response during the 2021–2022 inflation surge—an error policymakers are keen to avoid repeating.
At the same time, moving too quickly carries its own risks, potentially worsening inflationary pressures or hindering growth. Ultimately, the Fed’s task is less about identifying a perfect policy and more about staying flexible in an unpredictable environment. One thing is clear: whenever the next policy move comes, it will be made amid significant uncertainty.
Sterling fell on Tuesday, trading around $1.3234 at 03:50 ET, as the U.S. dollar held firm ahead of a White House deadline linked to the U.S.–Iran conflict.
The decline extended recent losses, with GBP/USD briefly dipping to an intraday low of $1.3211, while the 52-week low remains at $1.2721.
The dollar gained support from heightened geopolitical uncertainty as investors awaited clarity on a potential ceasefire. A failure to reach an agreement could lead to U.S. and Israeli strikes on Iranian civilian infrastructure, increasing the risk of retaliatory action across the Gulf region.
Rising energy prices have also bolstered the greenback. Further gains in oil and gas amid escalating tensions would be “unambiguously dollar-positive,” according to ING strategist Chris Turner.
Stronger U.S. domestic data has added to dollar strength. The March jobs report surprised to the upside, while markets now largely expect the Federal Reserve’s policy stance to remain unchanged this year, contrasting with expectations for additional rate hikes among other major central banks.
ING noted that stronger activity data and higher energy costs could shift expectations toward Fed tightening. Investors are now focused on Wednesday’s Federal Open Market Committee minutes and Friday’s March CPI report for further guidance.
Headline U.S. inflation is forecast to rise to 3.4% year-on-year from 2.4%. Comments from New York Fed President John Williams will also be closely watched for any change in tone.
ING expects the dollar index (DXY) to stay supported within a 100–100.50 range.
Elsewhere, the euro remained under pressure, with EUR/USD at $1.1544 and trading within a 1.1420–1.1640 band. Markets have reduced expectations of an April ECB rate hike to just below 50%, though around 75 basis points of tightening is still priced in for the year.
ING warned that if the ECB holds off on an April move despite elevated energy prices, the euro could face additional downside pressure.
In Central and Eastern Europe, markets followed global trends. Czech inflation is expected to rise due to higher fuel costs, while Romania’s central bank is projected to keep rates at 6.50% despite persistent double-digit inflation. Poland’s central bank is also expected to maintain its 3.75% rate, with forward guidance later in the week in focus.
In Asia-Pacific, the Reserve Bank of New Zealand is widely expected to keep rates unchanged at 2.25% on Wednesday. The New Zealand dollar has underperformed the Australian dollar this year, and without a hawkish surprise, that divergence may continue.
Thinner liquidity later in the week due to holidays could amplify price swings driven by geopolitical developments.
Asian currencies moved without a clear trend on Monday, while the dollar remained steady as investors weighed escalating geopolitical tensions in the Middle East against signs of renewed ceasefire efforts.
The US Dollar Index inched up 0.1% following recent gains, with its futures also rising 0.1% as of 02:52 ET (06:52 GMT).
Trump issues ultimatum to Iran; Axios reports ongoing ceasefire negotiations
Trump issued a deadline for Iran to reopen the Strait of Hormuz, while reports from Axios pointed to ongoing ceasefire discussions. Traders closely watched the situation as he warned Tehran to resume tanker traffic by 8 p.m. Eastern Time on Tuesday or risk strikes on key infrastructure such as power plants and bridges.
Market sentiment improved slightly after Axios reported that the U.S., Iran, and regional mediators were negotiating a potential 45-day ceasefire, although no deal had been finalized.
In currency markets, USD/JPY remained largely unchanged, while USD/KRW slipped 0.3%. Regional currencies were also shaped by persistently high oil prices following a recent surge, which typically weigh on major importers like Japan, South Korea, and India by worsening their trade balances.
Meanwhile, USD/CNY fell 0.1%, USD/SGD was steady, and AUD/USD rose 0.3%.
Indian rupee weakens; RBI policy decision expected later this week
The Indian rupee weakened, with the USD/INR pair rising 0.6% to 93.281 on Monday, after touching a more than two-week low of 92.585 in the previous session.
The currency had strengthened over the past five sessions, supported by measures from the central bank.
Attention now turns to the Reserve Bank of India’s policy decision on Wednesday, where rates are widely expected to remain unchanged despite the rupee’s decline.
Meanwhile, investors are also reacting to stronger-than-expected U.S. payroll data released on Friday, which has reinforced expectations that the Federal Reserve could keep interest rates higher for longer.
For years, a dependable macro strategy was to buy dips when economic data weakened. Softer labor figures implied a more accommodative Fed, leading to lower discount rates and, in turn, higher equity valuations. That chain is now being tested.
The key issue this Wednesday isn’t whether the data are weak—they clearly are. The real question is whether markets can continue to interpret soft data as a trigger for policy easing when inflation signals remain stubborn.
A Familiar Macro Play—and Why It May Be Breaking Down
For much of the past three years, equity markets leaned on a simple framework: weaker growth would trigger easier monetary policy, and that easing would offset the damage from slowing activity. Soft payrolls boosted expectations of rate cuts, often lifting stocks. Weak manufacturing data pushed bond yields lower, compressing discount rates and supporting higher valuations—especially in growth equities. The pattern became almost automatic.
But that playbook only works when slowing growth comes with easing inflation. A disinflationary slowdown gives the Fed room to cut rates. When growth weakens while inflation pressures stay firm, that flexibility disappears. Easing policy into persistent price pressure risks unanchoring inflation expectations, which could later require more aggressive tightening. Today’s data point to exactly that mismatch: labor conditions are deteriorating, while inflation-sensitive indicators remain elevated. The JOLTS hires rate for February dropped to 3.1%, near pandemic-era lows, with hiring at its weakest since March 2020. Meanwhile, the Conference Board’s 12-month consumer inflation expectations rose to 5.2% in March, up from 4.5% in January. In other words, hiring is slowing sharply even as households expect higher inflation ahead.
Jerome Powell addressed this dilemma directly in remarks at Harvard on Monday. He highlighted the downside risks to the labor market, which argue for lower rates, alongside upside risks to inflation, which argue against easing. The Fed can afford to sit with that tension and wait for clearer trends—but markets typically cannot; they adjust immediately to incoming data. If Wednesday’s ISM Prices Paid index stays elevated following February’s 70.5 reading—the highest since mid-2022—it would reinforce what the mixed signals already suggest: this is not the kind of slowdown the old “buy-the-dip” reflex was designed for.
What the Hiring Data Is Already Signaling
The labor market’s weakening is showing up more clearly in the JOLTS hires rate than in headline payroll numbers. This metric tracks gross hiring as a share of total employment, and at 3.1% in February, it has dropped to levels last seen during the pandemic slowdown. While layoffs remain relatively low—and initial jobless claims around 213,000 suggest companies aren’t aggressively cutting staff—the real shift is in reduced hiring activity. The labor market is losing momentum on both sides: workers are less willing to quit, and employers are less willing to hire. Both trends point to softening demand.
The quit rate has stayed at or below 2.0% for eight straight months through February, with total quits falling to 2.97 million—the lowest since August 2020. When workers stop leaving jobs, it reflects declining confidence in finding better opportunities. This kind of stagnation tends to push unemployment higher धीरे through attrition rather than layoffs, making the deterioration less visible in monthly payroll reports. February’s payroll decline of 92,000 followed a series of inconsistent and often weak readings, including multiple recent negative months. Even January’s gain was driven by narrow sector strength rather than broad-based hiring. For March, the FactSet consensus sits at +57,000, but much of that expected increase may simply reflect the return of workers temporarily excluded in February due to a healthcare strike—hardly a sign of genuine improvement.
The ADP private payroll report, scheduled for release Wednesday morning, will offer an early look at March hiring trends. While ADP emphasizes that its data is independent and not a forecast of official figures, its February reading of +63,000 diverged significantly from the government’s count. At this point, the exact number matters less than the direction: whether hiring picked up meaningfully in March, or whether the slowdown seen in JOLTS extended into the new data.
Technical Snapshot
JOLTS – February 2026 (released Mar 31) Job openings declined to 6.9 million from 7.2 million in January. Hiring totaled 4.85 million, with the hires rate at 3.1%—near pandemic-era lows and the weakest since March 2020. Quits fell to 2.97 million, marking an eighth straight month at or below 2.0%.
Conference Board Consumer Confidence – March 2026 The headline index came in at 91.8, above the 88.0 consensus. The Present Situation component rose 4.6 points to 123.3, while Expectations slipped 1.7 points to 70.9—its 14th consecutive month below the 80 threshold often associated with recession risk. One-year inflation expectations climbed to 5.2%, up from 4.5% in January.
ISM Manufacturing PMI – February (latest actual) The headline PMI registered 52.4. The Prices Paid component surged to 70.5, the highest since June 2022. The March reading is due Wednesday, April 1 at 10:00 AM ET, marking the first release since the late-February escalation.
ADP Private Payrolls – March (Apr 1, 8:15 AM ET) Still pending. February showed a gain of 63,000, though this diverged sharply from the BLS estimate (roughly -50,000 in private payrolls). ADP emphasizes that its figures are independent and not a direct forecast of official data.
Nonfarm Payrolls – March (Apr 3, 8:30 AM ET) Consensus stands at +57,000, according to FactSet. U.S. equity markets (NYSE, Nasdaq) will be closed for Good Friday, with SIFMA recommending a full bond market closure. The next regular equity session is Monday, April 6.
10-Year U.S. Treasury Yield Currently at 4.41%, hovering near an eight-month high and up 44 basis points from 3.97% before the late-February escalation.
U.S. National Average Gasoline Price (AAA, Mar 31) $4.00 per gallon, reaching that level for the first time since August 2022.
How the Data Panels Frame the Argument
The three panels together lay out the core evidence. The first highlights a choppy payroll trend with several negative prints, and even if March meets expectations, hiring remains subdued. The second shows that the drop in the hires rate is not just monthly noise but a structural shift—hovering near pandemic-era lows while separations stay relatively stable, meaning the weakness is concentrated in reduced hiring. The third panel captures the real tension: consumer confidence from the The Conference Board came in stronger than expected at 91.8, yet the Expectations index sits at 70.9, below the recession signal threshold for 14 straight months. At the same time, 12-month inflation expectations climbed to 5.2%. Households are both pessimistic about growth and anticipating higher inflation—a mix that limits the Fed’s flexibility. Cutting rates risks reinforcing inflation expectations, while holding steady risks deepening the slowdown.
ISM Prices Paid: The Deciding Variable
While early attention will likely focus on the ADP payroll release, the more critical variable is the inflation signal from ISM. The Prices Paid index surged to 70.5 in February, its highest since mid-2022, reflecting rising input costs across commodities and tariffs. March will be the first reading to fully capture conditions after the late-February conflict, including the energy shock.
With oil prices elevated and gasoline back above $4 per gallon, this release becomes the first real test of how deeply cost pressures are feeding into the production chain. If Prices Paid remains high—or climbs further—while hiring data weakens, it creates the exact setup that challenges the old market playbook. Soft labor data alone would typically support expectations of easing, but persistent cost pressures make that response less likely without accepting inflation risk.
That divergence matters. The traditional “bad data is good news” logic only works when both growth and inflation move in the same direction. If hiring weakens while inflation signals stay firm, that relationship breaks down.
A Shift in Market Interpretation?
The issue isn’t that one week of data changes the macro outlook—it’s that the framework markets use to interpret data may no longer hold. The familiar reflex—weak data leads to rate-cut expectations, which lifts equities—was built in an environment where the Fed had room to ease because inflation was falling alongside growth. When those two forces diverge, that reflex starts to fail.
Jerome Powell emphasized this balance in recent remarks, noting that policy operates with long and variable lags and that the Fed does not respond mechanically to every short-term shock. That approach preserves institutional credibility. Markets, however, operate differently—they price probabilities in real time. The risk isn’t simply weak data; it’s weak data paired with stubborn inflation, which removes the usual policy backstop.
What Comes Next: CPI as the Decisive Test
The next major checkpoint is the March CPI release on April 10. February’s data largely preceded the late-February shock, while March will begin to reflect its impact—especially through energy prices. If CPI confirms what current indicators suggest—a cooling labor market alongside rising inflation expectations—it would strengthen the case that the old interpretation mechanism is no longer reliable.
Wednesday’s data won’t settle the question. But it will be the first structured test of whether markets can still treat weak data as bullish in an environment where inflation refuses to cooperate.
Gold is stabilizing above $4,500, though its recovery remains uncertain following a steep sell-off earlier this month. Despite a modest rebound at the start of the week, momentum is still fragile.
Gains in oil prices, higher Treasury yields, and a stronger U.S. dollar continue to limit gold’s upside potential. In the near term, resistance around $4,700 and support near $4,400 are expected to define its trading range.
Gold began the week on a positive note, rising 0.8% in early Monday trading. However, the recent surge in geopolitical tensions between Israel and Iran triggered a sharp decline, and while prices are rebounding, it may be premature to view this as a full recovery.
Oil Price
Oil prices remain the key driver of market sentiment. Crude has stayed elevated after intensified weekend fighting between Israel and Iran, with the Houthis also entering the conflict. Although Trump claimed progress in negotiations, Iran has continued to reject those assertions.
While U.S. futures and European markets showed some early stability, this could prove short-lived, as seen in prior weeks. Meanwhile, the U.S. dollar continues to strengthen and bond yields remain firm.
Brent crude holding above $110 is reducing expectations for rate cuts and even prompting some to consider possible hikes. Typically, a stronger dollar and rising yields would pressure gold, but increased safe-haven demand is helping to keep it supported for now.
Still, investor confidence has weakened after gold’s previous strong upward trend stalled in recent months. Looking ahead, everything hinges on developments in the Middle East and their impact on energy prices, inflation, and central bank policy.
If tensions ease and oil prices decline in the coming weeks, the U.S. dollar could soften, which would support gold and other risk assets. However, the situation remains highly uncertain. Iran appears reluctant to negotiate, potentially leveraging elevated energy prices. Until there is clear progress toward de-escalation, any short-term market moves should be viewed cautiously.
XAU/USD technical analysis
Gold finished last week largely unchanged, rebounding from Monday’s decline after experiencing notable losses in the prior weeks. Importantly, it managed to stay above the $4,400 level — its February low — which provides a modestly positive signal.
That said, stronger confirmation is still needed before traders can conclude that gold has formed a bottom. Multiple resistance levels overhead may limit further gains, particularly as the metal has been in a downtrend since its peak in January.
Key Levels to Watch
A crucial area on the upside is the former short-term bullish trendline, now acting as resistance, along with the $4,700 level. This zone is strengthened by the 21-day exponential moving average near $4,750, making the $4,700–$4,750 range a significant barrier if prices continue to rise.
Beyond that, the next resistance lies between $4,800 and $4,840 — a region that has previously served as both support and resistance. A strong breakout above this band could open the path toward the key psychological level of $5,000.
On the downside, the $4,400–$4,500 zone is a critical support area. A daily close below this range would weaken the short-term outlook and could lead to a decline toward last week’s lows near $4,100, where the 200-day moving average provides additional support.
Further down, longer-term support is seen around $4,000, where a major upward trendline aligns with this important psychological level.
Overall, gold remains in a fragile position and has yet to fully stabilize.
The main disruption in financial markets right now is the sharp rise in both food and energy prices, reflected in the Producer Price Index (PPI) and the highest import costs in four years. March inflation data for these sectors is expected to be particularly severe, with many economists now forecasting annual inflation above 4%. This has already pushed Treasury yields higher, especially following weak demand at a recent auction. As a result, expectations for further Federal Reserve rate cuts have diminished.
However, a weak March jobs report or potential stress in private credit markets could prompt the Fed to lower rates sooner than expected, despite persistent inflation pressures. Federal Reserve Chair Jerome Powell is set to speak at Harvard this week, and investors will be watching closely for signals on whether slowing job creation could justify policy easing.
Ongoing geopolitical uncertainty is also keeping many investors cautious and on the sidelines. Historically, markets tend to rebound once war-related concerns ease.
Despite broader volatility, fundamentally strong companies continue to hold up well. For example, Argan (AGX) surged after reporting better-than-expected quarterly results, with strong gains in both revenue and earnings. As a data center-related company, its performance has also supported other stocks in the same sector.
Looking ahead, the U.S. is expected to maintain significant influence over global energy markets, including regions in the Caribbean, North America, and the Middle East. Lower domestic energy prices remain a priority, especially after substantial profits among energy producers. With a potential oversupply of crude oil in the coming months, energy stocks may face pressure, except possibly for tanker companies unless earnings forecasts improve significantly.
Overall, the U.S. is likely to remain the primary driver of global economic growth, continuing to attract international investment due to its stronger GDP outlook and a firming dollar.
The Nasdaq 100 attempted to rally early in the week but ultimately tumbled as market fear intensified. With U.S. interest rates continuing to rise, the index has now broken below the key 23,800 level.
We are also trading below the 50-week EMA, and quite frankly, this is a market being driven almost entirely by the latest headlines out of Washington or Tehran, as they are causing sharp swings in interest rate expectations. As rates climb, they put significant pressure on technology stocks—and that dynamic is clearly playing out now.
USD/MXN
The U.S. dollar initially declined against the Mexican peso but has now formed a hammer pattern for the third consecutive week. This suggests the peso may start to weaken, and with U.S. interest rates rising, the negative swap cost associated with buying this pair becomes less of a burden.
On the upside, the 50-week EMA is near the 18.29 level, with the 18.50 area as the next likely target. If the pair pulls back from here, pay close attention to next week’s candlestick formation, as it would take significant downside pressure on the U.S. dollar to shift the trend. While the interest rate differential makes me hesitant to buy the dollar against the peso, the market still appears to be attempting a rally.
GBP/JPY
The British pound edged higher against the Japanese yen this week, and the key level to watch now is 214 yen, which has acted as a significant barrier. A break above this level would likely open the door for further upside.
Short-term pullbacks should continue to present buying opportunities, but there is always the risk of intervention from the Bank of Japan. That said, it’s likely a challenging task for the central bank to prevent the yen from weakening significantly. The ongoing interest rate differential will keep driving yen-denominated pairs higher, with the British pound standing out as a key beneficiary.
EUR/USD
The euro has been quite volatile this week, ultimately forming something resembling a shooting star. We remain within the same range that’s held for some time, suggesting little has fundamentally changed. However, a breakdown below the 1.14 level could trigger a sharp strengthening in the U.S. dollar.
In that scenario, you’d likely look to buy the U.S. dollar against most currencies—not just the euro—since this pair often acts as a broader signal for how the greenback performs globally. On the other hand, if we break to the upside and clear this past week’s highs, that would be broadly dollar-negative and could pave the way for a move toward the 1.18 level.
Gold (Xau/Usd)
Gold prices dropped sharply over the week but staged a solid recovery. A large weekly hammer is beginning to form, though a break above $4,600 is needed to confirm strong momentum. While there are many factors supporting further gains, rising U.S. interest rates remain a key headwind.
Rising interest rates remain a significant headwind, weighing on gold despite ongoing geopolitical tensions that could otherwise push prices higher. A drop below the $4,000 level would be severely bearish, but for now, the market appears to be attempting a rebound.
BTC/USD
Bitcoin has been a bit weak over the week, but it’s still holding within the same range. Given the ongoing conflict between the U.S. and Iran, that actually counts as relatively strong performance. The price is currently hovering around the 200-week EMA, a key long-term support level.
The $72,000 level continues to act as resistance, while $60,000 below remains a solid support zone. Overall, the market is quite choppy, but it appears to be in the process of building a base for a potential longer-term move.
Natural Gas
Natural gas declined over the week but has shown a modest rebound. However, it’s likely a market retail traders should avoid for now, as demand is dropping sharply.
While Europe may continue to face supply challenges, this is seasonally a weak period for natural gas demand. Many retail traders also overlook that they are trading a U.S.-centric contract. With spring approaching, the typical strategy is to sell into rallies once signs of exhaustion appear.
USD/CHF
The U.S. dollar has gained solid ground against the Swiss franc and is now approaching the key 0.80 level. A breakout above that point could trigger a stronger upward move, but for now, such a scenario seems unlikely.
In this environment, the outlook remains bullish, with interest rate differentials continuing to support further upside. The Swiss central bank also provides a form of downside protection, having signaled it may intervene if the franc strengthens excessively. This creates a favorable “buy on dips” setup, with the added benefit of earning daily swap.
The US dollar weakened over the week, with the US Dollar Index (DXY) falling back below the 100 mark to around 99.60 by Friday, after a midweek boost following the Federal Reserve’s decision to keep interest rates unchanged at 3.50%–3.75%. Meanwhile, the conflict in Iran has entered its third week, and the Strait of Hormuz remains effectively shut, keeping oil prices elevated. Reports of the Pentagon sending thousands more Marines to the region point to a prolonged standoff. At the same time, Fed Chair Jerome Powell warned that inflationary pressures may still build further.
EUR/USD is hovering around the 1.1550 level after hitting new lows for 2026 earlier in the week, despite the European Central Bank’s hawkish stance, with markets now assigning an 85% chance of a rate hike this year.
GBP/USD is trading near 1.3330 after the Bank of England kept rates unchanged on Thursday but hinted that further tightening could be necessary if energy-led inflation continues.
USD/JPY is holding close to 159.30, with the yen gaining support as the Bank of Japan signaled a return to policy normalization.
AUD/USD is sitting around 0.7010 following a second straight rate hike from the Reserve Bank of Australia, though broader risk-off sentiment is still weighing on the currency.
West Texas Intermediate (WTI) crude is near $98 per barrel, close to weekly highs, after Israeli Prime Minister Benjamin Netanyahu indicated efforts to reopen the Strait of Hormuz.
Gold dropped sharply to $4,583 amid a heavy selloff driven by rising Treasury yields and forced liquidations of leveraged positions, overwhelming any safe-haven demand linked to the conflict.
Upcoming economic outlook: Key voices to watch
Monday, March 23:
ECB’s Escrivá
ECB’s Cipollone
ECB’s Lane.
Tuesday, March 24:
RBNZ’s Breman
ECB’s Kocher
ECB’s Sleijpen
ECB’s Cipollone
ECB’s Nagel
ECB’s Lane
Fed’s Barr
Wednesday, March 25:
ECB’s President Lagarde
ECB’s Lane
BoE’s Greene
Fed’s Miran
Thursday, March 26:
ECB’s De Guindos
BoE’s Breeden
BoE’s Greene
BoE’s Taylor
Fed’s Cook
Fed’s Miran
Fed’s Jefferson
Fed’s Logan
Fed’s Barr
Friday, March 27:
Fed’s Daly
Fed’s Paulson
ECB’s Schnabel
Saturday, March 28:
ECB’s Cipollone
These scheduled speeches and appearances from central bank officials across the European Central Bank, Federal Reserve, Bank of England, and Reserve Bank of New Zealand will be closely watched for signals on inflation, interest rates, and policy direction amid ongoing global uncertainty.
Key economic data and central bank signals shaping policy outlook
Monday, March 23:
Eurozone March Consumer Confidence (Preliminary)
Australia March S&P Global PMIs (Preliminary)
Japan February Consumer Price Index
Tuesday, March 24:
Eurozone March HCOB PMIs (Preliminary)
UK March S&P Global PMIs (Preliminary)
US ADP Employment Change
US Q4 Nonfarm Productivity & Unit Labor Costs
US March S&P Global PMIs (Preliminary)
Bank of Japan Monetary Policy Meeting Minutes
Wednesday, March 25:
Australia February Consumer Price Index
United Kingdom Inflation Data (CPI, PPI, RPI)
Switzerland March ZEW Expectations Survey
Germany March IFO Business Climate
Swiss National Bank Quarterly Bulletin (Q1)
Thursday, March 26:
Germany April GfK Consumer Confidence
Eurozone Q4 Gross Domestic Product
Deutsche Bundesbank Monthly Report
US Initial Jobless Claims
New Zealand March ANZ–Roy Morgan Consumer Confidence
Friday, March 27:
UK March Consumer Confidence
UK February Retail Sales
Eurozone March Harmonized Index of Consumer Prices (Preliminary)
US March Michigan Consumer Sentiment & Inflation Expectations
This packed calendar of releases across major economies—alongside guidance from institutions like the European Central Bank, Federal Reserve, and Bank of England—will play a crucial role in shaping expectations for interest rates, inflation trends, and overall monetary policy direction in the near term.
The U.S. labor market is weakening, reducing the flow of passive dollars into the stock market. Both labor supply and demand are declining simultaneously.
Supply-Side Pressures:
Immigration into the U.S. has fallen from roughly 2 million annually since 2020 to near zero today.
Demographics are slowing population growth: from 1.8% post-WWII to 0.5% currently.
Aging population: Over 4.1 million Baby Boomers are turning 65 each year from 2024–2027 (~11,200 daily).
Labor Force Participation Rate (LFPR) peaked at 66% with baby boomers, remained stable from 1990–2008, and has now fallen to 62%.
Demand-Side Pressures:
AI adoption is suppressing hiring, with estimates of 200–300k job losses in 2025 alone.
U.S. bonds’ 40-year bull market has ended; persistent inflation (>2% for 5 years) and $2T annual deficits are fueling a $39T national debt. Higher yields on debt suppress business formation and expansion.
The result: employment growth has stalled. January 2025 had 170.7M workers; today it’s 170.4M. Fewer employed individuals mean less money flowing into 401(k)s and the stock market, reversing trends seen over past decades.
Recent Economic Highlights:
U.S. spent $11.3B in the first week of the Iran war.
Home foreclosures rose for the 12th consecutive month in February (+20% YoY).
Private credit default rate climbed to 9.2%, exceeding 2008 crisis levels. Q4 GDP revised down to 0.7% from 1.4% estimate (Q3 was 4.4%).
Fed added $18B in base money supply last week.
January core PCE inflation: 3.1% (well above 2% target); headline: 2.8%. Post-Iran war, energy price spikes will likely push headline higher.
February PPI: 3.4% YoY; core PPI: 3.9% YoY (rising from January’s 2.9%/3.4%).
The Fed did not cut rates in March, and future rate reductions are unlikely as inflation remains elevated. War-related energy price spikes further complicate monetary stimulus.
Market Valuations:
The stock market is historically expensive, with Total Market Cap/GDP at 220% (vs. 50% in 1975–1990).
Geopolitical Outlook:
Low probability scenario: Iran surrenders enriched uranium and reopens the Strait of Hormuz in exchange for bombing cessation—unlikely due to U.S. and Israel demanding regime change.
More probable: war scales down over weeks, partial shipping resumes, oil prices moderate to ~$80/barrel. This scenario limits aggressive market shorts but allows portfolio hedges against stagflation.
Investment Strategy:
Favor precious metals, energy, and defensive stocks.
Short rate-sensitive stocks and bonds.
Stagflation makes buy-and-hold 60/40 portfolios risky; active management through inflation/deflation cycles is a better approach.
Dollar posts a weekly drop as policymakers adopt a cautious stance due to the ongoing Iran war.
The U.S. dollar held steady on Friday but remained below multi-month highs and was set for a weekly decline, as investors weighed the future of U.S. interest rates amid the ongoing war in Iran. The US Dollar Index, tracking the greenback against six major currencies, rose 0.3% to 99.50 but fell 0.9% for the week.
EUR/USD slipped 0.2% to 1.1570 and GBP/USD dropped 0.7% to 1.3338, both aiming for weekly gains, while USD/JPY gained 0.9% to 159.21. Rising oil prices, driven by attacks on Middle East energy infrastructure and disruption of key shipping routes, have fueled expectations that global central banks may tighten monetary policy to counter renewed inflation risks, boosting demand for the dollar since the conflict began in late February.
The Federal Reserve left interest rates unchanged this week, citing uncertainty around U.S.-Israeli actions in Iran, though it maintained projections for potential rate cuts later this year. This positions the Fed as the only major central bank not expected to hike rates in 2026, in contrast to the European Central Bank’s more hawkish stance. JPMorgan analysts noted the stark difference, highlighting that early hikes could risk repeating past policy errors, though market expectations still tilt toward some rate increases this year.
Brent crude prices fell from a recent $119 per barrel spike after President Donald Trump sought to calm markets, pledging to resolve the crisis without deploying ground troops—though Pentagon planning and additional troop deployments suggest contingency preparations. The White House is also exploring measures to ease energy market pressures, including potentially lifting sanctions on Iranian oil, while requesting $200 billion in funding for the conflict.
The pound falls as rising oil prices counteract a hawkish signal from the Bank of England.
Sterling fell on Friday as higher oil prices pressured sentiment, but the pound remained on track for a weekly gain following a hawkish surprise from the Bank of England that revised UK rate expectations. At 12:52 GMT, GBP/USD was down 0.3% at $1.34, partially reversing Thursday’s 1.31% jump, with the currency up 1.2% for the week.
EUR/GBP was largely unchanged, as hawkish signals from both the ECB and BoE offset each other. EUR/USD slipped 0.2% to 1.15, pulling back from Thursday’s 1.2% rally, as the dollar found tentative support despite the ECB’s April rate hike guidance.
On Thursday, the BoE voted unanimously 9-0 to keep rates on hold, surprising markets that had expected some members to favour a cut. Dovish MPC member Swati Dhingra even discussed possible hikes to manage inflation. Traders quickly repriced expectations, now anticipating around 80 basis points of tightening by year-end, though ING cautioned this may be excessive given weaker conditions for second-round inflation than in 2022.
Oil continued to drive markets, with Brent volatile amid the Iran conflict and Strait of Hormuz concerns. ING strategist Francesco Pesole noted that while the hawkish BoE stance provided some support for sterling, commodity prices and geopolitical developments remained the dominant market influences. ING retains a bullish view on EUR/GBP, targeting 0.88 by end-Q2, factoring in May local elections and potential future BoE cuts.
The U.S. dollar has remained a favored safe-haven asset since late February, when the U.S. and Israel launched attacks on Iran. Investors have priced in the expectation of prolonged higher interest rates due to inflationary pressures from surging oil prices, which typically strengthen the dollar.
Market sentiment was largely negative on Thursday after oil and gas prices jumped again following attacks on energy facilities in the Middle East. Iran’s South Pars gas field—the world’s largest natural gas deposit—was targeted, prompting Tehran to retaliate against sites in Gulf countries, including Qatar and Saudi Arabia.
Israeli Prime Minister Benjamin Netanyahu told reporters that Israel acted alone in the South Pars strike and that U.S. President Donald Trump had requested no similar actions in the future. Netanyahu added that Iran no longer possesses the capacity to enrich uranium or produce ballistic missiles, which caused oil prices to retreat.
“We are winning, and Iran is being decimated,” Netanyahu stated.
Federal Reserve holds rates steady
On Wednesday, the Federal Reserve kept its key policy rate unchanged, as expected. The Fed’s updated projections raised the 2026 inflation forecast, partly due to rising oil prices. Fed Chair Jerome Powell emphasized uncertainty over the war’s impact on inflation and the U.S. economy, noting repeatedly, “I’m not certain. I’m uncertain.”
JPMorgan economist Michael Feroli observed that Powell seems to be giving little weight to current forecasts and mentioned that this would have been a round where the Summary of Economic Projections could have been skipped, similar to March 2020. Regarding future rate hikes, Powell reiterated that no option is off the table, though it is not expected to be the baseline for most of the monetary policy committee.
Euro, pound, and yen rise after central bank decisions
On Thursday, both the European Central Bank (ECB) and the Bank of England (BoE) held policy rates steady, mirroring the Fed. The ECB described the Middle East conflict’s impact on inflation and growth as “uncertain,” while the BoE warned that higher oil prices would push up household fuel and utility costs and indirectly affect business expenses.
EUR/USD rose 1.2% to 1.1586, and GBP/USD climbed 1.3% to 1.3429. Deutsche Bank’s Sanjay Raja noted that the BoE’s Monetary Policy Committee voted unanimously 9-0 to pause, reflecting the scale of the energy shock and potential inflationary pressures.
The Bank of Japan also kept rates unchanged, as expected. USD/JPY fell 1.3% to 157.67. Only one board member, Hajime Takata, opposed the decision, advocating a 25-basis-point hike. Japan relies heavily on Middle Eastern energy imports, and although slowing rice price increases have helped the BoJ manage inflation, the war-driven oil surge could intensify price pressures, according to José Torres of Interactive Brokers.
The U.S. dollar paused on Wednesday as softer crude oil prices helped revive some risk appetite ahead of a series of major central bank decisions.
The yen remained fragile near levels that have previously raised concerns about possible intervention by Tokyo, especially with Japanese Prime Minister Sanae Takaichi set to meet U.S. President Donald Trump in Washington. Meanwhile, the euro slipped slightly after two sessions of gains, as the European Central Bank prepared to kick off its two-day policy meeting.
Amid the ongoing Middle East crisis, now in its third week, the dollar has strengthened as the primary safe-haven currency. However, oil prices edged lower after data from the American Petroleum Institute indicated a rise in U.S. crude inventories.
According to Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation, while the pause in oil’s rally hasn’t dramatically improved conditions, markets are showing signs of stabilization. He noted that USD/JPY has moved modestly in favor of yen strength.
The dollar index rose slightly by 0.06% to 99.61 following a two-day decline, while the euro dipped 0.05% to $1.1532. The yen weakened marginally to 159 per dollar, and sterling remained steady at $1.3355.
The greenback had surged to a 10-month high late last week, driven by geopolitical tensions and rising oil prices that pushed investors toward safer U.S. assets.
Highlighting the broader impact of the crisis, Trump announced he would delay a planned trip to Beijing to meet Chinese President Xi Jinping. Takaichi is expected to leave for Washington later Wednesday.
Analysts at Mizuho Securities noted that even if the conflict drags on, equities could rebound, supporting commodity-linked currencies like the Australian dollar, as well as currencies of oil-importing nations such as the yen and euro. However, they expect limited downside for USD/JPY, partly due to the Japanese government’s preference for a weaker yen.
Attention now turns to central banks, with the Federal Reserve set to announce its decision Wednesday, followed by the ECB, Bank of England, and Bank of Japan a day later. All are widely expected to hold rates steady, though markets will closely watch their outlooks on inflation and growth amid geopolitical uncertainty.
Expectations for Fed rate cuts have been trimmed to around 25 basis points this year. Meanwhile, traders are now pricing in more than one ECB rate hike in 2026—a notable shift from earlier expectations of potential cuts.
Elsewhere, the Australian dollar gained 0.1% to $0.7109, and the New Zealand dollar rose 0.05% to $0.586. In crypto markets, bitcoin slipped 0.40% to $74,257.80, while Ethereum edged up 0.22% to $2,333.60.
This week will see a series of major central bank meetings worldwide, including those of the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England. With oil prices climbing sharply and inflation expectations edging higher, investors will be closely watching how policymakers assess the outlook for monetary policy and the implications of elevated energy costs.
Among these institutions, the Bank of Japan faces perhaps the most delicate situation, particularly after the country’s February general election and the policy trajectory it had already been pursuing since its previous meeting. With oil trading near $100 a barrel, the BOJ must proceed cautiously as the USD/JPY exchange rate moves toward 160 — a level widely viewed as a potential tipping point for the currency.
The pair has already broken above resistance near 159, though it still remains below the highs reached in July 2024.
From a technical perspective, once USD/JPY moves above its July 2024 peak, there would be no clear resistance levels ahead, potentially opening the door for further and possibly sharp depreciation of the Japanese yen.
Meanwhile, the recent surge in oil prices has reshaped expectations for U.S. interest-rate cuts. Markets have gradually scaled back their projections for easing, even though the incoming Federal Reserve chair nominee has indicated a preference for looser monetary policy.
December Fed funds futures have climbed to around 3.44%, reflecting reduced expectations for rate cuts. Since 2022, market pricing for Fed easing has broadly moved in tandem with oil prices.
If oil continues to rise, it could complicate the Fed’s ability to lower rates, as higher energy costs tend to fuel inflation. Rate cuts may only become more likely if oil prices rise to a point where they begin pushing the economy toward recession.
Rising rates are not limited to the U.S., as Australia’s 2-year bond yield has now moved above its October 2023 peak.
Rising global oil prices are likely to tighten liquidity and financial conditions worldwide. Tighter financial conditions typically place pressure on economic activity and risk markets. As long as oil prices remain elevated — or continue to climb — they are likely to further tighten global financial conditions and weigh on risk assets.
For investors trying to gauge the outlook for risk assets, the direction of oil prices has become increasingly important. However, predicting oil’s near-term path remains challenging. Weekend oil CFDs were trading about 3% higher and above $100 per barrel.
From a technical perspective, the trend remains upward for now, as long as oil continues to hold above its 10-day exponential moving average.
The situation is similar for the S&P 500—as long as the index stays below its 10-day exponential moving average, the short-term trend is likely to remain downward.
The distribution pattern in the S&P 500 appears relatively clear, with a key pivot level near 6,525, which coincides with the index’s November lows.
More significantly, measuring the decline from the recent high to this pivot level and projecting that move 100% lower points to a potential downside target near 6,050. Such a move would also fill the price gap from June 24 and allow the index to retest the breakout level from the pre-tariff highs, an area that could act as technical support.
Such a scenario would likely require oil prices to stay elevated while interest rates and the U.S. dollar continue to strengthen. The U.S. Dollar Index could also extend its gains; a decisive break above 100.50 may open the door for a move toward 102.
With momentum indicators turning positive, it appears likely that CTAs and leveraged funds may start adding long dollar positions while reducing their existing shorts.
Meanwhile, the U.S. 2‑Year Treasury Yield may have room to extend higher, with the next resistance level seen near 3.80%, followed by a potential move toward 3.97%.
Technically, the outlook has strengthened as the yield has moved above its 200-day moving average, while the 50-day moving average is beginning to trend upward. In addition, the yield recently broke above a multi-year downtrend line that had been in place since April 2024, reinforcing the case for further upside momentum.
We’ll have to watch how the week develops. With options expiration (OPEX) taking place, market volatility could remain elevated. This is particularly true for the S&P 500, where put options currently dominate positioning, increasing the potential for sharp and erratic intraday price swings.
The sharp rise in oil prices following escalating tensions between the United States and Iran has reignited talk of stagflation. That concern is largely misplaced. What markets may actually be reacting to is not a repeat of the 1970s, but the early stages of a broader shift in capital allocation — away from financial assets and toward tangible ones.
The Stagflation Comparison Falls Apart
Whenever oil prices surge, fears of stagflation quickly emerge. The pattern appeared in 2022 and is resurfacing again. The instinct makes sense: higher energy costs can push inflation upward while weighing on economic growth. However, drawing a direct parallel with the stagflation period of the 1970s and early 1980s oversimplifies the situation.
Classic stagflation requires a persistent combination of three conditions: entrenched inflation far above target levels, stagnating or shrinking economic activity, and limited policy tools capable of correcting the imbalance without worsening the problem. In the United States during 1973 and again in 1979, all of these factors were present. Today’s environment looks very different.
Inflation is the first major distinction. During the 1970s, U.S. consumer prices averaged above 7% for much of the decade and surged beyond 13% at the end of the period. Inflation was embedded in wages, expectations, and policy frameworks. By contrast, today’s inflation has already declined significantly from its 2022 highs. While still above the ultra-low levels seen after 2008, it remains far more controlled. Importantly, central banks now possess the credibility that was missing during the Federal Reserve leadership of Arthur Burns. Inflation expectations remain relatively stable — a crucial difference.
Economic growth tells a similar story. Real GDP continues to expand at a respectable pace, and while the labor market is gradually cooling, it is far from collapsing. Corporate profits have generally remained resilient, apart from sectors particularly sensitive to higher interest rates. Consumer spending — supported by continued employment — has not stalled. In this context, an oil price spike represents a headwind rather than an automatic trigger for recession.
Supply conditions also differ dramatically from those of the 1970s. The earlier oil crises were driven by coordinated OPEC embargoes that deliberately restricted supply to Western economies. At the time, alternatives were limited and domestic production could not compensate. Today, the United States is the world’s largest oil producer thanks to the shale revolution. A disruption involving Iran can lift prices, but it does not recreate the systemic vulnerability that defined the 1973 crisis.
The reality is straightforward: energy prices may push inflation slightly higher and shave some growth at the margins. But an isolated oil shock does not produce stagflation unless the broader economic structure is already broken — and that is not the case today.
What the Oil Spike Actually Signals
Rather than focusing on stagflation, investors should consider what oil’s move may be revealing about broader market dynamics.
Historical patterns following geopolitical shocks offer a useful guide. In the first three months after such events, oil tends to be the strongest performer among major assets, rising roughly 18% on average. Gold typically advances about 6%, while equities post modest gains of around 4%, often reflecting relief that the situation did not escalate further.
Six months later, however, the picture often changes. Gold generally continues to climb, with average gains near 19%. Equity markets lose momentum, and oil frequently gives back much of its initial spike as supply responses and fading fear premiums bring prices back down.
The tactical takeaway is clear: oil tends to perform best during the initial shock phase, while gold benefits from the longer period of uncertainty that follows. The geopolitical risk premium embedded in oil prices is often temporary, but in gold it can evolve into a more lasting repricing tied to concerns about currencies, fiscal sustainability, and the reliability of financial assets.
The Bigger Shift: Real Assets Regaining Importance
Looking at the broader market landscape, the oil rally may represent just one element of a larger transition.
During 2024 and 2025, equity markets were dominated by a single theme: artificial intelligence. Capital poured into a small group of large technology companies investing heavily in AI infrastructure. The narrative was simple — if AI would reshape the economy, investors should own the companies leading that transformation.
By 2026, leadership appears to be shifting. The strongest performers are increasingly the firms supplying the physical foundations of the AI economy: semiconductor manufacturers, materials producers, energy providers, and industrial supply chains. Meanwhile, some of the technology platforms themselves face rising costs and pressure on their traditional software revenue models.
This development suggests something deeper than a normal sector rotation.
For decades, capital markets favored companies that consumed resources while undervaluing those that produced them. Asset-light businesses commanded premium valuations, while industries tied to the physical economy — mining, energy, utilities, and heavy industry — were often neglected and underfunded.
Yet the real economy never disappeared. In fact, its importance is now becoming more apparent.
The expansion of artificial intelligence requires enormous amounts of electricity to power data centers. Electrification of transportation and manufacturing depends on vast quantities of copper and other metals. Efforts to rebuild domestic manufacturing and strengthen supply chains demand steel, critical minerals, and engineering capacity that has been underdeveloped for years. Energy security has also become a top political priority, encouraging renewed investment in domestic production infrastructure.
All of these forces point toward the same conclusion: the materials and energy systems that underpin the global economy are increasingly scarce relative to rising demand.
When markets begin to recognize a prolonged supply gap in strategically important commodities, the resulting repricing can be powerful and long-lasting. Recent strength in assets such as copper, gold, uranium, and energy infrastructure may be early evidence of that process.
Investment Implications
Viewing the current environment through the lens of stagflation frames it as a temporary economic problem. That interpretation misses the larger opportunity.
The macroeconomic risks are likely overstated: inflation is not deeply entrenched, the economy continues to expand, and the conditions that produced 1970s-style stagflation are absent. Investors who position primarily for economic collapse may find themselves overly defensive.
At the same time, the stagflation narrative understates the structural shift taking place. If markets are beginning to rotate from financial assets toward real ones — from digital platforms to the physical infrastructure supporting them — then the investment strategy should focus less on protection and more on positioning.
In simple terms, the beneficiaries are likely to be the builders rather than the spenders: companies involved in energy production, materials, infrastructure, and industrial supply chains, along with scarce hard assets.
History shows that when these types of market rotations begin, they often last longer and move further than most investors expect. Commodity sectors have experienced more than a decade of underinvestment, while the forces driving demand — artificial intelligence power needs, electrification, and reindustrialization — are structural trends rather than short-term cycles.
This moment may not replicate the 1970s. But it could mark the beginning of a similarly significant shift: a period in which the physical economy returns to the center of global capital markets, rewarding investors who recognize the change early.
Middle East tensions likely to delay Fed rate cuts
The conflict in the Middle East is expected to increase price pressures, while at the same time posing risks to U.S. economic growth and employment prospects. As a result, the situation is more likely to delay potential Federal Reserve rate cuts rather than eliminate them entirely. This differs from the situation in 2022, when a combination of demand and supply shocks sharply accelerated inflation and forced the central bank to raise interest rates.
Rising inflation limits the Fed’s flexibility
Recent developments in the Middle East have significantly altered expectations for monetary policy at the Federal Reserve. Financial markets had previously anticipated two 25-basis-point rate cuts this year, but pricing has now shifted to reflect barely one cut.
Investors are also overwhelmingly expecting the Federal Open Market Committee to leave interest rates unchanged at its meeting on March 18, a view we also support.
Military activity in Iran and heightened risks to shipping through the Strait of Hormuz have driven a sharp rise in energy prices. Although the United States imports relatively little crude oil from the Persian Gulf and remains self-sufficient in natural gas, global oil pricing means domestic consumers still feel the impact.
Retail gasoline prices in the U.S. have already climbed above $3.60 per gallon, with the national average potentially approaching $4.25 per gallon in the near term. Higher fuel costs are expected to raise transportation and distribution expenses, while airline ticket prices could also increase.
If the disruption persists, price pressures may extend into other sectors such as fertilizers, food products, and plastics. As a result, inflation could rise toward 3.5% by the summer, remaining well above the Fed’s 2% target.
Growth and employment outlook uncertain
The implications for economic growth and employment remain less certain. February’s ISM business surveys suggested activity levels consistent with roughly 3% GDP growth. However, the labor market data paints a less optimistic picture.
The February employment report showed the economy lost 92,000 jobs, while the unemployment rate rose to 4.4%. This suggests the Fed may have been premature in removing its earlier assessment that “downside risks to employment rose in recent months” from the January FOMC statement.
Increasing geopolitical and economic uncertainty is unlikely to support stronger job creation and may dampen economic activity outside the U.S. energy sector.
Fed expected to signal a delay in rate cuts
Against this backdrop, attention will turn to the updated economic projections from the Federal Reserve. In its December outlook, the Fed had anticipated one interest-rate cut in 2026, followed by an additional 25-basis-point reduction in 2027.
However, the ongoing conflict and the uncertainty surrounding its duration and severity make the outlook highly unpredictable. As a result, policymakers are likely to have limited confidence in their forecasts.
At the press conference, Fed Chair Jerome Powell is expected to emphasize the difficulty of setting monetary policy amid such geopolitical and economic uncertainty.
Even so, the Fed may modestly downgrade its growth projections, raise its inflation forecasts, and ultimately push back the previously expected 2026 rate cut to 2027.
Risks still tilted toward lower interest rates
We have been projecting two interest-rate cuts in September and December, although—like financial markets—we acknowledge the possibility that these reductions could be pushed into next year. While the Federal Reserve operates under a dual mandate of maintaining price stability and promoting maximum employment, safeguarding its credibility on inflation remains crucial. Cutting rates becomes difficult to justify when inflation is already above target and appears to be moving further away from it.
In early 2022, the Fed initially argued that inflation would prove temporary because it was largely driven by supply disruptions, suggesting there was no immediate need to raise rates. However, strong job creation, rapid wage growth, pent-up consumer demand following pandemic lockdowns, and stimulus payments fueled a surge in spending. Inflation subsequently accelerated far more than expected.
As a result, the central bank was forced to respond aggressively, lifting interest rates by 525 basis points between March 2022 and July 2023 in an effort to regain control over rising prices.
Currently, the U.S. labour market appears significantly weaker, with both job creation and real household disposable income showing little growth over the past six months. At the same time, consumer confidence has been weighed down by concerns over tariffs and job security, reducing the likelihood of a strong demand surge that could push inflation higher. This environment suggests that inflationary pressures may indeed prove temporary this time.
Instead, the current energy shock may ultimately dampen demand, which would help ease core inflation over time. A correction in equity markets could amplify this demand destruction further. For this reason, we continue to expect a downward bias in Federal Reserve policy rates over the next 12–18 months.
Although tax refunds this year are expected to be relatively large—averaging around $4,000 compared with $3,200 last year—a much stronger fiscal stimulus would likely be required to generate enough demand to entrench inflation. Measures such as widespread stimulus checks would probably be necessary to produce sustained price pressures that might force the Fed to raise interest rates again.
However, such a scenario could unsettle bond markets due to concerns about rising government debt and renewed inflation risks. This, in turn, could trigger fears of 1970s-style inflation dynamics, a period marked by persistent inflation and financial market volatility. For now, we view that outcome as relatively unlikely.
Should the Fed Address the Persistent Stickiness in the Effective Funds Rate?
Since the Federal Reserve resumed purchasing Treasury bills in mid-December 2025, it has accumulated about US$165 billion in T-bill holdings. Overall, the Fed’s total securities portfolio—including bills—has increased by US$130 billion, bringing the balance sheet to roughly US$6.26 trillion. At the same time, bank reserves have risen by around US$180 billion to slightly above US$3 trillion, partly supported by a moderate drawdown in the Treasury’s cash balance.
Despite this US$130 billion expansion of the balance sheet, the Fed may find it frustrating that the effective federal funds rate has not declined, even marginally. Historically, the effective rate traded roughly 8 basis points above the policy floor, but it climbed to about 14 basis points in September and October 2025—one of the factors that prompted the renewed T-bill purchase program.
The underlying issue emerged when bank reserves slipped below US$3 trillion, causing conditions in the repo market to tighten noticeably. That tightening, from a relative-value perspective, helped push the effective funds rate higher. While the broader policy narrative has been dominated by rate cuts, the real concern is the effective funds rate drifting upward within the 25-basis-point target range.
For now, the effective funds rate remains stuck at 3.64%, just 1 basis point below the interest rate on reserve balances (3.65%). Moving up to 3.65% would be difficult because eligible counterparties can choose between holding reserves or lending in the federal funds market, though the rate should not exceed that level. Whether the Fed will address this issue publicly remains uncertain, although it arguably warrants attention from reporters, given that efficient market functioning is particularly important in the current environment.
Looking more broadly at interest rates—especially the outlook for bonds—the Fed is facing signals of higher nominal yields, rising real yields, and widening inflation breakevens. This mix does little to support further rate cuts. In fact, each element points toward the logic of maintaining current policy settings. For the time being, the market is likely to see more of the same, with 10-year Treasury yields potentially moving into the 4.3%–4.5% range before real yields eventually begin to decline again.
Fed Caution Should Continue to Support the Dollar
Like the rest of the world, the United States has seen a hawkish re-pricing of short-term interest rate expectations as the Middle East energy shock reduces the likelihood of near-term monetary easing. Although the shift in US rates has been smaller than in many other regions, it has done little to weaken the dollar. At the moment, the macro impact of rising energy prices is the dominant force shaping currency markets, while traditional drivers such as rate differentials have temporarily taken a back seat.
This suggests that even a mildly hawkish Federal Open Market Committee meeting on Wednesday—where the Fed could push the projected 25-basis-point rate cut from 2026 to 2027—may not provoke a dramatic reaction in the dollar. Still, if policymakers emphasize the inflation risks posed by higher energy prices while the US labor market remains resilient, it would likely provide modest support for the currency. In fact, the market’s reassessment of the Fed’s policy path has amplified the energy shock confronting Europe, Asia, and many emerging economies, undermining earlier expectations of a gradual dollar decline this year.
As long as energy prices remain elevated—or climb further—it will be difficult for the dollar to surrender the gains it has made this month. One potential source of increased dollar supply could come from official intervention, particularly if Japan steps in to curb USD/JPY should the pair rise beyond 160. A coordinated intervention by the United States and Japan to sell dollars would be unexpected and could trigger a broader correction in the currency. However, unless energy prices retreat meaningfully, any intervention would likely serve only to limit volatility rather than reverse the dollar’s broader strength.
The U.S. dollar strengthened on Friday and remained on course for a solid two-week winning streak, supported by its status as a preferred safe-haven asset amid the ongoing conflict involving Iran.
By 15:46 ET (19:46 GMT), the U.S. Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.7% to 100.36 and was set for a weekly gain of around 1.4%. Meanwhile, EUR/USD fell 0.8% to 1.1423 and GBP/USD dropped 0.9% to 1.3228. USD/JPY edged 0.2% higher to 159.65.
Analysts at ING noted that the dollar has climbed to fresh monthly highs as markets struggle to see a clear resolution to the escalating Middle East crisis.
The joint U.S.–Israeli military campaign against Iran has now lasted more than a week and shows little sign of easing. President Donald Trump stated that Washington is “totally destroying” Iran’s military and economic capacity.
However, Tehran has signaled it will continue resisting. Iran’s new Supreme Leader, Mojtaba Khamenei, emphasized that the strategic Strait of Hormuz — a crucial shipping lane responsible for roughly one-fifth of global oil supply — will remain closed.
The possibility of a prolonged shutdown of the strait has triggered significant volatility in global oil markets. Brent crude prices surged to nearly $120 per barrel earlier in the week before briefly dropping below $90. On Friday, Brent futures were trading above $100 per barrel.
Because much of the oil and gas transported through the Strait of Hormuz is used to produce key goods such as fertilizers and plastics, rising energy prices could intensify inflationary pressures worldwide.
These inflation risks could lead central banks, including the Federal Reserve, to reconsider plans for near-term interest rate cuts. Higher interest rates typically attract foreign capital, which could further strengthen the U.S. dollar.
PCE inflation data in focus
Investors are also closely watching U.S. inflation data due on Friday, when the personal consumption expenditures (PCE) price index for January will be released.
The core PCE index — which excludes volatile categories like food and energy — is expected to rise 3.1% year-on-year, slightly above the 3.0% reading in December. This indicator is closely followed by financial markets because it is one of the Federal Reserve’s preferred gauges when setting monetary policy.
According to ING analysts, the core PCE index has been drifting further away from the Fed’s 2% target since reaching a low of 2.6% last summer.
They suggested that this trend may limit the Fed’s ability to lower interest rates this year and that policymakers will likely address the issue during next Wednesday’s Federal Open Market Committee (FOMC) meeting.
Interestingly, recent PCE data has shown stronger inflation than the Consumer Price Index (CPI) reported by the Labor Department. This difference largely reflects variations in weighting methods, particularly for housing and healthcare costs, as well as differences in coverage and consumer substitution patterns. Lower weighting for cooling shelter costs and higher exposure to rising medical expenses have kept PCE inflation relatively elevated compared with CPI.
In contrast, February’s CPI data released on Wednesday showed relatively moderate inflation of 2.4% year-on-year.
However, these figures mostly reflect a period before the Iran conflict escalated in late February with a wave of U.S. and Israeli airstrikes. Since then, the inflation outlook has become more uncertain.
Major central bank decisions ahead
Next week will be a crucial period for global monetary policy watchers, as several major central banks — including the Federal Reserve, the European Central Bank (ECB), and the Bank of England — are set to announce interest rate decisions.
Investors will pay close attention to how policymakers address the economic implications of the Iran conflict.
According to JPMorgan economist Michael Feroli, markets widely expect the Fed to leave its benchmark interest rate unchanged at a target range of 3.5%–3.75%.
However, the Middle East conflict may complicate the outlook. Feroli said the Fed’s post-meeting statement is likely to mention the crisis as an additional source of uncertainty affecting both employment and inflation objectives.
The ECB is also expected to keep rates unchanged, although policymakers are likely to comment on the severe oil and gas shock Europe is experiencing due to the conflict.
JPMorgan economists Bruce Kasman and Nora Szentivanyi noted that central banks often face difficult policy choices during periods of volatile energy prices. Energy costs frequently fluctuate by around 25% annually, pushing up energy inflation while making it difficult to determine whether changes stem from supply disruptions or shifts in demand.
While oil prices are expected to remain elevated, a prolonged closure of the Strait of Hormuz could drive prices well beyond current market expectations. A sustained rise to $125 per barrel or higher would likely increase inflation while simultaneously weakening economic growth.
They warned that such a scenario could trigger different policy responses from major central banks. The Federal Reserve typically prioritizes mitigating recession risks and could adopt a more dovish stance if oil shocks intensify. In contrast, the ECB has historically been more sensitive to rising inflation and could tighten monetary policy if oil prices climb significantly.
Before the attack began on Feb. 28, lingering inflation concerns had already made the Federal Reserve cautious about continuing the interest rate cuts introduced last year. While several indicators of price pressure had eased compared with earlier highs, policymakers were reluctant to declare victory over inflation, which had peaked at 9.0% year over year in the Consumer Price Index in June 2022.
Since then, inflation has fallen sharply and stabilized around the mid-2% range, slightly above the Fed’s 2% target. However, the cautious optimism that accompanied this disinflation may quickly fade because of the war.
The main concern is that surging energy prices could reignite inflation and force the central bank to keep monetary policy tighter for longer. With oil, gasoline, and natural gas prices rising sharply, it remains unclear how persistent the shock will be—or how the Fed should respond. This uncertainty creates a policy gray area that may take time to resolve. The longer the conflict lasts, the more uncertain the outlook for monetary policy becomes.
Two key questions dominate the discussion: When will the war end, and what economic consequences will follow? For now, the answers remain highly speculative. Much of the analysis focuses on the recovery of oil exports through the Strait of Hormuz, which remains largely closed due to the conflict and normally handles about one-fifth of the world’s seaborne oil exports.
The basic calculation is straightforward: the longer shipments remain disrupted, the greater the hit to global supply, which could sustain upward pressure on energy prices. According to estimates from Capital Economics, cited by the Financial Times, prolonged export disruptions would likely extend the period of elevated oil prices and complicate the inflation outlook.
The challenge for the Federal Reserve is determining which scenario is most likely and calibrating monetary policy accordingly. With no clear end to the war in sight, the near-term outlook for energy prices—and their implications for inflation and economic growth—remains highly uncertain.
Financial markets are also struggling to assess the range of possible outcomes and are largely adopting a wait-and-see stance. One signal of this caution can be seen in the U.S. 2‑Year Treasury Yield, which is widely viewed as a proxy for expectations about Fed policy. In recent days, the yield has hovered close to the Effective Federal Funds Rate, suggesting investors broadly expect the central bank to keep interest rates steady in the near term.
Fed funds futures point to a similar outlook, indicating that markets expect the Federal Reserve to keep interest rates unchanged over the next three policy meetings. Current pricing suggests the first potential rate cut could come in July or September, although those expectations remain tentative given the high level of uncertainty surrounding the war’s impact on growth and inflation.
“The Fed always has a problem in deciding how to respond to a supply shock,” said Alan Detmeister, a former Fed economist now at UBS. “On the one hand, the inflationary effects argue for raising interest rates. On the other, weaker output and rising unemployment point toward lowering rates. It’s not clear-cut, which often leads the Fed to wait and see which side of its dual mandate—inflation or employment—requires the most support.”
Ultimately, even if a ceasefire eventually stabilizes the region, the economic aftershocks could persist. As a result, the Fed’s policy outlook is likely to remain uncertain for some time, with policymakers needing clearer signals on how the conflict will shape inflation and economic growth.
It’s difficult to get too excited about today’s CPI report. Because the data entirely predates the Iran war, it does not capture the recent surge in energy prices that could make next month’s inflation reading far more dramatic. Normally, this might be considered the last relatively “clean” inflation print before those effects appear. However, the data is not truly clean either, as lingering distortions from earlier shutdowns are still influencing the figures.
Those lingering effects may become more visible in April’s report, when rent data could show a temporary spike. This is expected because the October owners’ equivalent rent (OER) sample—assumed to have contained zero increases—will drop out of the calculation, potentially lifting the shelter component for one month. By that time, inflation data will also begin to reflect the impact of the Iran conflict. As a result, the next couple of months could bring more volatile inflation readings.
For February, expectations were roughly +0.26% for headline inflation and +0.24% for core inflation. That pace implies an annual rate close to 3%—still above the Federal Reserve’s target but not dramatically so. However, inflation had already been showing signs of firming even before the geopolitical tensions in the Middle East intensified, raising questions about how markets and policymakers will interpret the latest data.
The U.S. CPI swaps curve already appears to be factoring in the effects of the conflict. Unsurprisingly, it is inverted, reflecting expectations of higher inflation in the near term due to energy prices. What is more unusual is that longer-term inflation expectations remain lower. While that might initially seem odd, it also serves as a useful reminder that markets may expect the energy shock to be temporary rather than a lasting source of inflation pressure.
Another interesting point can be seen in the chart of five-year inflation swaps across several regions. Despite the sharp swings in energy prices, U.S. five-year CPI swaps have moved relatively little compared with other markets. This is partly because the U.S. economy is generally less sensitive to oil price fluctuations than many other countries. In addition, the U.S. dollar has often moved in the same direction as oil prices, which can soften the direct pass-through of energy costs into domestic inflation.
Even so, the move still appears notable. Given that this is a five-year tenor, it is somewhat surprising to see such a reaction when most of the current volatility stems from spot energy prices rather than longer-term inflation pressures.
With those preliminaries in mind, the actual data is worth examining. Forecasts proved fairly accurate, with headline CPI rising 0.267%, while core CPI increased 0.216%, both broadly in line with expectations.
The spike in apparel prices is somewhat unusual, although such jumps do occur occasionally and the category represents a relatively small share of the overall CPI basket. The increase in medical care costs—driven largely by hospital services—was somewhat concerning. On the other hand, shelter inflation came in softer, which helped offset some of the upward pressure from other components.
Both core services and core goods inflation eased on a year-over-year basis. Core goods inflation is now running at about +1% y/y. While a continued downward turn had been widely expected, the key question is where it ultimately stabilizes—around +0.5% or -0.5%. My view is that it is more likely to settle near +0.5%. Even so, the latest trend is encouraging news for the broader inflation outlook.
The main surprise in the report came from primary rents. While Owners’ Equivalent Rent (OER) rose 0.22% month-on-month, roughly in line with the previous month and continuing to trend lower on a year-over-year basis, Rent of Primary Residence increased by only 0.13% month-on-month.
This softer reading was notable, although the year-over-year trend in OER may shift in the coming months as the October sample—when increases were effectively assumed to be zero—drops out of the calculation.
The broader trend in rents is clearly moving lower, but the sharp drop is still surprising—especially given the ongoing cost pressures faced by landlords. It is possible that the decline will partially reverse next month. One likely explanation could be compositional shifts in the data. For example, rents may be softening in large cities as reverse immigration flows ease pressure on housing supply, while outmigration from places like New York City could also be influencing the figures. A deeper breakdown of the data would be needed to confirm these effects.
Meanwhile, the Lodging Away from Home category rose 1%. This component has been recovering after a dip last year, although hotel prices remain below the post-pandemic surge that followed COVID-19, when pent-up travel demand pushed rates sharply higher. Given the ongoing recovery in travel demand, there is a reasonable chance that hotel prices could reach new highs in 2026.
Airfares also increased, rising 1.4% month-on-month. This is worth watching closely. As energy prices climb, airlines often pass higher fuel costs on to passengers. While February’s data does not yet reflect the latest surge in energy prices, persistently high jet fuel costs could push airfares higher in the coming months.
If that happens, it may show up as stronger core inflation, even though the underlying driver would primarily be energy-related rather than a broader rise in service-sector prices.
The red dot reflects the end-of-February reading. Since then, jet fuel prices have been highly volatile. They are currently around $3.49, after briefly reaching $4.11 just a few days ago. Such swings in fuel costs typically feed through to airline pricing with a short lag, meaning the impact is likely to appear in next month’s airfare data.
Turning to “supercore” inflation—core services excluding shelter—**the pace eased compared with the previous month. Last month, supercore rose 0.59% month-on-month, while this month it increased a more moderate 0.35% m/m.
On a year-over-year basis, core services excluding rents currently stand at 2.94%. However, that figure is likely to jump next month due to base effects. The comparison will drop the unusually weak reading from last March, when several travel-related categories posted sharp declines: airfares fell 5.27%, lodging away from home dropped 3.54%, and car and truck rentals declined 2.66%.
As those unusually weak numbers roll out of the calculation, the year-over-year supercore measure will likely rise—even if the month-to-month readings remain relatively modest. And given recent developments in travel and energy costs, those monthly figures may not stay soft for long.
The overall distribution of price changes this month is also notable. Several categories recorded increases of less than 1% on an annualized month-to-month basis, although most of them were only slightly below that threshold.
It is also worth noting that the figures shown in red reflect adjustments based on my own estimate of seasonal patterns, rather than the methodology used by the Federal Reserve Bank of Cleveland.
There were also many categories in the upper tail of the distribution, although the upper tail appears longer than the lower one. Of course, Median CPI—a measure published by the Federal Reserve Bank of Cleveland—doesn’t depend on how long those tails are. That is precisely the point of using a median measure.
While I’m not fully confident in my estimate this month, I expect the median reading to come in relatively soft, likely below 0.2%.
Typically, median CPI tends to run comfortably above the mean CPI because for many years inflation has existed in a disinflationary regime, where price-change distributions were skewed to the downside—meaning the tails were longer on the negative side. In such environments, the median usually sits above the mean. This month, however, that pattern may not hold. During inflationary cycles, the distribution often flips, with longer tails on the upside, causing the mean to exceed the median. That said, one month of data is not enough to draw firm conclusions.
Regarding monetary policy, the February CPI figures may not carry much weight given the developments in March. Markets appear to be misinterpreting the recent energy price spike, treating it as an inflationary impulse that complicates the Federal Reserve’s policy path amid soft employment data. In reality, energy-driven increases in CPI are not typically the kind of inflation central banks try to suppress through tighter policy. Energy prices tend to be mean-reverting and are often anti-growth, meaning they slow economic activity.
Earlier observations about the CPI swaps curve—which is inverted and shows lower longer-term inflation expectations than a month ago—likely reflect markets beginning to price in a possible recession. While recessions themselves are not inherently disinflationary, markets often treat them that way.
If the Fed were to tighten policy in response to an energy-driven spike in inflation, it could worsen an economic slowdown. That dynamic contributed to several policy mistakes during the 1970s inflation crisis, something modern policymakers are well aware of. As a result, an energy shock combined with weak employment data is more likely to push the Fed toward easing rather than tightening.
In that sense, the current situation would not qualify as classic stagflation if core inflation continues to moderate. It may resemble “stag”—sluggish growth—but a higher headline CPI driven by energy does not necessarily signal persistent inflation if core and median measures remain contained.
That said, there are reasons for caution. Core and median inflation may not remain subdued indefinitely. There are already signs they could move back toward the mid-to-high 3% range, and indicators such as the Enduring Investments Inflation Diffusion Index are trending higher, suggesting broader price pressures could gradually re-emerge.
(That said, the Federal Reserve does not necessarily share this view. We may eventually find ourselves discussing stagflation in a more literal sense, but many observers could still be misled by spikes in headline inflation.)
Another key implication is that the February data will likely have limited influence on policy decisions. Given the events that unfolded in March, the CPI figures for February are already somewhat outdated. Since the report came in largely in line with expectations, markets are unlikely to dwell on it for long.
In short, February’s inflation print will probably be forgotten quickly. Attention will soon shift to the next few releases, which are likely to reflect the impact of the recent energy shock. Those upcoming numbers could be far more dramatic—and not necessarily in a reassuring way.
The U.S. dollar remains exceptionally strong, a factor that could help keep U.S. financial markets relatively resilient. Because gold is priced in dollars, the metal may once again attract nervous investors as a safe haven. At the same time, shipping disruptions have created an acute shortage of fertilizers, raising concerns about potential food supply shortages.
Meanwhile, the International Energy Agency has proposed the largest release of oil reserves in its history—around 400 million barrels—to help offset supply disruptions linked to tensions around the Strait of Hormuz. Bloomberg also reported that Germany and Japan are preparing to tap their strategic crude reserves in the coming days.
Signs of stress are also emerging in private credit markets. BlackRock has restricted withdrawals from one of its flagship private credit vehicles, the HPS Corporate Lending Fund, after a surge in redemption requests. The $26 billion fund received about $1.2 billion in withdrawal requests during the first quarter but will permit only $620 million in redemptions—roughly 5% of the fund. If anxiety spreads further across private credit markets, it could tighten lending conditions and slow economic growth, potentially prompting the Federal Reserve to respond with additional interest-rate cuts.
Inflation data also supported expectations for future rate reductions. The U.S. Department of Labor reported that the Consumer Price Index rose 0.3% in February and 2.4% over the past 12 months, with both headline and core readings matching economists’ forecasts. A particularly encouraging detail was the moderation in shelter costs—often measured through owners’ equivalent rent—which increased only 0.2% in February. Given that shelter costs have risen about 3% over the past year and have been a major driver of inflation, this slowdown suggests price pressures in that category may be cooling more rapidly.
On the corporate front, Nvidia is set to host its annual GPU Technology Conference next week, where the company is expected to unveil details about its next-generation chip architecture. Anticipation surrounding the event has already helped lift semiconductor and memory stocks. The conference is also expected to emphasize optical networking technologies, which could benefit companies such as Ciena, Corning, and Ubiquiti.
Gold prices edged higher in Asian trading on Wednesday as investors weighed mixed developments surrounding the U.S.-Israel conflict with Iran, particularly concerns about energy market disruptions and the possibility that the fighting could ease.
Traders are also awaiting U.S. consumer inflation data for February for fresh insight into the health of the world’s largest economy, although the report is unlikely to fully capture the recent surge in energy prices linked to the Iran conflict.
Spot gold rose 0.2% to $5,204.29 an ounce as of 01:17 ET (05:17 GMT), while gold futures slipped 0.5% to $5,213.11 per ounce.
Gold breaks above $5,200/oz as markets weigh mixed Iran signals
Gold’s gains on Wednesday pushed prices above the $5,000–$5,200 per ounce range that had contained trading over the past week, though it remained uncertain whether the breakout would hold.
The precious metal has experienced sharp volatility in recent weeks, retreating significantly after reaching a record high near $5,600 per ounce in late January.
Conflicting developments surrounding the Iran war also contributed to choppy trading this week. U.S. President Donald Trump said late Monday that the conflict was nearing an end. However, exchanges of strikes between the U.S., Israel, and Iran continued into early Wednesday, marking the twelfth straight day of fighting.
Investors remain concerned that a surge in energy-driven inflation could prompt global central banks to adopt a more hawkish policy stance—an outlook that typically weighs on gold. As a result, the metal’s gains were capped despite rising safe-haven demand.
Elsewhere in the precious metals market, price movements were relatively muted. Spot silver slipped 0.1% to $88.2245 an ounce, while spot platinum edged up 0.3% to $2,208.89 per ounce.
U.S. CPI report in focus for fresh clues on inflation
Markets are awaiting the release of U.S. consumer price index (CPI) data for February later on Wednesday, which is expected to offer clearer signals on inflation and the outlook for interest rates in the world’s largest economy.
Headline CPI is forecast to hold steady at 2.4% year-on-year, while core CPI is projected to remain unchanged at 2.5%.
Although the data is unlikely to capture the recent spike in energy prices triggered by the Iran conflict, investors will still monitor the report closely for indications on consumer spending trends and the broader health of the U.S. economy.
The CPI release follows a weaker-than-expected February payrolls report, which has fueled some concerns that economic momentum in the United States may be slowing.
The U.S. dollar weakened on Friday after a disappointing jobs report increased expectations that the Federal Reserve could cut interest rates. Nevertheless, the currency was still on track for a strong weekly gain, supported by rising demand for safe-haven assets amid escalating tensions in the Middle East.
By 16:30 ET (21:30 GMT), the Dollar Index — which measures the dollar against six major currencies — had fallen 0.4% to 98.89. Despite the decline, it remained poised for a weekly rise of about 1.3%, its strongest performance since August 2025.
Dollar pressured by weak payroll data
Markets focused on the February nonfarm payrolls report released Friday. The data showed the U.S. economy lost 92,000 jobs last month, far below economists’ expectations for a gain of 58,000. At the same time, the unemployment rate increased slightly to 4.4%.
The weak February figure followed a stronger January reading of 126,000 jobs, revised down from 130,000. December’s employment data was also revised lower, shifting from a gain of 48,000 to a loss of 17,000 jobs.
Following the report, traders increased their expectations that the Federal Reserve may cut interest rates. Since higher rates typically support the dollar while lower rates weaken it, the data weighed on the currency.
However, despite Friday’s pullback, the dollar benefited throughout the week from its safe-haven status as geopolitical tensions intensified in the Middle East.
U.S. Defense Secretary Pete Hegseth said Thursday that U.S. firepower directed toward Iran could increase significantly. Meanwhile, Israel announced earlier Friday that it had begun a large-scale wave of strikes targeting infrastructure in Tehran.
Iran retaliated by launching attacks against Israel and several regional countries including Gulf states, Cyprus, Turkey, and Azerbaijan, expanding the scope of the conflict.
Analysts at ING said the dollar is unlikely to resume a sustained decline unless a meaningful political breakthrough leads to a ceasefire. Until then, governments will likely continue grappling with the economic consequences of elevated energy prices. The Dollar Index is now approaching the key psychological level of 100.
According to Trade Nation senior market analyst David Morrison, the 100 level represents an important technical resistance point. The index repeatedly tested this level in November but failed to break through before eventually falling to a four-year low at the end of January.
At that time, some traders speculated the dollar’s decline could continue amid concerns it might eventually lose its role as the world’s primary reserve currency. Morrison said those predictions now appear premature, although the Dollar Index still faces several significant resistance levels.
Euro heads for weekly decline
In Europe, EUR/USD was mostly unchanged at 1.1611, though the euro was on track to lose about 1.7% for the week as higher energy costs weighed on economic growth prospects in the region.
Eurozone GDP data due later in the session is expected to confirm growth of 0.3% in the final quarter of last year and annual expansion of 1.3%.
Earlier data also showed eurozone inflation in February came in higher than expected, even before the outbreak of the Iran conflict.
Despite the geopolitical developments, European Central Bank policymaker and Dutch central bank chief Olaf Sleijpen said the eurozone’s monetary policy environment remains relatively stable.
Speaking in an interview Friday, he noted that while the situation is no longer ideal, he has not significantly changed his overall assessment of the region’s economic position.
Meanwhile, GBP/USD rose 0.3% to 1.3393, although sterling was still on track for a weekly decline of around 0.8% as rising energy prices add further pressure on the U.K. economy and government.
Yen weakens amid rising oil prices
In Asia, USD/JPY increased 0.2% to 157.83 and was on track for a weekly gain of 1.1%. The Japanese yen remained under pressure as higher oil prices raise inflation risks for energy-importing economies such as Japan.
Bank of Japan Deputy Governor Ryozo Himino told parliament that the weaker yen is pushing up import costs and could influence underlying inflation.
USD/CNY rose 0.1% to 6.8965 and was also heading for weekly gains, following a week in which Chinese authorities announced their lowest economic growth target since 1991.
Meanwhile, AUD/USD climbed 0.3% to 0.7026, though the Australian dollar was still set for a weekly loss of about 1.3%, as risk-sensitive currencies remained under pressure.
Recent U.S. growth data have pointed to notable economic resilience — but consumer sentiment tells a more cautious story.
According to the Federal Reserve Bank of Atlanta, real Gross Domestic Product is projected to have expanded at an annualized pace of 4.2% in the fourth quarter of 2025. That figure exceeded expectations and represents one of the strongest quarterly performances in the past two years.
The expansion was supported by steady consumer spending, firmer exports, and higher government expenditures. Household consumption climbed 3.5%, its fastest rate of increase this year. On the surface, these numbers portray a macroeconomy that remains firmly in growth mode.
Gross Domestic Product (GDP) represents the total value of goods and services produced within the United States. Of that total, personal consumption expenditures (PCE) account for roughly 68%. Put simply, the consumer is the backbone of the U.S. economy — as household spending goes, so too goes overall economic growth.
When GDP rises, it reflects an increase in overall economic activity — stronger consumer demand that supports higher production and broader expansion. For that reason, growth rates are closely watched by policymakers, investors, and corporate leaders. Strong GDP figures are often interpreted as a signal of improving sales prospects and profit potential.
However, GDP does not tell the whole story of household financial well-being.
By design, economic growth data measure aggregate output. They do not reveal how income is distributed, how conditions vary across regions, or how millions of families actually experience the economy. A clear illustration is the breakdown of consumer spending by income level. At present, roughly half of all U.S. consumer spending is driven by the top 10% of earners — a share that has been increasing — while the spending contribution from the bottom 90% has been declining.
In other words, headline growth can appear solid even as the underlying breadth of participation narrows.
In short, strong headline growth can conceal areas of financial strain among households and small businesses. Expansion driven primarily by exports or government spending may not meaningfully filter through to broad segments of workers, creating a disconnect between aggregate output and lived experience.
A clear example of this distortion appeared in 2025. In the first quarter, a surge in imports aimed at front-running tariffs weighed heavily on GDP. When those trade fears subsided in the second quarter, import flows normalized, producing a sharp rebound in growth. Yet these swings in trade data had limited direct impact on most consumers. The volatility was largely statistical rather than reflective of a dramatic shift in household conditions.
While GDP figures suggest a sturdy economic backdrop, other coincident and leading indicators tell a more cautious story. The The Conference Board Leading Economic Index (LEI), which historically leads the U.S. economy by roughly six months, has remained in contraction for an extended period. Its six-month rate of change has long been regarded as one of the more reliable signals of impending slowdowns or recessions.
Notably, however, despite the prolonged weakness in the LEI, the broader economy has not formally entered recession — underscoring the growing divergence between traditional warning signals and realized economic outcomes.
At first glance, headline growth data suggest the economy remains on firm footing. Output is expanding, spending is holding up, and aggregate indicators point to continued resilience.
But a closer examination reveals a more nuanced picture. Beneath the surface, several crosscurrents — from uneven income distribution and trade-related distortions to persistent weakness in leading indicators — point to a mixed underlying environment.
That divergence helps explain why economic sentiment can feel far weaker than the headline numbers imply. Strong aggregate growth does not automatically translate into broad-based confidence, particularly if gains are concentrated or forward-looking indicators continue to flash caution.
The Gap Between Rising Stocks and Weak Consumer Sentiment
Historically, it makes sense that stock markets and economic data would trend in the same direction over the long run. Corporate earnings ultimately derive from economic activity, and sustained growth in output and income should support higher equity valuations over time.
As discussed in “Return Expectations Are Too High,” long-term market returns are anchored to the growth of the underlying economy, productivity gains, and profit expansion — not simply short-term momentum or sentiment-driven rallies.
“The chart illustrates average annual inflation-adjusted total returns (including dividends) dating back to 1948, using total-return data compiled by Aswath Damodaran at the NYU Stern School of Business. From 1948 through 2024, the stock market delivered an average real return of 9.26%.
However, in the years following the 2008 financial crisis, inflation-adjusted total returns increased by nearly three percentage points across the last three measured periods.
Here’s the challenge: real (inflation-adjusted) equity returns are relatively straightforward to conceptualize. Over time, they reflect economic growth (GDP) plus dividend income, minus inflation. That relationship broadly held from 1948 to 2000.
Since 2008, though, the math has diverged. Nominal GDP growth has averaged roughly 5%, and dividend yields have hovered near 2%. Yet actual market returns have significantly exceeded what that underlying economic engine would normally justify in terms of sustainable earnings expansion.”
That 15-year divergence is not particularly surprising. As discussed in “Pavlov Rings the Bell,” markets have repeatedly been cushioned from deeper corrections by aggressive fiscal and monetary intervention.
Over the past decade and a half, major drawdowns were often met with policy stimulus — whether through deficit spending or actions by the Federal Reserve. Each episode of support was followed by market recovery, reinforcing a powerful feedback loop: intervention became associated with rising asset prices.
In effect, investors were conditioned to expect rescue during periods of stress — to buy every dip under the assumption that policymakers would step in. That conditioning ties directly to the concept of “moral hazard.”
Moral hazard (noun, economics): A reduced incentive to guard against risk when one is shielded from its consequences — as with insurance protection.
Following the Global Financial Crisis, near-zero interest rates and repeated rounds of quantitative easing strengthened the belief that a policy backstop would reappear whenever volatility increased. Over time, that expectation hardened into a reflexive behavior: assume support, assume recovery, assume higher prices.
Those sustained supports — in both the real economy and financial markets — helped drive a wedge between underlying economic fundamentals and realized financial returns. In other words, policy intervention became a key force behind the growing disconnect between economic reality and asset-price performance.
At present, GDP growth has continued to surprise to the upside, and several macro indicators reflect ongoing resilience. At the same time, major equity benchmarks such as the S&P 500 have climbed to record levels. That advance has been fueled less by current consumer sentiment and more by expectations of future earnings growth.
The challenge, however, is that equity valuations appear increasingly disconnected from underlying revenue growth. Markets are pricing in optimism about future expansion, even as broad-based income and demand trends remain uneven.
There is also a structural limitation embedded in the “wealth effect.” Rising stock prices can support consumption by boosting household net worth. Yet equity ownership in the United States is highly concentrated. Roughly 87% of equities are owned by the top 10% of households. As a result, the transmission from higher stock prices to broader economic activity is narrower than headline gains might suggest.
That concentration is reflected in spending patterns as well. The top 40% of income earners now account for approximately 80% of total consumption. Consequently, while financial asset values have surged, the macroeconomic lift from those gains is disproportionately tied to higher-income households — leaving sentiment among the broader population more subdued than market performance alone would imply.
That divergence goes a long way toward explaining the disconnect between subdued consumer sentiment and robust headline economic data.
When growth and market gains are concentrated among higher-income households — and asset-price appreciation primarily benefits those with significant equity exposure — aggregate statistics can remain strong even as large segments of the population feel financial strain.
In other words, the macro numbers reflect the strength of those driving the bulk of spending and asset ownership, while sentiment surveys capture the broader lived experience. The result is an economy that looks resilient on paper but feels far less secure to many households.
Consumer Confidence Surveys Remain Soft Even as Economic Data Stays Strong
In clear contrast to upbeat macroeconomic indicators and strong equity market gains, consumer sentiment readings have deteriorated significantly. Both the Conference Board Consumer Confidence Index and the University of Michigan Surveys have fallen steeply over the past two years, even as stock prices have climbed. Historically, consumer sentiment tends to move in tandem with rising markets, which is intuitive. The chart below presents a composite measure combining these two leading sentiment indicators.
In both surveys, readings on current conditions and future outlook remain notably subdued, with the expectations component dropping to levels that have historically been linked to recession warnings.
The downturn in sentiment points to rising concerns over employment prospects, business conditions, and future income. Respondents frequently highlighted worries about inflation, elevated prices, food and energy expenses, the affordability of health insurance, and broader geopolitical and political uncertainty. Yet despite this widespread unease, GDP has continued to grow.
Importantly, the gap between soft sentiment data and hard economic figures is not unprecedented. Analysts have often observed that consumer attitudes tend to lag underlying economic performance, and sentiment could improve if expansion persists. In the near term, surveys typically capture prevailing fears and uncertainty, which can weigh on confidence even when actual spending remains relatively solid. Although nominal figures indicate that consumer spending is holding up, much of that resilience reflects paying higher prices for the same—or even fewer—goods, rather than an increase in real consumption, which helps explain the sustained weakness in sentiment readings.
Importantly, if consumer sentiment influences spending—and consumption accounts for roughly 68% of the economy—then that spending ultimately represents demand for businesses of all sizes. In a genuinely strong growth environment, we would expect improving demand to be mirrored by rising confidence across households. Yet, as the composite index illustrates, sentiment levels remain subdued. The historical relationship between confidence measures and the future trajectory of economic activity underscores why this divergence warrants attention.
Soft sentiment readings do not necessarily signal an imminent downturn. However, they do reflect a guarded mindset among both consumers and business owners. That caution can translate into more restrained spending across key components of GDP. If confidence remains depressed, a moderation in economic activity would be a reasonable outcome.
Why the Divergence Matters and What It May Signal Ahead
The gap between solid economic data, rising equity markets, and subdued consumer confidence carries meaningful implications. On the surface, macro indicators point to continued expansion, reinforcing higher stock prices and optimistic earnings forecasts. Yet beneath that strength, households and many business owners report lingering insecurity and pessimism about the future.
This disconnect prompts several key questions:
Can growth remain durable if confidence stays depressed?
Will corporate earnings hold up if consumers begin to retrench?
Could persistent pessimism eventually shape real-world behavior, leading to slower spending and softer growth?
History offers cautionary precedents where negative sentiment foreshadowed downturns—not because the hard data was inaccurate, but because sentiment ultimately influenced economic decisions.
The divergence also highlights distributional dynamics. Aggregate growth figures often mask disparities in income and wealth. Higher-income households account for roughly half of total consumption, while lower-income groups may not fully share in the benefits of expansion. That imbalance helps explain weaker sentiment readings. It also leaves markets vulnerable to any shock that prompts affluent consumers to scale back spending—particularly in an environment where the gap between economic “haves” and “have-nots” remains wide.
Investment Implications
For investors, this mixed backdrop argues for disciplined risk management. Markets may continue advancing on elevated earnings expectations, but those expectations can shift quickly as economic conditions evolve.
Scrutinize valuations. Rising indices do not preclude overpricing. Favor firms with strong balance sheets, reliable cash flows, and pricing power.
Diversify thoughtfully. Sector performance can diverge sharply. Defensive areas such as utilities, consumer staples, and healthcare often prove more resilient during sentiment-driven slowdowns.
Track leading indicators. Watch employment trends, consumer credit conditions, and forward-looking economic indices. Weak confidence can precede softer activity.
Maintain liquidity. Holding cash provides flexibility amid volatility created by divergence.
Consider hedging strategies. Exposure to bonds or volatility-linked instruments may help cushion downside risks.
Emphasize quality. Companies with durable competitive advantages are typically better positioned to navigate uncertainty.
The split between hard data, market performance, and consumer mood represents a meaningful economic signal. While there are persuasive arguments that markets can continue climbing and that pullbacks should be bought, prudence requires acknowledging alternative outcomes.
To borrow a well-known observation from Bob Farrell:
Historically, when “all experts agree,” discipline and preparation for the unexpected have often proven wise.
Inflation measurement sits at the core of modern macroeconomics. Interest-rate policy, asset valuations, fiscal planning, and central-bank credibility all hinge on how price pressures evolve. Yet the benchmark most policymakers rely on — the Consumer Price Index (CPI) — is a monthly government report designed for a far less digitized and fast-moving economy.
Increasingly, market participants are supplementing that traditional gauge with real-time alternatives. Among them, Truflation has emerged as the most widely cited live inflation index. Built from millions of observed prices and updated continuously, it offers a near real-time snapshot of price dynamics. In early 2026, its signal diverges meaningfully from official CPI data.
Methodology and Structural Differences
Truflation was launched in December 2021 amid frustration over the lag in official inflation reporting. While CPI is released monthly and relies heavily on surveys, sampling, and statistical smoothing, Truflation applies a bottom-up, digitally native methodology.
The index aggregates data from more than 30 million items across 30+ licensed providers — including online retailers, housing platforms, and consumer-data firms. Prices update daily and are secured through decentralized oracle infrastructure on the Chainlink network, increasing transparency and reducing the risk of retrospective revisions.
Like CPI, Truflation tracks twelve broad consumption categories. However, its category weights are recalibrated annually using observed spending patterns rather than fixed survey-based assumptions. This allows the index to adjust more quickly to shifts in consumer behavior and pricing trends.
Historically, that responsiveness has mattered. Empirical comparisons suggest Truflation has often led CPI turning points by roughly 40 to 75 days, flagging inflection points in inflation momentum well before they appear in official releases.
Institutional Validation
Skepticism toward alternative measures is natural. Still, Truflation has begun clearing some of the credibility hurdles required for broader institutional adoption.
Throughout 2024 and 2025, its short-term forecasting accuracy was notable. In many instances, its readings anticipated CPI outcomes within approximately ±0.1 percentage points. That degree of precision has encouraged growing usage among macro hedge funds and systematic trading strategies.
Institutional validation advanced further in early 2026 when Truflation was integrated into the Bloomberg L.P. terminal ecosystem — a quiet but meaningful step that elevated it from a crypto-native experiment into a recognized macro data input.
Transparency also strengthens its appeal. Daily updates, publicly documented methodology, and auditability offer advantages in markets that reprice continuously, where a 30-day lag can materially affect positioning.
The 2026 Divergence
By mid-February 2026, the spread between Truflation and official CPI readings had widened to one of the largest gaps since the index was created:
Official CPI (January 2026): 2.4% year-over-year
Truflation (Feb 1–18, 2026): ~0.7%
Core CPI: ~2.5%
Truflation core proxy: ~1.3%
Such a divergence presents a challenge: either real-time data are signaling a rapid disinflationary shift not yet captured by government statistics, or the high-frequency approach is temporarily underestimating sticky components embedded in CPI.
If historical lead times hold, markets may need to reassess the inflation trajectory sooner rather than later.
The widening gap between the two measures points to fundamentally different interpretations of current inflation momentum. The central source of divergence is housing.
Truflation incorporates real-time asking rents pulled from active market platforms, capturing the recent cooling in rental prices as it happens. By contrast, official CPI relies heavily on “Owner’s Equivalent Rent,” a survey-based estimate that typically lags actual rental-market conditions by six to twelve months.
In effect, the two gauges are measuring different time horizons. Truflation reflects present housing dynamics, while CPI still embeds rental trends from prior quarters.
The macro implications are significant. If the real-time signal is more accurate, the U.S. economy could be moving closer to disinflation — or even deflationary — conditions, historically associated with rising recession risk. Meanwhile, official data continue to portray a controlled soft landing, with inflation appearing comfortably near target.
Explaining the Reluctance
Despite its growing track record, many economists remain hesitant to incorporate Truflation into formal macro frameworks. The resistance tends to rest on three main arguments.
1. Institutional inertia. CPI has decades of embedded usage. Forecasting models, policy rules, asset-allocation frameworks, and academic research are all synchronized to its monthly release cycle. Integrating a daily inflation measure would require reworking not only projections, but established institutional workflows.
2. Volatility bias. Because Truflation updates continuously, it can display sharp short-term swings. A rapid daily decline may be dismissed as noise, even when it reflects genuine pricing shifts. By comparison, CPI’s smoothed profile feels more stable — even if that stability comes at the expense of timeliness.
3. Composition differences. Truflation assigns slightly less weight to housing than CPI. Critics argue this could understate inflation during periods of accelerating rents. Yet the reverse also holds true: when rental markets cool quickly, CPI may overstate underlying price pressure — which appears to be the present dynamic.
Ultimately, the hesitation is less about data availability and more about comfort. A measure that moves faster and smooths less inevitably challenges established interpretive habits.
Conclusion: Why the Signal Matters
If Truflation’s current reading is directionally correct, monetary-policy expectations could be misaligned with underlying inflation trends. The Federal Reserve may have greater scope to ease than prevailing consensus assumes, even as headline data suggest economic resilience.
This does not mean Truflation should replace CPI as the official benchmark. But when divergences persist and widen, dismissing the alternative becomes increasingly difficult.
More broadly, the debate underscores a structural issue: inflation cannot be treated solely as a once-a-month statistic in an economy where prices adjust continuously. Measurement tools must evolve alongside market speed.
Truflation’s importance does not rest on perfection. Its value lies in timeliness, transparency, and the growing challenge of ignoring what it is signaling.
Most Asian currencies slipped on Friday as investors weighed a mixed interest rate outlook across the region. The Australian dollar was on track for a solid monthly gain, while the Japanese yen remained under pressure.
The Chinese yuan declined after Beijing lowered a key reserve requirement to make dollar purchases cheaper domestically, though the currency continued to hover near three-year highs.
Meanwhile, the dollar index and dollar index futures edged down about 0.1% in Asian trading. Despite the dip, the greenback was up 0.7% for February, supported by safe-haven demand and lingering uncertainty over the direction of interest rates.
Japanese yen subdued after weak Tokyo CPI, February decline in focus
The Japanese yen saw the USD/JPY pair slip 0.2% on Friday and was on track to gain 0.7% for February.
Pressure on the yen intensified as uncertainty grew over the timing of the Bank of Japan’s next interest rate hike. Those doubts deepened following softer-than-expected consumer price index data from Tokyo for February.
The reading—often viewed as a leading indicator for nationwide inflation—showed core CPI falling below the BOJ’s 2% annual target for the first time in nearly four years, potentially complicating the central bank’s plans for further rate increases.
The yen had weakened earlier in February amid concerns about the fiscal implications of Prime Minister Sanae Takaichi’s proposed stimulus measures and tax cuts. However, she appeared to gain momentum for advancing her fiscal agenda after her ruling coalition secured a supermajority in Japan’s lower house of parliament.
Chinese Yuan slips after PBOC lowers FX risk reserve ratio
The Chinese yuan’s USD/CNY pair rose 0.2% on Friday after the People’s Bank of China removed a key foreign exchange risk reserve requirement for certain forward contracts—a step that makes dollar purchases cheaper domestically.
The move follows a strong rally in the yuan against the dollar in recent months, partly fueled by exporters offloading the greenback amid a robust trade surplus with the United States.
However, rapid appreciation of the yuan can weigh on Chinese exporters by shrinking returns on overseas sales. Friday’s decision suggests the central bank may be aiming to curb further strength in the currency.
The yuan had approached a three-year high on Thursday before pulling back.
Australian dollar set for February gains on hawkish RBA outlook
The Australian dollar’s AUD/USD pair climbed 0.25% on Friday, ranking among Asia’s top performers for the month.
The Aussie was on track to advance 2.3% in February, largely supported by a more hawkish stance from the Reserve Bank of Australia. The central bank raised interest rates by 25 basis points earlier in the month and signaled it would tighten further if inflation fails to ease.
Stronger-than-expected January CPI data released this week reinforced expectations that the RBA could deliver additional rate hikes.
Elsewhere in the region, most Asian currencies edged lower on Friday. The South Korean won’s USD/KRW pair ticked up slightly but remained down 1.3% for February.
The Indian rupee’s USD/INR pair steadied after climbing back above the 91-per-dollar mark, though it was still 0.8% weaker this month, despite gaining support from a U.S.–India trade agreement.
Meanwhile, the Singapore dollar’s USD/SGD pair was little changed on the day and down 0.7% for February.
The benchmark 10-year Treasury yield is testing critical support, with downside pressure beginning to build.
Equities and bond yields are sliding in tandem — an unusual combination that may reflect deteriorating macro-risk conditions.
A strengthening US dollar alongside declining yields could point to a broader defensive rotation across markets.
Last week, attention was drawn to the danger zone in the CBOE Volatility Index. Historically, when Wall Street’s “fear gauge” climbs into the mid-20s, equity markets have tended to experience heightened turbulence.
Now, focus shifts to the benchmark 10-year US Treasury yield. Recently, declining yields have supported the S&P 500 — particularly small- and mid-cap shares — since the so-called Liberation Day and the development of the expansive One Big Beautiful Bill Act (OBBBA). Additional fiscal stimulus or tax relief may still be forthcoming, as suggested by Donald Trump during Tuesday night’s State of the Union address.
Importantly, the surge in yields last April and May was not confined to the United States. Global bond markets reached multi-decade highs, pulling US Treasuries higher in tandem. Despite narratives around “selling America,” the primary US bond bear market unfolded between August 2020 and October 2023, when the 10-year yield climbed sharply from 0.504% to 4.997%. The past two and a half years have largely represented a consolidation phase rather than a fresh structural breakout.
The key question now: is that consolidation nearing resolution — and if so, in which direction?
10-Year Treasury Yield: A historic tightening pattern after the major bond bear market. Chart courtesy of StockCharts.com.
Treasuries Under the Spotlight
The chart below suggests that the 10-year Treasury yield could be slipping beneath a critical support level. A brief upside breakout in January quickly reversed as sellers stepped in, and now the benchmark rate is hovering near the 3% mark. It’s worth reminding traders that diagonal trendlines can be unreliable, while horizontal support and resistance levels tend to carry more weight. Additionally, log-scale charts are generally better suited for evaluating wide swings in price or yield.
With those caveats noted, what is the chart signaling? Trading below both the 50-day and 200-day moving averages, the primary trend favors Treasury price bulls (and lower yields). Meanwhile, the RSI has eased back toward the 30 level after failing to reach 70 during the fourth-quarter rate advance. The green upward-sloping support line is now pivotal — a decisive break beneath it, along with a drop below the late-2025 low of 3.947%, could push the 10-year yield down into the low 3% range.
10-Year Treasury Yield: Multi-Year Consolidation With Key Support at Risk (Log Scale). Chart courtesy of StockCharts.com.
In isolation, increasing exposure to Treasuries would be logical if yields break down and bond prices attract strong demand. But stepping back with an intermarket perspective, the bigger question becomes: what would that move signal for the broader financial markets?
A Potential Shift in the Stock–Bond Dynamic?
For stocks, a move toward 3–4% intermediate-term rates would likely coincide with softer economic conditions — perhaps a weak jobs report, sharply cooling CPI or PCE inflation, a downturn in sentiment indicators such as the ISM Manufacturing survey, or another disappointing Retail Sales release.
That said, with the fourth-quarter earnings season mostly wrapped up — including NVIDIA’s (NASDAQ: NVDA) results released Wednesday — it would probably take truly bleak off-season earnings updates or a wave of negative preannouncements to significantly rattle equities.
Another potential driver of a renewed bond bull market could be the ever-intensifying AI theme. In a “sell first, ask questions later” climate, fresh cautionary analyses or existential-impact discussions around artificial intelligence could further unsettle investors and sustain demand for safe-haven assets.
When Trading Ranges Start to Break Down
Regardless of the underlying catalyst, it’s evident that stocks and bonds are no longer moving in sync the way they did last spring and summer. The S&P 500 — like the 10-year Treasury yield — has been edging lower in recent weeks. We’re now nearly a month past the SPDR S&P 500 ETF Trust (SPY) intraday record of $697.84. Although much attention has focused on the tight trading range since late November, one could argue that a rounded-top formation is beginning to take shape.
A glance at the RSI momentum oscillator reinforces this view. Momentum has been trending lower since July. Much like a ball tossed into the air slows before changing direction, RSI often decelerates ahead of a price reversal. The unfolding narrative could be this: bond yields break down first — and equities eventually follow.
SPY: Emerging Rounded-Top Pattern, RSI Deteriorating, 200-Day Moving Average Around $650. Chart courtesy of StockCharts.com.
Don’t Overlook the Dollar
Largely flying under the radar is the US Dollar Index (USD). The greenback carved out a low near 95.55 around the same time U.S. large-cap equities peaked. Since then, the 98 level has surfaced as a potential breakout zone.
A setup featuring falling Treasury yields, declining stocks, and a strengthening dollar would reflect a classic risk-off macro environment. Based on a measured-move projection, the USD could target the 100 area — just shy of the zone where the dollar encountered resistance from May through November 2025.
US Dollar Index: Short-Term Ascending Triangle Pattern Points Toward 100. Chart courtesy of StockCharts.com.
The Bottom Line
Is this a doomsday forecast? Not at all. Market corrections are a normal part of the cycle. On average, the S&P 500 experiences an intra-year drawdown of about 14.2%, yet it has still finished higher in 35 of the past 46 years.
Rather than sounding alarms, this is simply a cross-asset check-in as we head into a month that has historically delivered heightened volatility. I tend to think of March as October’s little brother — price swings can become exaggerated. And with the CBOE Volatility Index still hovering around 20, disciplined risk management deserves to remain front and center.
The U.S. dollar recovered on Tuesday after the prior session’s slide, supported by upbeat economic data, while investors stayed cautious amid fresh volatility tied to President Donald Trump’s tariff policies.
At 15:24 ET (20:24 GMT), the Dollar Index—measuring the greenback against six major currencies—rose 0.2% to 97.86, after falling as much as 0.5% a day earlier.
Strong data underpin dollar
Encouraging economic releases lent the dollar some backing. ADP reported a gain of 12.8K in private payrolls last week, exceeding the previous reading. In addition, the Conference Board’s consumer confidence index for February surprised to the upside at 91.2.
According to José Torres, senior economist at Interactive Brokers, the stronger-than-expected figures nudged both the dollar and yields modestly higher, with a bear-flattening move led by shorter-dated maturities that are more sensitive to monetary policy.
He noted that firmer labor data are pushing rates up, as improving employment conditions weaken the case made by dovish Federal Reserve members for interest rate cuts based on softening job trends.
Trade tensions cloud outlook
Despite the rebound, uncertainty surrounds the U.S. currency as Trump’s revised tariff plans take shape following a Supreme Court ruling that his use of a 1977 emergency law to impose tariffs overstepped his authority.
In response, Trump said he would lift a temporary import tariff from 10% to 15% on goods from all countries. The move has cast doubt on the reliability of trade agreements reached prior to the ruling. Reflecting this uncertainty, the European Parliament delayed a vote on the European Union’s trade pact with the United States due to the new import tax.
Trade concerns have resurfaced at a time when questions are also emerging over the durability of heavy investment in artificial intelligence and the resilience of the U.S. economy after last week’s weak growth data.
Euro steady; Yen under pressure
In Europe, EUR/USD slipped 0.1% to 1.1779, with the euro largely steady after ECB President Christine Lagarde reiterated in Washington that the European Central Bank’s rate policy remains in a “good place,” while emphasizing the need for flexibility.
GBP/USD edged up 0.1% to 1.3501 ahead of parliamentary testimony from four Bank of England rate-setters, which may shape expectations before the March policy meeting.
In Asia, USD/JPY jumped 1% to 155.76 as expectations for near-term tightening by the Bank of Japan softened. The yen was also pressured by a Nikkei report suggesting U.S. authorities led recent rate-check efforts aimed at supporting Japan’s currency.
USD/CNY fell 0.4% to 6.8830 after the People’s Bank of China kept its one-year and five-year loan prime rates unchanged, signaling Beijing’s preference for calibrated support while balancing growth and financial stability. Chinese markets reopened Tuesday following the Lunar New Year holiday.
Elsewhere, AUD/USD rose 0.1% to 0.7060, while NZD/USD advanced 0.2% to 0.5967.
Thursday’s headline from the United States Department of Commerce showed the U.S. trade deficit widening sharply to $70.3 billion in December and reaching $901.5 billion for full-year 2025. December imports jumped 3.6% to $357.6 billion, while exports fell 1.7% to $287.3 billion. Economists had projected a $55.8 billion gap, making the release a significant downside surprise that prompted many to cut fourth-quarter GDP forecasts. Following the data, the Federal Reserve Bank of Atlanta lowered its Q4 GDP estimate to 3% from 3.6%.
The Commerce Department’s preliminary report showed the economy expanded at just a 1.4% annualized pace in Q4, well below the 2.8% consensus estimate. Federal government spending dropped 16.6% during the quarter — largely due to the shutdown — subtracting roughly one percentage point from growth. The wider trade deficit further weighed on output. For all of 2025, GDP rose 2.2%. Treasury yields drifted lower after the report, increasing expectations that the Federal Reserve may move toward another rate cut.
One potential obstacle to near-term easing is inflation. The Personal Consumption Expenditures (PCE) index rose 0.4% in December and 2.9% year-over-year. Core PCE, excluding food and energy, also climbed 0.4% on the month and 3% annually. On a positive note, consumer spending advanced 0.4% in December, offering some support for future growth momentum.
In financial markets, private credit came under scrutiny after Blue Owl Capital permanently restricted redemptions from one of its retail vehicles, Blue Owl Capital Corp II. The move triggered declines in alternative asset managers including Ares Management, Apollo Global Management, KKR, Blackstone, and TPG. Adding to concerns, BlackRock recently marked down portions of its private credit portfolio. Former PIMCO CEO Mohamed El-Erian publicly questioned whether this could signal a broader stress point for the sector.
In a separate development, The Wall Street Journal reported that President Donald Trump ordered the release of government files related to UFOs and unidentified aerial phenomena following heightened public interest. The directive reportedly came after comments by former President Barack Obama referencing extraterrestrial topics. Christopher Mellon, who previously helped publicize the “Tic Tac” military footage, suggested the move could have far-reaching implications.
Taken together, the combination of a widening trade deficit, softer GDP growth, persistent inflation, and emerging private credit strains presents a complex macro backdrop — one that leaves markets balancing expectations of further rate cuts against lingering structural risks.
When President Donald Trump returned to the White House in January 2025, he reaffirmed tariffs as the core instrument of his economic strategy — a blend of leverage, protectionism, and industrial revival. That strategy is now facing meaningful strain.
The recent ruling by the Supreme Court of the United States that Trump exceeded his authority in imposing sweeping global tariffs without congressional approval represents more than a procedural setback. It challenges the legal scaffolding underpinning a trade agenda that has shaped U.S. economic and foreign policy over the past year.
Markets have taken note — but without panic.
The contrast is notable. A defining pillar of presidential economic policy has been curtailed, yet equity markets remain resilient. Volatility has surfaced intermittently, but capital has not fled risk assets. Understanding this requires separating political drama from financial mechanics.
In theory, tariffs were meant to rebalance trade and accelerate reshoring. In practice, they largely operated as a cost-transfer mechanism. Importers absorbed part of the burden; consumers absorbed another portion through higher goods prices. Manufacturers dependent on global inputs faced margin compression. Retailers recalibrated pricing strategies. Supply chains, already strained in prior years, became more complex.
Economic data reflect this friction. Growth momentum has slowed from last year’s pace. Manufacturing surveys show uneven demand. Trade-sensitive capital expenditure has cooled. Meanwhile, inflation remains sticky — particularly in services — and goods categories exposed to import costs have seen renewed firmness. The anticipated mix of rapid expansion and stable prices has not materialized.
Markets, however, trade forward expectations — earnings trajectories and liquidity conditions — rather than political symbolism.
Large-cap U.S. equities continue to attract global capital, particularly in AI and advanced technology. Investment in semiconductors, cloud infrastructure, and computing capacity remains strong despite macro uncertainty. Earnings concentration in these sectors offsets weakness in more cyclical areas.
Investors see deceleration, not collapse. Corporate balance sheets remain broadly healthy. Employment is moderating but not deteriorating sharply. Financial conditions are tighter than in prior cycles, yet not restrictive enough to signal systemic stress.
Against this backdrop, a potential scaling back of tariffs introduces nuance rather than shock.
If trade barriers are diluted or subject to firmer congressional oversight, input costs could ease over time. That may gradually relieve goods-based inflation pressures. Supply chain planning could improve. Corporate forecasting may gain clarity — and clarity reduces risk premiums.
Bond markets reflect this balance. Treasury yields have fluctuated as investors weigh persistent inflation against moderating growth. Should tariff-driven price pressures fade, longer-term yields may stabilize. However, fiscal deficits and wage resilience continue to exert upward pressure. The tension remains unresolved.
Currency markets face competing forces. Reduced trade escalation could temper safe-haven demand for the dollar. Yet relative U.S. growth and yield differentials still offer structural support. Conviction remains limited.
Emerging markets are unlikely to move uniformly. Economies closely tied to U.S. demand may feel slower export momentum if domestic growth softens. Commodity exporters could benefit if inflation expectations anchor raw material prices at elevated levels. Capital allocation is becoming more selective.
None of this implies smooth conditions ahead.
Political backlash to the court’s decision could generate renewed volatility. Legislative countermeasures remain possible. Trade partners will recalibrate strategy in response to shifting U.S. authority.
Markets tend to resist escalation but adapt to adjustment.
Trump’s tariff strategy was presented as transformative. The measurable economic payoff has been less decisive. Growth has moderated, inflation has persisted, and structural trade imbalances remain largely intact.
Investors are pragmatic. A policy losing legal footing does not automatically trigger liquidation. If the outcome is reduced uncertainty and steadier price dynamics, equities can continue advancing even as political narratives fragment.
Cautious optimism defines the current tone.
Risk appetite remains conditional. A renewed acceleration in inflation would alter expectations quickly. A material deterioration in employment would challenge confidence. Fiscal expansion without corresponding growth would intensify long-term sustainability concerns.Markets are not celebrating policy unraveling — they are recalibrating probabilities.
The assessment is sober: an economy that is softer but not broken; inflation that is persistent but not runaway; profitability concentrated but durable in structurally advantaged sectors.Trade authority may now face clearer constitutional limits. Structural investment in innovation continues.
Capital ultimately flows toward earnings visibility and long-duration growth themes. Tariffs have dominated headlines. Technology and AI dominate capital expenditure.
Investors are adjusting exposure and preparing for volatility — but not retreating.The tariff agenda is under pressure. Financial markets, for now, are looking past it.
The U.S. dollar edged lower on Friday as investors digested the impact of the Supreme Court’s decision to invalidate President Donald Trump’s broad tariff measures. Despite the pullback, the greenback remained on track for its strongest weekly advance since November, supported by a more hawkish tone from the Federal Reserve and ongoing geopolitical tensions between the U.S. and Iran.
As of 17:31 ET (22:31 GMT), the Dollar Index slipped 0.2% to 97.72, though it was still poised to post a weekly gain of around 1%, its best showing in nearly three months.
The Supreme Court ruled 6–3 that Trump lacked authority under the International Emergency Economic Powers Act (IEEPA) to implement sweeping reciprocal tariffs. The president criticized the decision as “deeply disappointing” and indicated that tariffs would remain in effect through alternative legal channels, alongside a new 10% global levy.
According to Jeff Buchbinder of LPL Financial, removing the tariff overhang eliminates a drag on economic growth that had been expected to lift costs and pressure corporate margins. With that risk easing, growth may stabilize and inflation expectations embedded in bond markets could cool more quickly, potentially prompting a modest reassessment of Fed rate-cut expectations and weighing slightly on the dollar.
Even so, the dollar had attracted demand earlier in the week, underpinned by resilient U.S. economic data, hawkish Fed meeting minutes, and heightened Middle East tensions.
Friday’s data, however, delivered mixed signals. Core PCE — the Fed’s preferred inflation measure — rose 0.4% month-over-month and 3.0% year-over-year in December 2025, marking the highest annual reading since November 2023 and remaining well above the 2% target. Meanwhile, preliminary fourth-quarter GDP growth came in at 1.4%, falling short of the 2.8% consensus forecast.
In Europe, EUR/USD ticked up 0.1% to 1.1781, though the euro was still headed for a 0.7% weekly decline amid uncertainty surrounding ECB President Christine Lagarde’s tenure and softer German producer price data. Analysts at ING noted that while sentiment indicators such as the ZEW survey disappointed, the eurozone composite PMI is expected to stay above the 50 threshold, limiting downside pressure on the euro.
GBP/USD rose 0.1% to 1.3474, but sterling hovered near a one-month low and was set for a weekly loss of about 1.3%. Strong January retail sales — up 1.8% month-over-month and 4.5% year-over-year — failed to provide sustained support. ING analysts said markets are pricing in a Bank of England rate cut in March, with another possible move in June, while political risks continue to weigh on the pound.
In Asia, USD/JPY held steady at 155.06 after data showed Japan’s inflation slowed to 1.5% in January, slipping below the Bank of Japan’s target for the first time in nearly four years. Core inflation excluding fresh food and fuel also moderated, reinforcing uncertainty over the timing of the next rate hike. Separate data showed Japanese factory activity expanded at its fastest pace in over four years in February.
USD/CNY was unchanged at 6.9087, with Chinese markets closed. Meanwhile, AUD/USD climbed 0.5% to 0.70892, although the Australian dollar trimmed some gains after unemployment held at 4.1% in January, signaling a still-tight but gradually cooling labor market.
Here’s what you need to know for Friday, February 20:
The US Dollar Index (DXY) maintains its upward momentum, hovering near 98.00 after reaching a near one-month high on Thursday. The economic agenda for Friday features preliminary February Purchasing Managers’ Index (PMI) data from Germany, the Eurozone, the UK and the US. The spotlight, however, will be on the first estimate of fourth-quarter Gross Domestic Product (GDP) growth and the December Personal Consumption Expenditures (PCE) Price Index, both to be released by the US Bureau of Economic Analysis.
The US Dollar outperformed major peers on Thursday amid a risk-off market tone fueled by rising tensions between the US and Iran. According to BBC, US President Donald Trump warned that Iran must strike a deal or face serious consequences. Iran, in communication with UN Secretary-General Antonio Guterres, stated it does not seek conflict but would not tolerate military aggression. Iranian officials also reportedly cautioned that any US military move over the nuclear issue would be met with a decisive response. Early Friday, US stock index futures were modestly higher.
The US economy is expected to have expanded at an annualized pace of 3% in Q4, following a 4.4% increase in the prior quarter. Meanwhile, the core PCE Price Index — the Federal Reserve’s preferred inflation gauge — is forecast to rise 2.9% year-over-year in December, up slightly from 2.8% in November.
EUR/USD, which closed lower on Thursday, remains under pressure early Friday, trading near 1.1750. PMI figures from Germany and the Eurozone are anticipated to continue signaling expansion in private-sector activity for February.
GBP/USD extended its decline for a fourth straight session on Thursday and trades below 1.3450, marking its weakest level since late January. Data from the UK’s Office for National Statistics showed that Retail Sales climbed 1.8% month-over-month in January, significantly beating the 0.2% consensus estimate.
USD/JPY continues its weekly advance and holds comfortably above 155.00 in early Friday trading. Japan’s Prime Minister Sanae Takaichi stated that necessary expenditures would largely be financed through the initial budget, adding that efforts would be made to gradually reduce the debt-to-GDP ratio and restore fiscal discipline. Japan’s National Consumer Price Index rose 1.5% in January, down from 2.1% in December.
Gold benefited from safe-haven demand on Thursday but struggled to build momentum amid broad USD strength. XAU/USD edges higher during the European session on Friday, trading above $5,000.
In Australia, flash data from S&P Global showed the Composite PMI easing to 52 in February from 55.7 in January. AUD/USD largely brushed off the release and was last seen slightly lower on the day near 0.7050.
Most Asian equities declined on Friday as mounting uncertainty over the U.S. interest-rate outlook and escalating tensions surrounding Iran dampened appetite for risk assets.
South Korea stood out as a bright spot, with the KOSPI surging to fresh record highs on sustained optimism in domestic markets following a recent tech-led rally.
Regional bourses tracked overnight losses on Wall Street, where a wave of risk-off sentiment pressured stocks. S&P 500 Futures edged up 0.16% by 22:37 ET (03:37 GMT), as investors awaited key inflation and growth data due later in the session. Chinese markets remained shut for the Lunar New Year holiday.
Japan slides despite mixed data; Hong Kong retreats after break
In Japan, the Nikkei 225 and TOPIX were the region’s weakest performers, falling 1.4% and 1.2%, respectively.
Shares came under pressure following mixed economic releases. Data showed Japan’s headline consumer price index slowed to its lowest level in nearly four years in January, while core inflation also eased but remained above the Bank of Japan’s 2% annual target.
Meanwhile, purchasing managers’ index figures indicated factory activity expanded to a four-year high in February, supported by firm overseas demand.
Hong Kong’s Hang Seng Index fell 0.6% as trading resumed after a three-day holiday, with local technology stocks mirroring earlier global declines.
Among the laggards were Alibaba Group and Baidu Inc, which tumbled between 4% and 6% after being briefly named on a U.S. government list of firms allegedly linked to the Chinese military. BYD Co, also cited in the list, slipped 1.6%.
Elsewhere, markets were subdued. Australia’s S&P/ASX 200 dipped 0.2%, Singapore’s Straits Times Index edged up 0.1%, and India’s Nifty 50 was little changed, with local tech shares remaining cautious despite reports of new artificial intelligence ventures.
Risk sentiment remained fragile after U.S. President Donald Trump gave Iran a 10–15 day deadline to reach a nuclear agreement or face potential U.S. action, with multiple reports suggesting further strikes were under consideration.
South Korea outperforms as KOSPI hits record
South Korea’s KOSPI bucked the regional trend, climbing more than 1.6% to a record 5,768.61 points and marking its second straight session at an all-time high.
While Thursday’s gains were driven by technology stocks, Friday’s advance was led by strong performances in brokerage, defense, and insurance names.
Local media reported a surge in buying by retail investors, even as foreign investors continued to pare holdings.
Separately, South Korea’s top court on Thursday sentenced former President Yoon Suk-Yeol to life imprisonment over charges linked to an attempted insurrection in late 2024.
Inflation came in cooler than anticipated in January, though markets still largely expect the Federal Reserve to hold its benchmark rate steady until June. However, the bond market appears ready to test that timeline, increasingly factoring in the possibility of a rate cut arriving sooner.
According to government data released Friday, the Consumer Price Index (CPI) rose 2.4% year over year in January, down from 2.7% in December and marking the lowest reading in eight months. Core CPI—which excludes volatile food and energy prices and is considered a clearer gauge of underlying inflation—also eased to 2.5% annually, its slowest pace since 2021.
While the slowdown in headline inflation is a welcome development, a deeper dive into the data suggests it may be premature to relax concerns about where prices are headed next. Persistent increases in tariff-sensitive goods remain one pressure point. Food prices are another, climbing 2.9% year over year—elevated by historical standards.
Energy costs rose even more sharply, and both homeowners’ and renters’ insurance premiums continued to increase. Moreover, inflation is still running above the Federal Reserve’s 2% target, reinforcing the likelihood that policymakers will proceed carefully.
Although it’s too soon to claim inflation has been fully tamed, the broader trend of moderating price growth strengthens the argument that the worst may be behind us. The Capital Spectator’s ensemble forecast has long projected continued disinflation in core CPI, a view that has so far aligned reasonably well with actual data. The model still anticipates further easing, with core CPI’s 12-month rate expected to edge down to around 2.4% in the upcoming February report.
Fed funds futures continue to indicate that the first rate cut won’t arrive until the June meeting. In contrast, the Treasury market appears to be probing the possibility of an earlier move. The policy-sensitive 2-year Treasury yield has fallen to about 3.45%—near its lowest level since 2022—and now sits below the Federal Reserve’s current target range of 3.50% to 3.75%, signaling that bond investors may be anticipating a faster shift in policy.
In short, Treasury market sentiment is tilting toward the idea that a rate cut could come sooner than previously anticipated. Other market-based indicators are reinforcing that view by assigning higher odds to continued disinflation.
The average of two Treasury-derived inflation gauges now projects five-year inflation in the low 2% range—the mildest reading in a month and not far from the Federal Reserve’s 2% objective. The surge in inflation expectations seen in January has since unwound, signaling that investors have grown less worried about upside inflation risks in recent weeks.
Markets are not infallible, but it would likely require a meaningful upside surprise in the economic data—pointing to renewed inflationary pressure—to overturn the prevailing disinflation narrative. For now, investors show little appetite for betting on a reflationary turn.
USD/JPY is consolidating Wednesday’s strong advance, hovering near the 155.00 mark early Thursday. The bullish bias remains intact as concerns over Japan’s fiscal outlook and a generally positive market sentiment continue to weigh on the safe-haven Japanese Yen.
At the same time, the latest FOMC Minutes revealed divisions among Fed officials regarding the need and timing of additional rate cuts amid lingering inflation risks. This uncertainty lends support to the US Dollar, providing an added tailwind for the pair.
USD/JPY Technical Overview
The US Dollar (USD) is trading with a mild bullish bias against the Japanese Yen (JPY) this week, hovering near the top of the 153.00 range. However, the pair remains confined within its weekly boundaries, as resistance around 154.00 continues to cap upside attempts ahead of the release of the minutes from the US Federal Reserve’s latest meeting.
Fundamental Overview
The Federal Reserve kept its benchmark rate unchanged at 3.5%–3.75% and signaled that policy is likely to remain steady in the near term. The meeting minutes are expected to underscore divisions within the committee—differences that are drawing added attention after last week’s softer U.S. inflation data and disappointing jobs report.
On Tuesday, Chicago Fed President Aistan Goolsbee pointed to those internal splits, noting that if inflation continues to ease, the central bank could lower rates multiple times this year.
In Japan, weak fourth-quarter GDP data released Monday have renewed worries about the country’s economic prospects, reinforcing Prime Minister Sanae Takaichi’s push for substantial fiscal stimulus and tax cuts.
Meanwhile, the International Monetary Fund cautioned that reducing the consumption tax could strain public finances and urged the Bank of Japan to tighten monetary policy further to keep inflation in check. As a result, the yen’s recent bullish momentum has faded somewhat, offering relief to the previously pressured U.S. dollar.
GBP/USD is struggling to stage a meaningful rebound after dropping to a four-week low in Thursday’s Asian session, with the pair hovering just below the 1.3500 psychological level and appearing vulnerable to further losses. It is currently consolidating declines recorded over the past three days within a tight range near weekly lows.
The British pound remains under pressure amid growing expectations that the Bank of England will deliver a rate cut at its March meeting. Those bets were reinforced by weaker UK employment data and a slowdown in consumer inflation to its lowest level in nearly a year. Combined with a firm US dollar, this keeps the near-term bias tilted to the downside for GBP/USD.
Meanwhile, minutes from the Federal Reserve’s January meeting revealed divisions among policymakers regarding the timing and need for additional rate cuts, given persistent inflation concerns. While some officials signaled that easing could be appropriate if inflation continues to cool, others warned that premature cuts might jeopardize the Fed’s 2% target. The relatively less dovish tone has helped underpin the US dollar.
Geopolitical tensions also remain in focus, with reports suggesting the US military could be ready to strike Iran as soon as this weekend. Such risks have supported safe-haven demand for the greenback, allowing it to hold onto recent gains and reinforcing the case for an extension of the pair’s weekly downtrend. Any attempted recovery in GBP/USD may therefore attract fresh selling interest.
Traders now turn to Thursday’s US data releases, including weekly initial jobless claims, the Philadelphia Fed Manufacturing Index, and pending home sales. Speeches from key FOMC members are also due later in the North American session, though attention will ultimately center on Friday’s US Personal Consumption Expenditures (PCE) Price Index for clearer policy direction.
The inflation print investors had been bracing for came in cooler than expected.
Friday’s January CPI showed headline inflation at 2.4%—below the 2.5% consensus forecast and the lowest annual reading since May 2025. Core CPI, which excludes food and energy, eased to 2.5%, marking its softest level since April 2021. On a monthly basis, prices rose just 0.2%, the smallest increase since July.
Markets reacted swiftly. Homebuilder stocks rallied sharply, small caps climbed 1.2%, and the 10-year Treasury yield slid to its lowest point since early December.
My takeaway: the market may have just received the confirmation it was waiting for. And the most compelling opportunities from here likely aren’t the mega-cap tech leaders that have dominated performance, but rather rate-sensitive sectors that were punished under the “higher for longer” narrative and are now repricing for a potentially different 2026 backdrop.
What the CPI Report Really Signals
Shelter—by far the largest CPI component and the category that has stubbornly kept headline inflation elevated—rose only 0.2% in January, bringing the annual rate down to 3%. That’s a notable slowdown and perhaps the clearest indication yet that the housing inflation lag is beginning to unwind.
Energy prices declined 1.5%, with gasoline tumbling 3.2% during the month. Food inflation held at 2.9% year over year—still somewhat elevated, but not alarming. Importantly, core goods prices were flat, helping to counter concerns that renewed tariffs would reignite goods inflation.
“Headline CPI inflation was a touch softer than expected in January, delivering a welcome surprise to the downside at the beginning of the year,” said Bernard Yaros, lead economist at Oxford Economics. He added that tariff-related price pressures “are largely behind us.”
Lindsay Rosner of Goldman Sachs Asset Management was even more direct: “Trust the groundhog. The Fed’s path to normalization cuts appears clearer now.”
The timing is critical. A stronger-than-expected January jobs report—130,000 payrolls versus forecasts of 55,000—had pushed expectations for rate cuts further out, likely into the summer. This softer CPI reading shifts that outlook. Economists surveyed by Bloomberg now anticipate as much as 100 basis points of easing this year, with the first cut potentially arriving in June—or even March if disinflation continues.
Why Rate-Sensitive Stocks Stand Out
One key dynamic investors often overlook is that by the time the Federal Reserve actually begins cutting rates, much of the upside in rate-sensitive sectors has already played out. Markets tend to price in policy shifts well in advance.
Friday’s CPI data appeared to give institutional investors the confidence to begin reallocating toward sectors poised to benefit from lower yields. The equal-weight version of the S&P 500 and the Russell 2000 both climbed 1.2%, notably outperforming the traditional cap-weighted S&P 500, which was little changed.
That divergence is often viewed as a textbook signal of sector rotation—away from mega-cap dominance and toward more rate-sensitive, economically cyclical areas of the market.
Capital is rotating down the market-cap ladder and into economically sensitive groups. Three segments stand out most clearly: homebuilders, REITs, and small caps.
How to Position
D.R. Horton (DHI)
Closing Friday at $167.78, DHI is arguably the purest expression of the housing-affordability theme. The largest U.S. homebuilder by volume posted solid fiscal Q1 results in January, with revenue of $6.89 billion (ahead of $6.59 billion estimates) and EPS of $2.03 (vs. $1.93 expected).
At roughly 15.3x trailing earnings, the stock trades at a notable discount to the broader market. Beyond the rate backdrop, there’s also a policy angle: the Trump administration’s reported “Trump Homes” initiative has involved direct engagement with builders around affordability measures—potentially creating a dual tailwind of lower mortgage rates and regulatory support.
The median analyst price target is $170, with UBS as high as $195—suggesting upside potential of roughly 16%.
Lennar (LEN)
Trading at $122.28, Lennar offers a slightly different profile as the second-largest U.S. builder. Its “land-light” model—optioning land instead of holding it outright—reduces balance-sheet risk and positions it well for a rate-cutting cycle.
The stock has rebounded about 40% from its April 2025 lows but remains below its 2024 peak. With fiscal Q1 earnings due in late March, improving mortgage application trends could serve as a near-term catalyst if rates continue to ease.
SPDR S&P Homebuilders ETF (XHB)
At $121.36, XHB is up nearly 18% year-to-date and recently marked a fresh 52-week high of $123.13. As an equal-weighted ETF, it offers diversified exposure across the housing ecosystem—not just large builders, but also building products manufacturers, home improvement retailers, and construction suppliers.
For investors who prefer sector exposure over single-stock risk, XHB provides a balanced approach.
Vanguard Real Estate ETF (VNQ)
Trading near $94.59—close to its 52-week high—VNQ provides broad exposure to the REIT space, one of the most rate-sensitive areas of the market. The ETF holds over 150 REITs across healthcare, industrial, data center, and retail subsectors.
Its largest holdings include Welltower, Prologis, and American Tower.
With an average analyst target near $100.81, implied upside sits around 8%, in addition to a dividend yield of roughly 3.6%. After significant underperformance during the rate-hiking cycle, REITs are positioned to benefit mechanically as yields decline.
iShares Russell 2000 ETF (IWM)
At approximately $263, IWM tracks small-cap equities—arguably the most interest-rate-sensitive segment of the equity market. Smaller firms tend to carry more floating-rate debt and are disproportionately affected by elevated borrowing costs. That dynamic can reverse sharply when policy eases.
IWM surged 1.6% on Friday’s CPI release alone. With its 52-week high of $271.60 within reach, sustained rate declines could drive a prolonged catch-up rally in small caps.
The Big Picture
If inflation continues to moderate and rate-cut expectations firm, the leadership baton may continue shifting away from mega-cap growth and toward housing, real estate, and smaller domestically oriented companies. Markets typically front-run the policy cycle—and this rotation suggests that repositioning may already be underway.
The Bear Case (and Why It May Be Overstated)
There are valid reasons for caution. Fox Business pointed out that January’s CPI could carry a downward bias tied to last fall’s government shutdown. During that period, the Bureau of Labor Statistics missed portions of October data collection and relied on a “carry-forward” methodology that may influence inflation readings into spring 2026. In short, the 2.4% headline figure could be somewhat understated.
There’s also the Federal Reserve itself. Policymakers are not signaling urgency. Oxford Economics continues to project cuts in June and December rather than March. Meanwhile, although the labor market is cooling—annual benchmark revisions show 2025 job growth was the weakest since 2003 outside recessionary periods—it is far from collapsing. Jerome Powell has consistently emphasized the need for a sustained disinflation trend, not a single favorable report.
The Counterargument
Even if the Fed waits until June, markets won’t. Yields have already declined meaningfully. Mortgage rates are edging lower. And sectors that trade on rate expectations—rather than the actual fed funds rate—are beginning to reprice now. By the time the first official cut arrives, much of the move in rate-sensitive equities could already be behind us.
What to Watch
Three near-term catalysts will likely shape the next phase:
Fed Minutes (Feb. 18): The release of the latest policy meeting minutes could shift expectations quickly. Any dovish commentary on inflation progress or labor-market softness may pull forward rate-cut pricing.
Walmart Q4 Earnings (Feb. 19): As the largest U.S. retailer—now with a market cap above $1 trillion and up 13% year-to-date—Walmart’s guidance will offer real-time insight into consumer spending trends. If easing inflation is translating into stronger purchasing power, that reinforces the soft-landing narrative.
PCE Price Index (Later This Month): The Fed’s preferred inflation gauge will be pivotal. Confirmation of CPI’s cooling trend would likely solidify expectations for a June cut and intensify debate around a possible March move—potentially fueling the next leg higher in rate-sensitive stocks.
Bottom Line
The inflation backdrop has shifted in a way that favors investors. The opportunity isn’t complex—but it does require stepping away from the mega-cap tech trade that has dominated for the past two years and leaning into sectors positioned to benefit most from falling yields.
Here’s what you need to know for Monday, February 16:
Major currency pairs begin the week trading within established ranges, as investors remain cautious ahead of several key events and important macroeconomic releases scheduled for later in the week. In Europe, December Industrial Production figures are due on Monday. Meanwhile, US stock and bond markets are closed for the Presidents Day holiday.
The US Dollar Index ended last week on a softer note, as below-forecast inflation data prevented the greenback from gaining momentum before the weekend. According to the US Bureau of Labor Statistics, annual Consumer Price Index (CPI) inflation slowed to 2.4% in January from 2.7% in December, undershooting expectations of 2.5%. Early Monday, the USD Index is moving sideways around the 97.00 mark during European trading hours.
Early Monday, CBS News reported—citing two sources—that US President Donald Trump told Israeli Prime Minister Benjamin Netanyahu he would back Israeli strikes targeting Iran’s ballistic missile program. So far, markets have shown little reaction, with West Texas Intermediate crude trading largely flat near $62.80 per barrel.
EUR/USD remains in consolidation mode, hovering just above 1.1850 after ending last week slightly higher. European Central Bank policymaker Joachim Nagel is expected to speak later in the day.
In Asia, Japan’s data showed that fourth-quarter Gross Domestic Product (GDP) expanded at an annualized rate of 0.2%, rebounding from a 2.6% contraction in the prior quarter but missing the 1.6% growth forecast. After dropping nearly 3% last week, USD/JPY is recovering modestly, up 0.4% on the day to trade near 153.30.
AUD/USD trades in a tight range below 0.7100 in European hours. The Reserve Bank of Australia will release minutes from its February meeting early Tuesday, when it raised the policy rate by 25 basis points to 3.85%.
Gold surged on Friday and closed the week higher, though XAU/USD is struggling to maintain upward momentum and is trading below the $5,000 level on Monday morning in Europe.
The UK’s Office for National Statistics is set to publish employment data on Tuesday. GBP/USD remains subdued, edging slightly below 1.3650.
Finally, Statistics Canada will release January CPI data on Tuesday. USD/CAD trades steadily around 1.3600 in European hours after posting modest losses last week.
The US Dollar (USD) posted notable weekly losses, briefly rebounding after stronger-than-expected US jobs data showed 130K new positions added in January and the Unemployment Rate dipping to 4.3% from 4.4%. However, softer January CPI figures pressured the currency.
The US Dollar Index (DXY) slipped to around 96.80 from 97.15 highs as weak inflation data boosted expectations of a Federal Reserve rate cut later this year. Attention now turns to Friday’s release of the December Personal Consumption Expenditures (PCE) report, the Fed’s preferred inflation measure.
EUR/USD hovers around 1.1880, erasing earlier losses after Eurozone flash Q4 GDP came in at 1.4% YoY, above the 1.3% forecast. Focus next week includes the Eurogroup Meeting and December Industrial Production on Monday, followed by the EcoFin Meeting and February Eurozone and German ZEW Surveys on Tuesday.
AUD/USD trades near 0.7080, close to a three-year peak, supported by the hawkish stance of the Reserve Bank of Australia. Upcoming data include NAB Business Confidence and the Wage Price Index on Wednesday, then Australian jobs figures and the February flash S&P Global Composite PMI on Thursday.
USD/CAD sits near 1.3600, recovering nearly half of its weekly losses after US inflation data. Markets will watch Canada’s December Retail Sales on Friday.
USD/JPY trades around 152.80 following a sharp sell-off triggered by the election victory of Sanae Takaichi, which raised fiscal policy concerns. Japan’s National CPI is due on Thursday.
GBP/USD holds near 1.3650, with UK Producer Price Index and Retail Price Index data due Wednesday, and Retail Sales scheduled for Friday.
Gold trades around $5,038, rebounding from Thursday’s drop but still below January’s record high of $5,598, as easing geopolitical tensions push investors toward riskier assets.
Looking ahead to the economic outlook: Key voices take center stage.
Saturday, February 14
Christine Lagarde (ECB President)
Sunday, February 15
Christine Lagarde (ECB President)
Monday, February 16
Michelle Bowman (Fed)
Joachim Nagel (ECB)
Tuesday, February 17
José Luis Escrivá (ECB)
Michael Barr (Fed)
Mary Daly (Fed)
Wednesday, February 18
Piero Cipollone (ECB)
Isabel Schnabel (ECB)
Michelle Bowman (Fed)
Thursday, February 19
Piero Cipollone (ECB)
Luis de Guindos (ECB)
Raphael Bostic (Fed)
Michelle Bowman (Fed)
Neel Kashkari (Fed)
Christian Hawkesby (rbnz official)
Friday, February 20
Christine Lagarde (ECB President)
Raphael Bostic (Fed)
Central bank meetings and upcoming economic data releases are set to guide the next moves in monetary policy.
Sunday, February 15
Japan flash Q4 GDP
Tuesday, February 17
Reserve Bank of Australia (RBA) Meeting Minutes
Germany January Harmonized Index of Consumer Prices (HICP)
UK January Claimant Count Change
UK December Employment Change
UK December ILO Unemployment Rate
Canada January CPI
Wednesday, February 18
Reserve Bank of New Zealand (RBNZ) Interest Rate Decision
UK January CPI
Federal Open Market Committee (FOMC) Minutes
Thursday, February 19
Australia January Employment Change
Australia Unemployment Rate
Friday, February 20
UK January Retail Sales
Germany February flash HCOB Composite PMIs
Eurozone PMIs
UK flash February S&P Global PMIs
US December Core Personal Consumption Expenditures (PCE)
A few months ago, a government shutdown led to a missed CPI release because the Bureau of Labor Statistics (BLS) lacked sufficient data to calculate the October 2025 figure. The bigger issue, however, was methodological: when compiling the November index, the BLS was effectively required to assume that prices in several major categories—especially rents—were unchanged in October. This created an artificial drop in year-over-year inflation.
While some of that distortion has already begun to reverse, a more significant rebound is expected in a few months when the Owners’ Equivalent Rent (OER) survey rotation triggers a sharp offsetting increase—precisely six months after the initial dip. Until that adjustment plays out, inflation data will remain hard to interpret, and the annual comparisons will understate true price pressures. So claims that the latest report shows the smallest yearly increase in core inflation since 2021, suggesting the Federal Reserve is near its target, are misleading.
In reality, core year-over-year inflation is roughly 0.25%–0.3% higher than reported. Markets for CPI fixings already anticipate headline inflation rising to about 2.82% in four months—not because of energy prices, but due to this statistical catch-up.
January is typically a challenging month for inflation data anyway, as businesses often offer discounts in December before implementing annual price hikes in January. Because these adjustments are irregular, they are difficult to seasonally adjust, making January surprises common. This time, consensus forecasts called for a 0.27% month-over-month rise in headline CPI and 0.31% in core, with some estimates—such as from Barclays—as high as 0.39% for core. Much of the speculation centered on whether remaining tariff-related price increases would be passed through at the start of the year. Ultimately, they were not. The actual figures came in at +0.17% for headline and +0.30% for core.
The weaker headline reading was largely due to gasoline pricing dynamics. Although gas prices increased over the course of January, the monthly average was still lower than December’s average, because prices had fallen sharply in December. Since the BLS calculates CPI based on average monthly prices rather than end-of-month levels, this produced a softer headline figure.
Core inflation, meanwhile, appeared close to target at first glance: the 2.5% year-over-year rate is the lowest since March 2021. Yet the 0.30% monthly increase was the third-highest in the past year and translates to an annualized pace of 3.6%. That hardly signals a smooth return to 2% inflation—raising questions about whether it is truly “mission accomplished” for the Fed.
Core inflation was also somewhat flattered by a sharp 1.84% month-over-month decline in used car prices. In reality, used car prices did rise in January, but by less than the typical seasonal pattern, which translated into a sizable seasonally adjusted drop and created a noticeable drag on the core figure. (That said, it’s important not to dismiss components simply because they don’t align with the broader narrative.) Overall, core goods inflation slowed to 1.1% year over year from 1.4%, while core services edged down to 2.9% from 3.0%.
Although core goods inflation declined more than expected due to the sharp move in used cars, some moderation isn’t surprising. The real issue isn’t whether core goods will reaccelerate to 3–4%, but whether it remains in positive territory or slips back into the persistent deflation that characterized the sector for many years. That distinction matters, even if core goods make up only about 20% of the CPI basket. Until recently, the narrative centered on tariffs; going forward, it may shift toward onshoring. The decades-long trend of goods deflation—driven by offshoring production to low-wage countries—may not reassert itself if manufacturing activity continues to migrate back. That’s the broader theme to monitor, though it’s not the main takeaway from January 2026’s data.
On autos specifically, new car prices posted a modest increase. It’s worth considering how changes in sales composition might evolve now that electric vehicles are no longer being actively promoted by the executive branch. Traditional gasoline-powered cars tend to be cheaper upfront, so if buyers shift back toward them—absent tax incentives for EVs—the average transaction price could decline. However, it’s unclear how significantly overall sales patterns will change, or how production strategies will adjust now that automakers may feel less pressure to meet EV quotas. It’s also uncertain how granular the Bureau of Labor Statistics survey is in accounting for shifts in fleet composition. If there is any measurable impact on CPI, it would likely be slightly negative—and probably modest in size.
As for rents, Owners’ Equivalent Rent (OER) rose 0.22% month over month, down from 0.31% previously, while Rent of Primary Residence increased 0.25%, slightly below last month’s 0.27%. The month-to-month trend in OER shows a clear deceleration—though notably, it omits the artificial zero recorded in October due to the earlier data disruption.
While the slowdown is evident, my model suggests the pace should now be stabilizing around this level rather than continuing to decline sharply. In other words, rents are cooling, but likely nearing a plateau. That isn’t the defining story of January 2026—but it may well become one of the central inflation themes for the rest of 2026.
Medicinal drug prices slipped 0.15% month over month. Some observers had anticipated a much larger decline, partly due to efforts by the Trump Administration to push manufacturers to align U.S. drug prices more closely with those abroad. So far, however, no clear downward trend is evident. A potentially more consequential development is the Trump RX initiative, aimed at increasing pricing transparency and reducing the role of intermediaries in the highly opaque pharmaceutical distribution chain—long dominated by three major wholesalers and three large pharmacy benefit managers.
If successful, it could meaningfully reduce out-of-pocket drug costs for consumers. That said, when medications are paid for by insurers rather than directly by households, the impact does not show up straightforwardly in the CPI, appearing only indirectly—an accounting nuance that complicates interpretation. In short, consumer drug prices may decline, but the timing and visibility of that effect in CPI data remain uncertain.
The most encouraging element of the report was the continued slowdown in core services excluding rents—often referred to as “supercore” inflation—which eased further even as airfares jumped 6.5% on the month.
Gotcha. The apparent improvement in “supercore” inflation is another illusion created by the missing October data, which flatters the year-over-year comparison. On a month-over-month basis, core services ex-rents actually surged 0.59% (seasonally adjusted)—the largest increase in a year.
Even so, the broader trend may still be one of gradual cooling, particularly as median wage growth continues to decelerate. Admittedly, that data is also somewhat noisy at the moment. Still, the gap between median wage growth and median inflation remains around 1%, suggesting real income growth is positive, even if inflation progress is bumpier than headline figures imply.
There are tentative signs that wage growth’s downward drift may be stabilizing. If so, that would naturally limit how quickly supercore inflation can cool. At the same time, brewing cost pressures in insurance markets are likely to surface over the next six months. Still, none of that defines January 2026.
The real story this month is that inflation data remain clouded by the government-shutdown gap. The missing October observations continue to flatter year-over-year comparisons, overstating the degree of progress. That statistical quirk makes it easier for the Administration to claim victory, even though underlying inflation does not appear to be cleanly converging back to target.
Assuming the Federal Reserve recognizes these distortions, the policy outlook seems relatively straightforward. Core inflation—abstracting from the shutdown gap—appears to be running near 3.5%, labor market data have surprised to the upside, and the current Fed leadership has shown little inclination to accommodate political pressure. Under those conditions, there is scant reason to expect a near-term adjustment in overnight rates; if anything, the argument for tightening may be stronger than for easing.
To be fair, rents continue to decelerate even after adjusting for the October distortion, though my model suggests that slowdown is unlikely to persist much further. Even if it does, a return to outright housing deflation seems improbable. Moderation in supercore inflation is encouraging, but probably insufficient to deliver the degree of cooling the Fed would require. Core goods inflation also looks to have peaked; the open question is whether it settles into low positive territory or slips back into deflation.
Taken together, my modeling suggests that median inflation around 3.5% (excluding the shutdown effect) may represent something close to a new equilibrium. It’s not unreasonable to see constructive signals in the recent data, but neither do they justify expectations of imminent easing. If disinflation trends persist and leadership dynamics shift—potentially with someone like Kevin Warsh assuming the chair—the door to rate cuts later in the year could open.
Most Asian currencies edged lower on Friday, while the U.S. dollar held steady as investors assessed the interest rate outlook ahead of closely watched U.S. inflation data due later in the session. Despite the day’s softness, many regional currencies were still on track for weekly gains, whereas the dollar continued to reflect broader weekly losses amid uncertainty surrounding U.S. monetary policy.
Japanese yen outperforms on intervention speculation
The Japanese yen emerged as one of the strongest Asian performers this week, supported by rising speculation of potential government intervention in currency markets, which helped investors look beyond concerns about Japan’s fiscal position. The USD/JPY pair ticked up 0.2% on Friday but remained down roughly 2.6% for the week—its strongest weekly showing since November 2024.
The yen’s rally followed a series of hawkish remarks from Japanese officials signaling readiness to intervene, easing worries over elevated fiscal spending under Prime Minister Sanae Takaichi.
Elsewhere, the Australian dollar also posted solid gains, with AUD/USD climbing 1% for the week to a three-year high after hawkish commentary from the Reserve Bank of Australia.
The South Korean won strengthened as well, with USD/KRW down 1.4% on the week, aided by renewed foreign inflows into domestic equities, particularly chipmakers tied to artificial intelligence themes.
China’s yuan saw USD/CNY edge up slightly on Friday but remain 0.4% lower for the week, supported by a series of firm daily midpoint settings from the People’s Bank of China. The currency hovered near a nearly three-year peak reached earlier in the week.
Meanwhile, the Indian rupee was little changed for the week, and the Singapore dollar gained 0.6% against the greenback.
Dollar steady before CPI, but weekly loss likely
The dollar index and its futures posted modest gains during Asian hours Friday, with attention fixed on January’s consumer price index report. Although expectations point to a slight cooling in both headline and core inflation, traders remained cautious about potential upside surprises, especially as January CPI has exceeded forecasts in each of the past four years.
The greenback drew some support earlier in the week from stronger-than-expected nonfarm payrolls data, yet it was still down about 0.7% on a weekly basis. Ongoing uncertainty over U.S. monetary policy—particularly following Kevin Warsh’s nomination as the next Federal Reserve Chair—continued to weigh on the currency.
Gold held steady in early Asian trading on Friday after slipping below key technical levels amid growing uncertainty about the outlook for U.S. interest rates, with investors now awaiting upcoming inflation data for clearer direction.
Silver also stabilized after shedding roughly 10% in the previous session, though metals remained vulnerable following a sharp selloff earlier in the month.
Persistent doubts about the timing of future U.S. rate cuts continued to pressure precious metals, particularly after January data signaled resilience in the labor market. The U.S. dollar rebounded from weekly lows following Wednesday’s stronger-than-expected nonfarm payrolls report.
Spot gold edged down 0.1% to $4,915.40 an ounce by 18:31 ET (23:31 GMT), while April gold futures slipped 0.1% to $4,937.60 per ounce. In the prior session, spot prices had dropped more than 3%.
Spot silver was little changed at $75.060 per ounce, while platinum recovered to trade back above $2,000 per ounce after steep losses a day earlier.
Thursday’s decline effectively wiped out most of this week’s gains for gold and other precious metals, putting the yellow metal on track for a third consecutive weekly loss.
Markets have struggled to find direction since a late-January flash crash, with interest rate uncertainty remaining a central headwind. Gold’s retreat from recent record highs was initially sparked by U.S. President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve Chair, a choice seen as less dovish.
The robust January jobs report reinforced expectations of fewer rate cuts ahead, while sharp price volatility has also weakened metals’ appeal as safe-haven assets.
Attention now turns to the January U.S. consumer price index data due later Friday, which could offer further insight into the trajectory of the world’s largest economy. Inflation and labor market conditions remain the Federal Reserve’s primary factors in setting monetary policy.
GBP/USD is hovering around the critical 1.3508 level, where competing Elliott Wave counts are in play. The bullish scenario remains intact above 1.3508, while a sustained move below this level would strengthen the bearish case. A significant directional move is expected once one count clearly takes control.
On January 14, when GBP/USD was trading at 1.3428, we projected a modest pullback followed by a rally to kick off wave (iii). Price action has largely followed that script, although the drop from January 27 to February 6 was deeper than expected. This larger-than-anticipated decline opens the door to a possible revision in our wave interpretation.
GBP/USD Elliott Wave Analysis
We have been accurately tracking the broader GBP/USD structure, anticipating further upside. However, the sharper decline between January 27 and February 6 raises concerns that an alternative pattern may be unfolding. While no Elliott Wave rules have been violated, the structure now warrants closer scrutiny.
Bullish Scenario
The primary bullish view assumes wave (ii) завершed at 1.3339, near the upper boundary of our projected 1.3125–1.3333 reversal zone. Under this interpretation, wave ‘i’ of (iii) advanced to 1.3869 on January 27, and the subsequent decline into February 6 represents wave ‘ii’ of (iii).
The complication lies in the size of this wave ‘ii’ pullback. At 360 pips, it is considerably larger than its higher-degree counterpart wave (ii), which measured only 147 pips. While this does not breach any Elliott Wave rules, it is unusual for a lower-degree correction to significantly exceed the size of its higher-degree equivalent.
Typically, subwaves within an extended wave maintain proportions comparable to higher-degree waves. With this second wave nearly double the size, we must stay alert for an alternative count if GBP/USD continues to weaken.
For the bullish case to remain valid, Cable needs to rebound swiftly and push above 1.39. A retest of the February 6 low at 1.3508 would serve as an early warning that the bullish interpretation may be losing credibility.
Bearish Alternative Scenario
Should GBP/USD break decisively below 1.3508, the bearish alternative would gain traction.
Under this view, wave ‘2’ did not finish at the November low and remains in progress. The January 27 peak would represent wave ((b)) of 2, and the decline since then marks the early stages of wave ((c)) of 2. If this scenario unfolds, the pair could revisit the November support level near 1.3010.
Bottom Line
GBP/USD stands at a pivotal juncture, with both bullish and bearish Elliott Wave scenarios in contention. While the primary outlook favors a strong upward move, a continued slide toward 1.35 would shift focus toward the bearish alternative.
Gold and silver prices declined during Asian trading on Thursday after stronger-than-expected U.S. payrolls data dampened expectations for deeper Federal Reserve rate cuts, though losses were cushioned by ongoing safe-haven demand.
Precious metals largely held onto this week’s gains, supported by continued dollar weakness and elevated tensions between the U.S. and Iran, which kept demand for safe assets intact.
Spot gold dropped 0.7% to $5,051.26 per ounce, while April gold futures slipped 0.5% to $5,072.04/oz as of 01:36 ET (06:36 GMT). Spot silver fell 1.3% to $83.2505/oz, and platinum declined 1.6% to $2,107.30/oz.
Gold pressured as dollar rebounds on solid payrolls data
Gold came under pressure after January’s U.S. nonfarm payrolls report, released Wednesday, exceeded expectations. The stronger labor market reading reduced bets that slowing employment would prompt additional rate cuts from the Fed.
According to CME FedWatch, markets are now assigning a 94.1% probability that the Fed will keep rates unchanged in March, and a 78% chance of no change in April.
The upbeat data also triggered a rebound in the U.S. dollar overnight, weighing on metal prices. However, the dollar stabilized in Asian trade and remains slightly lower for the week, partly due to strength in the Japanese yen.
OCBC analysts noted that a sustained dollar recovery would require further evidence of resilience in the U.S. economy — a scenario that could still offer some support to gold.
“Structural headwinds — including uncertainty around Fed leadership succession and broader U.S. policy risks — suggest the dollar will need additional upside data surprises to maintain any rebound,” OCBC analysts said.
Even so, precious metals remained volatile after sharp swings over the past week amid heightened uncertainty surrounding U.S. monetary policy.
U.S. inflation data and Iran tensions in focus
Investors are awaiting further signals on the U.S. economy, particularly January consumer price index data due Friday. Inflation and labor market conditions remain the Fed’s primary considerations for rate decisions. Weekly jobless claims figures are also scheduled for release later Thursday.
Safe-haven demand continued to lend support to metals amid ongoing U.S.–Iran tensions. Although both sides reported some progress in nuclear talks over the weekend, Washington was reportedly preparing to send a second aircraft carrier to the Middle East.
President Donald Trump also urged Tehran to accept a deal with Washington and met Israeli President Benjamin Netanyahu on Wednesday, underscoring persistent geopolitical risks.
It has become increasingly clear that Treasury Secretary Scott Bessent favored Kevin Warsh for the role. Warsh has advocated for tighter coordination between the Federal Reserve and the Treasury Department, particularly in managing the yield curve and conducting open market operations. The Treasury yield curve is currently at its steepest level in four years, suggesting that Bessent has been effective in resolving the inversion that occurred under his predecessor, Janet Yellen. If Warsh is confirmed as the next Fed Chair, Bessent’s influence is likely to grow further—an important factor if the Fed aims to reduce interest rates.
According to the Financial Times, some economists question Warsh’s belief that artificial intelligence will have a deflationary effect. Warsh argues that AI will spark “the most productivity-enhancing wave of our lifetimes—past, present and future,” boosting output and allowing the Fed to lower key rates without fueling inflation. Such remarks are expected to draw significant attention during his Senate confirmation hearing.
On Tuesday, the Commerce Department reported that retail sales were flat in December. However, November’s figures were revised upward to a 0.6% increase, up from the previously reported 0.3%. Economists had anticipated a 0.4% rise in December, making the latest data disappointing. Because of the federal government shutdown, the report was released a month late, and the substantial upward revision to November’s data has somewhat diminished the report’s impact. Following the release, Treasury yields fell, increasing the likelihood of another Fed rate cut.
Meanwhile, after a month-long pursuit, the U.S. Navy seized its eighth Venezuelan crude oil tanker in the Indian Ocean. The vessel, Aquila II, had attempted to bypass the U.S. blockade. The Navy’s intensified crackdown on so-called “shadow tankers” is expected to worry countries like Iran and Russia, which have also relied on similar methods to transport oil despite sanctions.
In diplomatic developments, U.S. and Iranian officials met in Oman to discuss dismantling Iran’s nuclear program. Washington is pressing Tehran to halt uranium enrichment, limit its ballistic missile program, and end support for regional proxy groups. Iran, however, has stated it is only willing to negotiate over its nuclear activities. If talks collapse, the U.S. could carry out another military strike, which explains its significant naval buildup in the region. Notably, Iran seized two oil tankers before the negotiations but later described the discussions as “positive.”
The U.S. dollar is in focus this week as investors await key economic data, including Non-Farm Payrolls and inflation figures that were postponed last week due to delays in passing a government spending bill. Recent data, such as the ADP report released on February 4, point to a cooling labor market. Attention will also turn to inflation readings due on Friday.
While high-frequency and analytical indicators suggest inflation is no longer accelerating and is gradually easing, it remains sticky—particularly in the services sector—keeping core inflation above the Federal Reserve’s 2% target.
CME FedWatch data indicate that markets continue to expect a gradual easing cycle from the Fed. The probability of a March rate cut remains low, at around 20–23%, with investors instead anticipating potential cuts later in the year as clearer signals emerge from inflation and labor market trends. Longer-term pricing implies a base case of 50–75 basis points of cumulative rate cuts by 2026. These expectations appear to be limiting further upside for the U.S. dollar.
In the euro area, inflation has already fallen to around or below target. ECB President Christine Lagarde said last week that inflation is in a good place, even though readings may fluctuate in the coming months due to unpredictable geopolitical risks, stressing that policy will not react to every data point.
Euro-area money markets are therefore pricing in a much firmer policy stance. Current market pricing implies roughly a 90% chance of no rate change at the March 2026 Governing Council meeting, with very limited easing expected over the year—around 0–10 basis points and, in some scenarios, no cuts at all. With inflation already subdued and a stronger euro adding further disinflationary pressure, euro-area rates are seen as relatively stable.
By contrast, U.S. front-end rates are expected to decline more quickly, by around 50–75 basis points. This narrowing of short-term rate differentials in favor of the euro provides mechanical support for further upside in EUR/USD.
Last week, the Bank of England kept its policy rate unchanged at 3.75%, but the decision was narrowly split 5–4, with an unexpected four members voting for an immediate 25 basis point cut. Forward guidance indicated that rates are “likely to be reduced further.” The BoE expects inflation to ease toward 2% from April, and both markets and economists are leaning toward a rate cut in the spring, around March or April.
Compared with the BoE, the ECB is seen as maintaining a steadier policy stance. As a result, the BoE’s signal that cuts are more likely later on does not, by itself, justify further downside in EUR/GBP unless the ECB were to shift unexpectedly toward a more dovish hold. Upcoming UK data through March and April—particularly wage growth, services CPI, and the April CPI release—will be crucial in determining whether the probability of an April rate cut rises, which would likely weigh on the pound.
In conclusion, interest rate differentials are narrowing, but unevenly. The Fed’s eventual easing bias caps sustained strength in the U.S. dollar, the ECB’s comparatively stable stance supports the euro, and the Bank of England’s closer proximity to further rate cuts creates relative downside risk for sterling.
As a polar vortex brings arctic conditions across the U.S., the economic calendar is set to heat up. The week ahead features two of the most consequential data releases for shaping Federal Reserve policy expectations: the January employment report and the Consumer Price Index (CPI).
Owing to recent government shutdowns, the January employment report (Wednesday) and CPI release (Friday) will be published unusually close together. The labor report is particularly significant, as January data typically incorporates annual revisions to employment figures, raising the possibility of notable downward adjustments for the year through March 2025.
A key reference point will be the Federal Reserve’s own assessment of potential overstatement in jobs growth. In December, Fed Chair Jerome Powell noted that internal research suggested official figures may have overstated monthly job gains by as much as 60,000 since April. Given that reported job growth averaged just under 40,000 per month over that span, the scope of upcoming revisions could have meaningful implications for the FOMC’s March policy decision.
The week also features remarks from several Fed officials, including Governors Christopher Waller (Monday), Stephen Miran (Monday and Thursday), and Michelle Bowman (Wednesday). Among voting Fed presidents this year, Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan are both scheduled to speak on Tuesday.
Markets will also be watching price action on Wall Street following last week’s record close for the Dow Jones Industrial Average above 50,000. The ongoing AI-led shakeout among major technology stocks bears close scrutiny, as does the renewed “old economy” rotation bringing previously sidelined sectors—such as oil and gas, chemicals, transportation, and regional banks—back into focus. Adding to the cross-currents is gold’s continued rally, occurring alongside a sharp pullback in bitcoin.
The following data releases carry the greatest potential to move markets and shape the Federal Reserve’s assessment of whether further rate cuts are warranted:
Employment
We expect nonfarm payrolls to rise by 60,000 in January, following a 50,000 increase in December (see chart). Markets will be closely focused on the size and direction of revisions to prior data. A meaningful downside surprise could increase pressure on Chair Powell to consider a rate cut later this month, even though we do not believe monetary policy can directly address the underlying weaknesses in the labor market.
CPI
Markets are seeking further confirmation that inflation continued to ease in January. December’s 2.6% year-over-year reading matched a four-year low in core CPI inflation (see chart). The Cleveland Fed’s Inflation Nowcasting model currently projects a 0.22% month-over-month increase in core inflation, translating to a 2.45% annual rate. Additional insight on inflation pressures will come from the Q4 2025 Employment Cost Index and December import and export prices, both due Tuesday, as well as the New York Fed’s January inflation expectations survey on Monday.
Retail sales
Despite ongoing concerns about the cost of living and a fragile labor market, household spending continues to show resilience. Retail sales in December, due Tuesday, are expected to post another solid gain following November’s 0.6% month-over-month increase. Looking ahead, larger annual tax refunds should help sustain consumer spending momentum. Reflecting this strength, forward earnings for the S&P 500 Retail Composite climbed to a record high during the week of February 6 (see chart).
Jobless claims
Initial jobless claims due Thursday will draw heightened scrutiny as investors look to determine whether last week’s jump to 231,000 was driven by severe winter storms rather than a broader acceleration in layoffs. The balance of evidence points to a weather-related distortion, which would likely reassure the Fed that the labor market remains on relatively stable footing.
The Japanese yen slid to a fresh two-week low as Sanae Takaichi’s landslide victory reignited concerns over Japan’s fiscal outlook. However, warnings of possible currency intervention sparked some intraday short covering in the yen, aided by broader U.S. dollar weakness.
Still, downside momentum in the yen was partly limited after data showed a decline in Japan’s real wages, which reduced expectations for an immediate interest rate hike by the Bank of Japan and helped cap further moves in the currency.
The Japanese yen began the new week on a softer footing after Prime Minister Sanae Takaichi’s landslide victory in Sunday’s election raised expectations of additional fiscal stimulus. That initial weakness proved short-lived, however, as Finance Minister Satsuki Katayama reiterated warnings over excessive currency moves and confirmed close coordination with the United States to counter disorderly FX fluctuations. Combined with continued U.S. dollar selling, the comments prompted an intraday reversal of nearly 150 pips in USD/JPY from the Asian session peak near 157.65.
Meanwhile, data released earlier showed Japan’s real wages fell in December for a 12th straight month, with nominal pay growth slightly lagging cooling consumer inflation. This reinforces expectations that the Bank of Japan will proceed cautiously after lifting interest rates to a three-decade high in December. In addition, a more upbeat risk environment, supported by signs of easing tensions in the Middle East, limited further safe-haven demand for the yen, allowing USD/JPY to find support and stall its pullback around the 156.20 area.
Yen bulls stay cautious as fiscal concerns and delayed BoJ hike bets offset intervention talk
Japan’s ruling Liberal Democratic Party, led by Prime Minister Sanae Takaichi, secured a decisive victory in Sunday’s election, comfortably surpassing the 233-seat threshold needed for a lower-house majority. The result clears the path for proposed tax cuts and increased defense spending, bringing renewed attention to Japan’s already stretched public finances.
Finance Minister Satsuki Katayama said on Monday that she stands ready to communicate with markets if necessary to help stabilize the yen. She reiterated that Japan remains in close coordination with U.S. Treasury Secretary Scott Bessent and emphasized Tokyo’s right to intervene if currency moves stray from economic fundamentals.
Meanwhile, data from the labor ministry showed nominal wages rose 2.4% year-on-year in December 2025, accelerating from a revised 1.7% gain previously but still missing market expectations. Adjusted for inflation, real wages fell 0.1% from a year earlier, extending their decline to a 12th consecutive month.
The figures have dampened expectations for an imminent Bank of Japan rate hike, as policymakers have stressed that further tightening hinges on sustained and broad-based wage growth. Together with a generally positive global equity backdrop, this has limited the yen’s rebound from a more than two-week low.
Risk sentiment was further supported by indirect U.S.–Iran talks on Tehran’s nuclear program, which concluded on Friday with agreement to keep diplomatic channels open. The development eased fears of a military escalation in the Middle East and encouraged demand for risk assets at the start of the week, despite new U.S. sanctions on Iran.
The U.S. dollar weakened for a second straight session amid growing bets that the Federal Reserve could cut interest rates twice more in 2026. This contrasts with expectations that the BoJ will continue its gradual policy normalization, helping to cap gains in USD/JPY and urging caution among bullish traders.
Attention now turns to key U.S. data later this week, including the closely watched nonfarm payrolls report due Wednesday and consumer inflation figures on Friday, both of which are likely to shape dollar direction and drive fresh moves in USD/JPY.
USD/JPY holds steady below 100-hour SMA as technical signals remain mixed
The USD/JPY pair is showing modest resilience around the 100-hour Simple Moving Average (SMA), with its intraday pullback stalling near the 156.20 area, which now stands out as a key pivot for short-term traders. Momentum indicators, however, paint a mixed picture. The Moving Average Convergence Divergence (MACD) has formed a bearish crossover near the zero line, signaling rising downside pressure, while the Relative Strength Index (RSI) is hovering around 46, below the neutral 50 level, pointing to subdued momentum.
At the same time, USD/JPY remains above the 100-hour SMA, currently located around the 156.55–156.50 zone, which preserves a mildly constructive near-term bias and provides dynamic support. A move by the MACD back into positive territory alongside an RSI break above 50 would strengthen the bullish case and open the door to further gains. On the other hand, a clear break and close below the 100-hour SMA would undermine the setup and increase the risk of a deeper corrective move.
Most Asian currencies traded in narrow ranges on Monday, while the yen edged higher after Japan’s finance ministry stepped up intervention warnings. However, the yen remained under pressure from concerns over heavy fiscal spending, which are expected to persist following Prime Minister Sanae Takaichi’s landslide election win. Elsewhere, Asian currencies stayed subdued after recent dollar strength, with markets now focused on key economic data due from the U.S. and China.
Yen buoyed by intervention warnings following Takaichi’s victory
The USD/JPY slipped 0.2% to 156.87 on Monday after earlier dropping as much as 0.5%, with the yen finding modest support from renewed intervention warnings by Japanese officials. While the currency remained broadly weak against the dollar, comments from Finance Minister Satsuki Katayama about close coordination with U.S. Treasury officials lent temporary relief.
However, the yen continues to face pressure following Prime Minister Sanae Takaichi’s decisive election victory, which gives her coalition a supermajority in the lower house and a clearer path to expansionary fiscal plans. Concerns over stretched government spending have weighed heavily on the yen and previously triggered a sharp sell-off in Japanese government bonds. Analysts at OCBC noted that while a looser fiscal stance could further pressure the yen, the risk of official pushback is likely to rise as USD/JPY nears the 160 level.
Dollar rebound eases as Asian FX trades quietly
The dollar eased slightly in Asian trade, extending its pullback from last week’s near-98 highs, as traders stayed cautious ahead of key U.S. data, including nonfarm payrolls on Wednesday and CPI inflation on Friday. The releases are expected to shape expectations for U.S. interest rates under potential Fed leadership changes.
Asian currencies were mostly rangebound. The Chinese yuan edged up, with USD/CNY down 0.1% and hovering near mid-2023 lows, supported by firm PBOC fixings ahead of Friday’s CPI data and the Lunar New Year. The Australian dollar rose 0.2% above $0.70 on bets of further RBA rate hikes after a hawkish move last week.
Elsewhere, the Singapore dollar was flat, the Korean won weakened slightly, and the Indian rupee stayed above 90 per dollar following the RBI’s steady policy stance and upgraded forecasts.
Early on, some questionable US labor market data set the tone, but the real catalyst was the shift to a risk-off mood. Day two is often decisive. We also cover updates from the ECB and BoE—no policy changes, but plenty of developments.
A growing sense of decay fuels demand for Treasuries
Markets reacted sharply to weaker US labor data on Thursday—arguably an overreaction. Challenger job cuts came in elevated, and headlines noting the highest January reading since 2009 quickly raised alarm. However, a higher figure was recorded as recently as October 2025, and the series itself is notoriously volatile.
A move lower in yields was the appropriate response, but the magnitude was reinforced by subsequent JOLTS data, which showed job openings falling more than expected. Openings remain sizeable at around 6.5 million, though down from 7.2 million. Initial jobless claims also edged higher, but the increase was modest and levels remain low in a broader historical context.
Broader market dynamics added fuel to the move. A pronounced risk-off backdrop—particularly concerns surrounding private credit—typically channels demand into Treasuries. Technical factors also played a role, with key thresholds giving way: the 10-year yield broke below 4.2%, while the 2-year slipped under 3.45%. While not extreme relative to recent months, the move was nevertheless notable. Hard to fight the move, particularly if the risk-off reassessment proves durable.
ECB meeting takes a back seat to global risk sentiment
A dovish tilt from the Bank of England, softer US labor signals, and persistent equity-market jitters have had a greater influence on markets than the ECB, with the 2s10s Bund curve modestly reflattening in a bullish move—still comfortably within recent ranges. The VIX remains elevated, indicating ongoing caution around potential equity volatility. While there has been no broad-based equity sell-off, investors are becoming more discerning about the sustainability of AI-driven business models.
ECB President Lagarde appeared to downplay the role of the exchange rate in the policy outlook, though our economists see it as a lingering vulnerability in the ECB’s “good place” narrative. In the near term, tail risks remain skewed toward further easing, even as the threshold for a rate cut stays high. Markets are currently pricing roughly a 25% chance of a cut later this year, which we view as reasonable. This pricing keeps the front end of the euro curve well anchored, implying that any further deterioration in global risk sentiment—stemming from outside the euro area—would likely continue to flatten the curve. That said, a concurrent strengthening of the euro would complicate the curve dynamics.
A dovish BoE fails to outweigh mounting political risks
Markets reacted far more strongly to the Bank of England meeting than to the ECB, with a March rate cut rapidly becoming the base-case scenario. The BoE’s relatively sparse inter-meeting communication means that policy surprises tend to generate outsized moves, and this meeting delivered just that. The 2-year swap rate dropped around 7bp as the outcome proved more dovish than markets had anticipated. We are broadly aligned with the revised pricing and see considerable scope for easing as inflation continues to soften. Governor Bailey appeared to endorse this view, later remarking that current market pricing for a March cut was “not a bad place to be.”
Attention now shifts to the long end of the curve, where political risks may continue to exert upward pressure on 30-year gilt yields. Unlike the front end, the 30-year yield actually rose by roughly 3bp on Thursday despite the BoE’s dovish pivot. Political uncertainty—particularly around Starmer’s position as prime minister—adds to doubts over the future fiscal trajectory. Ahead of November’s budget, we had estimated the 10-year gilt risk premium at around 25bp, underscoring investor sensitivity to the UK’s fiscal outlook. Against this backdrop, we see limited scope for 10-year GBP rates to move meaningfully lower in the near term.
Friday: Key Events and Market Outlook
Softer US labor indicators weighed on risk sentiment on Thursday. While Friday does not bring the official jobs report, attention will turn to the preliminary University of Michigan consumer sentiment index. Consensus expectations point to a weaker reading, but any sharper-than-anticipated deterioration would likely amplify existing market unease. Consumer credit data, also due on Friday, will be another point of focus.
In the euro area, the ECB will publish its Survey of Professional Forecasters. Following the ECB meeting, markets will also listen closely to remarks from ECB officials, with Kocher and Cipollone scheduled to speak. Elsewhere, BoE Chief Economist Huw Pill is also on the agenda.
On the supply side, government issuance is limited, with the only primary market activity being a €0.5bn Belgian ORI auction.
The Bank of England held its policy rate at 3.75%, but the decision revealed a notably divided committee, with four of the nine members voting in favor of another cut. This close split has reinforced expectations for a rate reduction as soon as March, particularly as inflation continues to ease and wage growth shows signs of cooling.
The BoE now estimates that wage growth consistent with its 2% inflation target is roughly 3.25%, only slightly below current private-sector pay growth of about 3.6%. With inflation projected to fall toward 1.8% by April, the central bank appears increasingly comfortable with the prospect of further policy easing.
Governor Andrew Bailey remains a pivotal swing vote, and if upcoming data confirms a softer labor market and moderating pay growth, he is widely expected to back a rate cut at the next meeting. Markets are already pricing in additional easing through the summer months.
GBP/USD Technical Perspective
GBP/USD has been trending lower, reflecting expectations of Bank of England rate cuts and a broadly dovish policy outlook.
On the four-hour chart, the pair continues to trade within a well-defined descending channel, currently hovering around 1.3536. This structure indicates that sellers remain in control for the time being.
That said, a notable support zone sits near 1.34, aligning with a previous accumulation area. A break lower within the channel could see price gravitate toward that level.
Conversely, a move above the upper boundary of the channel would signal a shift in momentum and could open the door to a rebound toward the 1.37–1.38 area in the near term.
Summary:
Trend: Bearish, within a descending channel
Support: 1.34
Resistance: 1.37–1.38
Key Catalyst: March Bank of England policy meeting
ECB Remains Comfortably on Hold
The European Central Bank left interest rates unchanged, signaling confidence that the eurozone economy remains in a solid position. Inflation is tracking close to the 2% target, growth is stable, and there is little immediate need to either tighten or ease policy.
That said, past experience suggests the ECB is willing to resume rate cuts after extended pauses if conditions evolve. A meaningful appreciation in the euro or a dip in inflation below target could prompt policymakers to consider a modest “insurance cut” later in the year to guard against undershooting inflation.
For now, however, the ECB appears comfortable remaining on hold, a stance that has translated into relatively calm market conditions.
EUR/USD Technical Perspective
EUR/USD continues to consolidate in a narrow range between 1.1780 and 1.1840, reflecting the ECB’s steady policy stance and a broader lack of directional conviction. Volatility remains subdued, underscoring ongoing market indecision.
A renewed move lower could develop if expectations build around further ECB easing, or if euro strength becomes a concern for policymakers. Until a clear catalyst emerges, price action is likely to remain range-bound, with consolidation dominating near-term trading.
Summary:
Trend: Sideways / range-bound
Range: 1.1780–1.1840
Downside risk: A decisive break below 1.1780 would expose a move toward 1.1700
Catalyst: Shift in ECB tone or renewed concerns over excessive euro strength
In short:
The BoE’s dovish stance is pressuring the pound, leaving GBP/USD biased lower.
The ECB’s steady, wait-and-see approach is keeping the euro supported, though excessive euro strength could revive rate-cut speculation.
With both central banks leaning dovish, the next meaningful FX moves are likely to be driven by shifts in rate expectations, not policy surprises.
Japanese yen bears trimmed positions ahead of Japan’s snap election on Sunday, allowing the currency to recover modestly. Growing speculation of an imminent Bank of Japan rate hike, combined with a broader risk-off mood, has also supported the safe-haven yen. Meanwhile, the U.S. dollar paused its recent rebound from a four-year low, adding further downside pressure on USD/JPY.
The Japanese yen attracted modest buying during Asian trading on Friday, appearing to snap a five-day losing streak against the U.S. dollar after touching a two-week low in the previous session. Traders remain alert to the possibility of coordinated Japan–U.S. intervention to curb further yen weakness, while a shift in global risk sentiment and elevated market volatility have boosted demand for the currency’s safe-haven appeal. Expectations for a more hawkish Bank of Japan have also provided underlying support to the yen.
Data released earlier showed Japan’s household spending fell sharply in December, highlighting the impact of higher prices on consumer activity and reinforcing expectations that the BoJ could move toward a rate hike sooner rather than later. That said, concerns about Japan’s fiscal position and ongoing political uncertainty may limit aggressive bullish positioning in the yen. In addition, the U.S. dollar’s recent recovery from a four-year low could help cap further declines in USD/JPY as markets look ahead to Japan’s snap lower house election on February 8.
Yen finds support from hawkish BoJ outlook and improving risk sentiment
Data released earlier on Friday showed that Japan’s Household Spending fell 2.6% YoY in December 2025, reversing a 2.9% increase in the previous month. The sharp contraction highlights the drag from elevated living costs on consumption and reinforces the Bank of Japan’s resolve to tackle inflation, strengthening the case for an earlier interest rate hike.
This view is supported by the Summary of Opinions from the BoJ’s January meeting, which revealed that policymakers discussed rising price pressures stemming from a weak Japanese Yen and agreed that further rate hikes would be appropriate over time. These factors helped the JPY attract modest buying during the Asian session.
The Yen also benefited from a risk-off impulse, as Asian equities extended losses for a second straight day following a deepening selloff in global tech stocks. Meanwhile, the US Dollar paused its recent advance to a two-week high, prompting traders to trim USD/JPY long positions ahead of Japan’s snap lower house election on Sunday, February 8.
Japan’s Prime Minister Sanae Takaichi’s Liberal Democratic Party (LDP) is widely expected to secure a decisive victory, which would strengthen her control over parliament and provide greater scope to pursue aggressive pro-stimulus policies. However, markets remain concerned that expansionary fiscal plans could further strain Japan’s already fragile public finances, limiting the Yen’s upside.
From the US, data released Thursday showed that Initial Jobless Claims rose to 231K for the week ending January 31, up from 209K and above expectations of 212K, adding to weak private-sector employment data released earlier in the week. Further evidence of labor market softening came from the JOLTS report, which showed job openings falling to 6.542 million in December from a downwardly revised 6.928 million previously.
The softer labor backdrop has reinforced expectations for additional Federal Reserve easing, with markets currently pricing in two more rate cuts in 2026. This has capped the US Dollar’s rebound from a four-year low and contributed to USD/JPY pulling back modestly from the two-week high above the 157.00 level touched on Thursday.
Traders now await the preliminary Michigan Consumer Sentiment Index and inflation expectations, along with remarks from key FOMC members, for fresh directional cues later in the North American session. However, market reactions are likely to remain subdued ahead of Japan’s closely watched political event.
USD/JPY buyers remain in control after breaking above the 200-period SMA resistance on the H4 chart.
The overnight move above the 156.50 barrier, which aligns with the 200-period SMA on the 4-hour chart, marked an important catalyst for USD/JPY bulls. The gently rising SMA reflects a stable underlying uptrend, and prices remaining above it preserve a bullish tone. However, the MACD has dipped below its Signal line around the zero level, with the histogram turning negative and widening, pointing to a loss of upside momentum. Meanwhile, the RSI has retreated to 63 from overbought territory, highlighting a more tempered momentum backdrop.
As long as USD/JPY holds above the rising 200-period SMA, upside risks remain favored. A sustained break below this level would shift the focus toward a corrective pullback. From a momentum perspective, continued expansion of the negative MACD histogram would strengthen downside risks, while a swift move back above zero would negate the bearish crossover. The RSI staying above 50 continues to support the bullish case, whereas a slide toward that level would signal weakening buying interest.
The U.S. dollar inched higher on Thursday, clawing back some strength amid ongoing volatility in equity markets, while attention turned to the euro and sterling following key central bank rate decisions. By 13:43 ET (18:43 GMT), the Dollar Index—which measures the greenback against a basket of six major currencies—was up 0.2% at 97.77, hovering near a two-week high and extending its rebound from levels close to four-year lows.
Stock market volatility lends support to the dollar
Heightened volatility across global equity markets—driven largely by concerns over stretched artificial intelligence spending—has prompted traders to rotate back into the U.S. dollar as a safe haven.
Analysts at ING noted that a more challenging equity backdrop typically triggers a move away from risk and pro-cyclical currencies toward the dollar, a dynamic they said has likely provided the greenback with some support this week. They added that while it remains unclear whether the current correction in U.S. technology stocks has further to run, a fully invested buy side appears increasingly vulnerable to negative surprises.
The dollar also found support late last week following the nomination of Kevin Warsh as the next Federal Reserve chair, with markets viewing him as less dovish than previously anticipated. Meanwhile, private payrolls data pointed to a cooling U.S. labor market, although the recent brief government shutdown has delayed the release of key employment figures scheduled for Friday.
Even so, several weak labor market signals emerged on Thursday. January job cuts rose to their highest level for that month since 2009, initial jobless claims exceeded expectations, and December job openings data fell short of forecasts.
Euro and pound move into focus
In Europe, the euro edged lower, with EUR/USD down 0.1% at 1.1799 after the European Central Bank left interest rates unchanged, in line with expectations. The ECB’s Governing Council said inflation is likely to stabilize around its 2% target over the medium term, while noting that the eurozone economy remains resilient despite a challenging global backdrop. Data released earlier in the week showed euro area CPI inflation eased to 1.7% year-on-year in January, from 1.9% in December.
Commenting on the decision, Mark Wall, chief European economist at Deutsche Bank, said the ECB was striking a necessary balance between downside risks and underlying strengths, adding that holding rates steady appeared appropriate given external vulnerabilities alongside domestic resilience, partly supported by increased defence and infrastructure spending in Germany.
Sterling also weakened, with GBP/USD falling 0.9% to 1.3544 after the Bank of England kept its benchmark rate unchanged. The Monetary Policy Committee said it expects inflation to return to its 2% target by the spring. Sanjay Raja, chief UK economist at Deutsche Bank, noted that while a rate cut was closer than anticipated, the meeting was more about positioning within the MPC, as rising economic trade-offs continue to fuel uncertainty over how restrictive current policy remains.
Yen in focus ahead of weekend elections
In Asian trading, USD/JPY edged 0.1% higher to 156.84, as the Japanese yen remained under pressure ahead of this weekend’s lower house elections. Prime Minister Sanae Takaichi’s party is widely expected to secure a larger majority, raising expectations of increased fiscal spending from Tokyo. Ongoing concerns about Japan’s stretched public finances have weighed heavily on the yen in recent weeks, with losses compounded by Takaichi’s remarks downplaying currency weakness.
Elsewhere, USD/CNY dipped slightly to 6.9378, with the Chinese yuan hovering near its strongest level in almost three years. The currency has been supported by a series of firm midpoint fixings from the People’s Bank of China, keeping the pair comfortably below the psychologically important 7.00 level.
The Australian dollar weakened, with AUD/USD sliding 0.4% to 0.6960, slipping back below 0.70 after two sessions of solid gains following a hawkish Reserve Bank of Australia meeting on Tuesday. The RBA raised interest rates by 25 basis points and upgraded its growth and inflation forecasts for the year.
Silver sold off sharply after Kevin Warsh’s nomination to the Fed caught investors off guard who had been anticipating a more dovish pivot. The metal remains under pressure from margin increases, elevated physical delivery requirements, and aggressive short positioning by Chinese traders. While long-term fundamentals remain constructive, prices are still range-bound as the market waits for clearer macro and technical signals.
The steep decline in silver toward the end of last week can reasonably be characterized as a crash, triggered primarily by the announcement of Kevin Warsh’s nomination to lead the Federal Reserve.
Prior to the news, markets had been positioned for a notably dovish appointment, an expectation shaped by President Donald Trump’s repeated calls for a weaker U.S. dollar and faster interest-rate cuts. Warsh’s nomination caught investors off guard, forcing a rapid reassessment of monetary policy expectations.
Even so, uncertainty remains around how the incoming Fed chair would ultimately steer the central bank.
At the same time, broader commodity markets have struggled to regain traction. Despite several rebound attempts, prices have failed to establish sustained upside momentum, leaving commodities—silver included—likely confined to a period of sideways consolidation for now.
Investors Demand Physical Deliveries
Beyond monetary policy concerns, silver prices are facing additional pressure following the CME Group’s decision to raise margin requirements for gold and silver. The higher margins have forced some leveraged investors to unwind long positions, intensifying selling pressure.
At the same time, a growing number of futures contracts are moving toward physical delivery rather than being rolled forward. Given the current supply tightness, this dynamic is, for now, benefiting sellers more than buyers.
Activity out of China has also drawn attention. Zhongcai Futures reportedly established a sizable short position in silver—estimated at roughly $1.5 billion—and appears to have profited significantly from the recent decline.
With the Lunar New Year holiday ending and the Shanghai Stock Exchange reopening, market participants will be closely monitoring how Asian demand evolves.
Overall, the recent move appears to be a corrective pullback after metals prices advanced too rapidly over a short period. While the near-term retracement has weighed on sentiment, it does little to alter the longer-term outlook. From a fundamental perspective, the case for higher prices remains intact, supported by constrained supply and steadily rising industrial demand.
Investors will also be watching Kevin Warsh closely, as any public remarks could provide clearer insight into his economic views and expectations for the interest-rate path in the months ahead.
Technical View on Silver
Early in the week, demand showed signs of returning as investors stepped in to buy the dip. However, the rebound proved short-lived, with a fresh wave of selling reversing the recovery. For now, prices are consolidating within a range of roughly $74 to $92 per ounce.
By the end of the week, prices are likely to stay confined within this range, provided U.S. labor market data does not deliver any major surprises. From a technical standpoint, the market appears to be in wait-and-see mode, looking for a decisive breakout to determine the next directional move. Meanwhile, the U.S. Dollar Index has once again held key support near the 96 level, which also represents its lows for the year.
If buyers are able to extend the rebound, the next major hurdle sits near the 100 resistance level. A decisive break above that area could pave the way for a move toward 103.
On the downside, a drop below 96 on the U.S. Dollar Index would be a clear signal that the broader downtrend remains intact and is likely to persist.
AUD/USD is trading lower below the key 0.7000 psychological level during Thursday’s Asian session, pressured by mixed Australian trade data. The pair is also weighed down by a firm U.S. dollar, which is hovering near a two-week high. With limited domestic catalysts, traders are now turning their attention to the upcoming U.S. JOLTS job openings data for fresh direction.
AUD/USD Technical Outlook
Should bullish momentum intensify, AUD/USD is likely to encounter its next resistance at the 2026 peak of 0.7093 (Jan 29), followed by the 2023 high at 0.7157 (Feb 2).
On the downside, a break below the February low at 0.6908 (Feb 2) may trigger a deeper pullback toward the interim 55-day SMA at 0.6693, ahead of the 2026 trough at 0.6663 (Jan 9). Additional downside support is seen at the 100-day SMA at 0.6628, with stronger support at the 200-day SMA at 0.6563 and the November low at 0.6421 (Nov 21).
Momentum indicators remain constructive and point to further upside potential, although the pair’s overbought readings suggest the risk of a near-term correction. The RSI hovers near 72, while the ADX around 50 continues to signal a strong underlying trend.
Bottom line
AUD/USD continues to be heavily influenced by global risk appetite and developments in China’s economy. A sustained move above the 0.7000 handle would reinforce a more credible bullish outlook.
For the time being, a weaker U.S. dollar, stable—though not particularly strong—domestic data, a still-hawkish tilt from the RBA, and modest backing from China leave the balance of risks skewed toward further upside rather than a pronounced pullback.
Fundamental Analysis
AUD/USD remains entrenched in its broader uptrend despite renewed selling pressure emerging on Wednesday. Any near-term pullbacks are expected to attract buying interest, as the Reserve Bank of Australia continues to project a clearly hawkish stance following its latest rate decision.
The Australian Dollar is struggling to extend Tuesday’s advance, easing back and once again testing the psychologically significant 0.7000 mark.
The retreat comes as the U.S. Dollar regains some traction, with markets having largely absorbed the RBA’s hawkish hike and refocusing attention on U.S. economic and monetary policy developments.
Australia: Growth Is Cooling, Not Collapsing
Recent Australian data have been underwhelming rather than alarming, reinforcing a well-established narrative. Economic activity is slowing, but in a controlled manner, with momentum easing rather than breaking down—supporting the soft-landing view.
January PMI surveys align with this assessment, as both Manufacturing and Services strengthened and remained firmly in expansion territory, at 52.3 and 56.3 respectively. Retail sales continue to show resilience, and although the trade surplus narrowed to A$2.936 billion in November, it remains solidly positive.
Growth is moderating only gradually, following a 0.4% quarter-on-quarter rise in GDP in Q3. On an annual basis, output expanded by 2.1%, matching the RBA’s projections.
The labour market remains a standout performer. Employment jumped by 65.2K in December, while the unemployment rate unexpectedly edged down to 4.1% from 4.3%.
Inflation, however, continues to be the key challenge. December CPI surprised to the upside, with headline inflation accelerating to 3.8% year-on-year from 3.4%. The trimmed mean rose to 3.3%, in line with market expectations but slightly above the RBA’s 3.2% forecast. On a quarterly basis, trimmed mean inflation increased to 3.4% in the year to Q4, marking the highest level since Q3 2024.
China: A Backdrop of Support, Not a Catalyst
China continues to offer a generally supportive backdrop for the Australian dollar, though without the momentum needed to drive a sustained upswing.
Economic growth ran at an annualised 4.5% in the October–December quarter, with quarter-on-quarter expansion at 1.2%. Retail sales rose 0.9% year-on-year in December—respectable, but not particularly compelling.
More recent indicators point to a renewed loss of momentum. Both the NBS Manufacturing PMI and the Non-Manufacturing PMI slipped back into contraction territory in January, at 49.3 and 49.4 respectively.
By contrast, the Caixin surveys painted a slightly brighter picture, with the Manufacturing PMI edging up to 50.3 to remain in expansion, while the Services PMI increased to 52.3.
Trade stood out as a relative bright spot, as the surplus widened sharply to $114.1 billion in December, supported by nearly 7% growth in exports and a solid 5.7% rise in imports.
Inflation signals remain mixed. Consumer prices were unchanged at 0.8% year-on-year in December, while producer prices stayed firmly negative at -1.9%, underscoring that deflationary pressures have yet to fully fade.
For now, the People’s Bank of China is maintaining a cautious stance. Loan Prime Rates were left unchanged in January at 3.00% for the one-year and 3.50% for the five-year, reinforcing expectations that policy support will remain gradual rather than aggressive.
RBA: Leaning Hawkish, In No Hurry to Ease
The RBA raised the cash rate to 3.85% in a decisively hawkish move that largely met expectations. Upward revisions to both growth and inflation forecasts signal firmer economic momentum and increasingly broad-based price pressures. Core inflation is now projected to remain above the 2–3% target band for much of the forecast horizon, reinforcing the case for a restrictive policy stance.
The central message is that inflation is becoming more demand-driven. The RBA cited stronger-than-expected private demand as a key justification for tighter policy, even as productivity growth remains subdued. While Governor Bullock described the move as an “adjustment” rather than the beginning of a renewed hiking cycle, the signal was clear: policymakers are uneasy with the upward drift in inflation.
For markets, this implies interest rates are likely to stay higher for longer, limiting the scope for near-term easing. From an FX perspective, this provides marginal support for the Australian dollar—particularly against low-yielding peers—even as the RBA’s emphasis on full employment tempers the likelihood of an aggressive tightening phase.
In the wake of the decision, markets are now pricing in nearly 40 basis points of additional tightening by year-end.
Positioning: Shifting Sentiment Toward the AUD
The latest positioning data suggest the worst of the bearish sentiment toward the Australian dollar may have passed. CFTC figures show that non-commercial traders have returned to a net long stance for the first time since early December 2024, although the position remains modest at just over 7.1K contracts in the week ending January 27.
Open interest has also climbed to its highest level in several weeks, exceeding 252K contracts, indicating that traders are beginning to re-engage with the market. That said, the move appears tentative rather than a strong conviction call on a sustained appreciation in the AUD, at least for now.
Key Drivers Ahead
Near term: Market attention is shifting back toward the United States. Incoming economic data, tariff-related developments, and ongoing geopolitical headlines are likely to drive movements in the U.S. dollar. For the Australian dollar, the key swing factors remain domestic labour market and inflation data, and how these shape expectations for the RBA’s next policy decision.
Risks: The AUD remains highly sensitive to global risk sentiment. A sharp deterioration in risk appetite, renewed concerns over China’s outlook, or an unexpected resurgence in the U.S. dollar could quickly unwind recent gains.
The Australian dollar strengthened after the Composite PMI surged to 55.7 in January, marking the fastest pace of expansion in nearly four years.
The Aussie also benefited as markets priced in an 80% probability of an interest rate hike in May, along with around 40 basis points of additional policy tightening.
Meanwhile, the U.S. dollar remained subdued for a second straight session.
The Australian dollar strengthened against the U.S. dollar on Wednesday, extending gains of more than 1% from the previous session. The AUD/USD pair held firm after China’s Services Purchasing Managers’ Index (PMI) rose to 52.3 in January from 52.0 in December, beating market expectations of 51.8. As China is Australia’s largest trading partner, improvements in Chinese economic activity tend to support the Aussie.
The AUD also drew support from upbeat domestic PMI data. Seasonally adjusted figures from S&P Global showed Australia’s Composite PMI climbed to 55.7 in January from 51.0 in December, marking the strongest expansion in 45 months. The Services PMI jumped to 56.3 from 51.1, its highest reading since February 2022, exceeding the flash estimate of 56.0 and remaining well above the 50.0 threshold. This extended the run of expansion in services activity to two years.
The Reserve Bank of Australia raised its Official Cash Rate by 25 basis points to 3.85% on Tuesday, pointing to stronger-than-expected economic growth and persistently elevated inflation. As the tightening cycle gathers momentum, markets have increased the odds of another rate hike in May to around 80% and are now pricing in roughly 40 basis points of additional tightening through the rest of the year.
Speaking at the post-meeting press conference, RBA Governor Michele Bullock said inflationary pressures remain uncomfortably high, warning that a return to the target range will take longer than previously expected and is no longer acceptable. She emphasized that the board will remain data-dependent and avoid providing forward guidance.
U.S. dollar little changed after recent losses
The U.S. Dollar Index (DXY), which tracks the greenback against six major currencies, remained subdued for a second straight session, trading near 97.40 at the time of writing.
Data released on Monday showed an unexpected rebound in U.S. manufacturing activity, underscoring economic resilience. The ISM Manufacturing PMI rose to 52.6 in January from 47.9 in December, comfortably beating expectations of 48.5.
Markets have also been assessing President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve chair, a move widely interpreted as signaling a more disciplined and cautious approach to monetary easing. The dollar found some support earlier as risk sentiment improved after the U.S. Senate reached an agreement to advance a government funding package, averting a shutdown, according to Politico.
Producer-side inflation in the U.S. remained firm, reinforcing the Fed’s policy stance. Headline PPI held steady at 3.0% year-over-year in December, unchanged from November and above expectations for a slowdown to 2.7%. Core PPI, which excludes food and energy, accelerated to 3.3% from 3.0%, defying forecasts for a decline to 2.9% and highlighting persistent upstream price pressures.
Fed officials struck a cautious tone. St. Louis Fed President Alberto Musalem said additional rate cuts are not warranted at this stage, describing the current 3.50%–3.75% policy rate range as broadly neutral. Atlanta Fed President Raphael Bostic echoed this view, urging patience and arguing that policy should remain modestly restrictive.
In Australia, inflation data showed mixed signals. The RBA’s trimmed mean inflation rose 0.2% month-over-month and 3.3% year-over-year, while the monthly CPI jumped 1.0% in December, exceeding forecasts of 0.7%. Export prices climbed 3.2% quarter-on-quarter in Q4 2025—the first increase in three quarters and the strongest gain in a year—while import prices rose 0.9%, beating expectations for a decline.
China’s RatingDog Manufacturing PMI edged up to 50.3 in January from 50.1 in December, in line with expectations and marking the fastest pace of factory expansion since October.
Additional Australian indicators pointed to easing inflation momentum and improving labor demand. The TD-MI Inflation Gauge rose 3.6% year-over-year in January, while monthly inflation increased just 0.2%, the weakest pace since August. Meanwhile, ANZ Job Advertisements surged 4.4% month-over-month in December, posting the strongest increase since February 2022 and signaling renewed momentum in hiring toward year-end.
Australian dollar rebounds toward three-year highs near 0.7100
The AUD/USD pair was trading near 0.7030 on Wednesday. Analysis of the daily chart shows the pair remains within an ascending channel, pointing to a sustained bullish bias. The 14-day Relative Strength Index (RSI) stands at 73.30, signaling strong upward momentum, though conditions appear increasingly stretched.
AUD/USD recently rebounded toward 0.7094, its highest level since February 2023, reached on January 29. A decisive break above this resistance could open the way for a move toward the upper boundary of the ascending channel around 0.7210. On the downside, initial support is seen at the nine-day Exponential Moving Average (EMA) near 0.6964, which coincides with the channel’s lower boundary. A deeper pullback could bring the 50-day EMA at 0.6759 into focus.
The U.S. dollar has extended its modest recovery as gold and silver have sold off sharply, and conditions now appear stable enough for incoming data to drive FX markets this week. The U.S. economic calendar is set to culminate in solid payrolls and unemployment figures, potentially leaving room for further upside in the dollar.
Elsewhere, the European Central Bank may avoid focusing heavily on the euro in its messaging, while the Reserve Bank of Australia could deliver a rate hike as soon as tonight.
USD: Some Health Restored
The dollar is showing renewed strength. The de-basement trade that appeared to drive last week’s sharp decline in the USD has begun to unwind following Kevin Warsh’s nomination by President Donald Trump as the next Federal Reserve chair. The steep correction in previously overbought precious metals has likely provided additional support for the dollar, although we have consistently argued that the earlier USD selloff had become overly disconnected from underlying macro fundamentals.
With the dollar now partially recovered, we expect price action to realign more closely with incoming data and short-term rate dynamics this week. The U.S. economic calendar is busy, featuring ISM surveys (with manufacturing due today), JOLTS and ADP reports ahead of Friday’s payrolls release. Our expectation is for around 80,000 jobs added and an unchanged unemployment rate of 4.4%, which could help underpin further stabilization or recovery in the dollar.
In the meantime, we are watching closely for signs of dip-buying interest in EUR/USD. We see the key support zone around 1.1880–1.1900, and the recent break below this area suggests some renewed confidence in the dollar. A renewed rally in the euro without clear data or event-driven justification would imply that damage to the dollar may be more persistent. For now, however, we maintain a short-term bullish outlook for the USD.
EUR: Concerns over euro strength may be overstated
This week’s key question is how concerned the European Central Bank truly is about the euro’s recent appreciation. With EUR/USD no longer hovering near the much-feared 1.20 level, the likelihood of an explicit reaction from ECB officials has diminished—any comments were always more likely to emerge after the meeting or in the minutes rather than in the main policy statement.
At Thursday’s meeting, there may be little to prompt a change in President Christine Lagarde’s long-standing reluctance to comment on exchange rate levels. At the same time, markets do not appear to be pricing in significant risk of verbal pushback against euro strength, suggesting that the threshold for a negative euro response is relatively low.
Eurozone core inflation data due on Wednesday are expected to ease slightly to 2.2%. Our economists see a marginally higher print of 2.3%, but either outcome is unlikely to have much impact on the currency. For now, EUR/USD should continue to be driven largely by dollar sentiment, and if confidence in the USD continues to recover as expected, we see the pair moving toward our short-term fair value estimate of 1.1770 in the near term.
AUD: RBA rate hike hangs in the balance
The Australian dollar has been among the hardest hit by the abrupt unwinding of long positions in gold and silver. More broadly, AUD/USD appeared to be pricing in an excessive amount of optimism in January, particularly given unchanged interest rate differentials. Unlike EUR/USD—where rate expectations have shifted little on the euro side—AUD/USD has seen notable moves at the front end of the curve on both sides.
Markets are now pricing in around 19 basis points of tightening from the Reserve Bank of Australia at tonight’s meeting, and we align with consensus in expecting a 25 bp rate hike to 3.85%. That said, the decision looks finely balanced. While the upside surprise in December CPI, coupled with a strong housing market, supports a hike, the RBA is unlikely to signal the start of a new tightening cycle. With markets already pricing at least one additional hike by year-end, any indication that this move is “one and done” would limit the support a hike could provide to the Australian dollar.
In our view, the impact of RBA tightening on AUD/USD is more likely to become apparent beyond the near term, once the overwhelming volatility in the U.S. dollar subsides. Consistent with our USD outlook, and given that market pricing is already skewed toward a hawkish outcome, we expect AUD/USD to trade lower in the coming weeks before eventually settling into a more sustainable recovery path beyond the 0.70 level.
Long EUR/USD after a daily close above 1.1866, resulting in a 0.24% loss.
Long Silver, which ended with a loss of 18.62%.
Long Gold after a daily close above $5,000, producing a 2.26% loss.
Taken together, these positions generated a total loss of 21.12%, or 7.04% per asset. While this was a sizable drawdown, the broader performance of my weekly forecasts over recent weeks remains positive, as earlier gains were exceptionally strong and more than offset this setback.
Key market data from last week:
U.S. Federal Reserve policy meeting: No surprises, with interest rates left unchanged.
U.S. Producer Price Index (PPI): The standout data release of the week. Inflation came in far hotter than expected, with headline PPI rising 0.5% month-on-month and core PPI increasing 0.7%, versus forecasts of just 0.2% for both. This reinforced a more hawkish Fed outlook, lifted the U.S. dollar, and accelerated the sharp reversal in Silver (and Gold). As a result, expectations for a second U.S. rate cut in 2026 were pushed back to October.
Bank of Canada policy meeting: No change to interest rates, as anticipated.
Australian CPI: Inflation exceeded expectations, with an annual rate of 3.8% versus 3.5% forecast, strengthening the case for possible RBA rate hikes and supporting the Australian dollar early in the week.
Canadian GDP: Slightly weaker than expected, showing zero month-on-month growth.
U.S. unemployment claims: In line with forecasts.
While PPI and Australian inflation influenced market moves, two broader developments likely had an even greater impact:
Federal Reserve leadership: President Trump announced his nominee for the next Fed Chair, Kevin Warsh. Although regarded as a hawk, Warsh is now thought to favor lower interest rates. The nomination contributed to the collapse of the Silver rally and provided additional support to the U.S. dollar.
Geopolitical tensions: The U.S. continued its military buildup near Iran, raising the risk of a wider regional conflict. Polymarket currently assigns a high probability to a U.S. strike on Iran in March, despite President Trump still referencing the possibility of a diplomatic agreement. These tensions appear to be supporting crude oil prices, with WTI crude reaching a new four-month high last week.
Meanwhile, the S&P 500 briefly pushed to a fresh record above 7,000. Although the index remains resilient, upside momentum is limited. In my view, a clearer resolution to U.S.–Iran tensions is needed before a more decisive directional move can develop.
The Week Ahead: 2nd – 6th February
The most significant data releases for the coming week, ranked by expected market impact, include:
U.S. Average Hourly Earnings and Non-Farm Payrolls
Preliminary University of Michigan Inflation Expectations
European Central Bank main refinancing rate decision and monetary policy statement
Bank of England official bank rate decision, voting breakdown, and monetary policy report
Reserve Bank of Australia cash rate decision, rate statement, and monetary policy statement
U.S. JOLTS job openings
Preliminary University of Michigan consumer sentiment
U.S. ISM services PMI
U.S. ISM manufacturing PMI
U.S. unemployment rate
New Zealand unemployment rate
Canadian unemployment rate
U.S. weekly unemployment claims
This will be a particularly busy and potentially market-moving week, with three major central banks delivering policy decisions. Please note that Friday is a public holiday in New Zealand, which may reduce liquidity in related markets.
Monthly Forecast February 2025
For the month of January 2026, I forecasted that the USD/JPY currency pair would rise in value. Unfortunately, this was a losing trade.
For the month of February, I forecast that the EUR/USD currency pair will rise in value.
Weekly Forecast 2nd February 2026
Last week, three currency crosses experienced unusually high volatility, prompting the following weekly trade forecasts:
Short NZD/JPY, which resulted in a 0.57% loss.
Short AUD/JPY, ending with a 0.32% loss.
Short NZD/CAD, producing a 0.39% loss.
Overall, the Swiss franc and the New Zealand dollar emerged as the strongest major currencies of the week, while the U.S. dollar was the weakest. Market conditions were relatively subdued, with directional volatility dropping sharply—only 11% of major currency pairs and crosses moved by more than 1% over the week.
Technical Analysis
Key Support/Resistance Levels for Popular Pairs
US Dollar Index
Last week, the U.S. Dollar Index formed a notably large bullish pin bar, rejecting a fresh four-year low. On its own, this price action is bullish. However, the broader technical structure remains bearish, with the index still trading below its levels from 13 and 26 weeks ago. As a result, the technical outlook for the U.S. dollar is mixed.
The nomination of Kevin Warsh as Federal Reserve Chair provided some support to the dollar during the week. Nevertheless, the forward outlook remains uncertain, and I believe the most attractive trading opportunities in the near term are likely to be independent of U.S. dollar direction.
EUR/USD
The EUR/USD pair recently staged a strong long-term bullish breakout as the U.S. dollar accelerated lower and printed a new 3.5-year low. However, the move quickly failed, with price retreating sharply and finding minimal follow-through support.
This price action suggests the breakout may have been a temporary spike, although the potential for a sustained bullish trend should not be dismissed, as EUR/USD has historically shown a tendency to trend cleanly once momentum is established.
That said, the appointment of a new Fed Chair and the renewed strength in the U.S. dollar late in the week—driven by hotter inflation data—argue for a more cautious stance.
Accordingly, I would only consider a long position following a daily (New York close) above 1.2039.
WTI Crude Oil
WTI crude oil has surged strongly in recent sessions as the risk of a regional conflict centered on Iran has intensified. Prediction markets are currently assigning a high probability to a U.S. strike on Iran in March, a scenario that could significantly disrupt global crude supply. Against this backdrop, prices pushed to a new four-month high by the end of last week, with a daily close above $66.25 marking a potential six-month high.
However, two important cautions should be noted:
While a daily close above $66.25 would typically attract trend-following buying, the current moving average structure does not confirm a bullish setup. Even in the event of military conflict, the move could prove to be a short-lived spike, especially if a rapid U.S. victory follows, potentially resulting in a failed breakout.
Unlike recent Democratic administrations, the Trump administration is likely to take aggressive steps to suppress crude oil prices, which could cap or reverse upside momentum.
Bitcoin
BTC/USD has finally completed a decisive bearish breakdown below the long-term support zone just above $81,000. Price is now firmly established beneath this level and has pushed to a new nine-month low, a development that is technically significant and clearly bearish.
While equities and precious metals have rallied strongly in recent months, Bitcoin peaked at a record high several months ago and has since trended steadily lower. This divergence highlights a broader downturn across the crypto sector, with Bitcoin now showing clear signs of structural weakness.
Despite early expectations that Bitcoin would fundamentally reshape global finance, real-world adoption remains limited outside parts of Africa. Practical usability is still constrained, and its underlying value proposition remains uncertain.
Although I generally avoid short-selling, Bitcoin appears entrenched in a long-term bearish trend. I would not consider buying at current levels. Short positions may be worth considering, but only with strict risk management, as shorting is best suited to experienced traders.
XAG/USD
Silver experienced an exceptionally volatile week, surging more than 15% to hit a new all-time high and the long-discussed $120 options target, before suffering a dramatic reversal. The sell-off unfolded sharply on Thursday and Friday—particularly Friday—when prices plunged 28% in a single session.
I had previously cautioned that the move was highly vulnerable to a sharp correction, and that while a long position was justified, it should be taken with a reduced position size.
The sheer magnitude of the collapse, even with some bullish undertones and modest resilience in the bounce from the weekly lows, strongly suggests that another record high is unlikely in the near term. This extraordinary rally appears to be finished, and the most probable next phase is a period of erratic consolidation, marked by large swings and gradually diminishing volatility.
XAU/USD
Much of the analysis above regarding Silver also applies to Gold. That said, gold’s volatility was noticeably lower, and its price action showed greater resilience at the lows.
While gold is also likely to enter a period of sideways consolidation, the underlying structure suggests it may recover to the upside more quickly than silver.
Bottom Line
My preferred trade for the coming week is:
Long EUR/USD, contingent on a daily (New York) close above 1.2039.
USD/JPY traded steadily after the Bank of Japan signaled that the risk of falling behind the curve has not increased meaningfully. Japanese Prime Minister Sanae Takaichi noted that a weaker Yen supports exports and helps offset the impact of US tariffs on the auto sector. Meanwhile, the US Dollar gained support following Kevin Warsh’s nomination as Federal Reserve Chair.
USD/JPY is holding steady after three consecutive days of gains, trading near 155.20 during Asian hours on Monday. Upside momentum may be capped as the Japanese Yen remains relatively calm following the Bank of Japan’s January Summary of Opinions.
The BoJ’s Summary of Opinions indicated that the risk of falling behind the policy curve has not increased materially, though members emphasized that timely policy action is becoming more important. With real interest rates still deeply negative, policymakers agreed that additional rate hikes would be appropriate if the outlook for growth and inflation remains intact, while continuing to favor a gradual tightening path. Over the weekend, Japanese Prime Minister Sanae Takaichi said a weaker Yen could benefit export-driven industries and help shield the auto sector from the impact of US tariffs.
The pair may still find support as the US Dollar strengthens following President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve Chair. Markets view Warsh’s appointment as signaling a more disciplined and cautious approach to monetary easing.
US producer inflation data also underpinned the Dollar, reinforcing the Federal Reserve’s restrictive policy stance. Headline PPI remained unchanged at 3.0% year over year in December, above expectations for a slowdown to 2.7%, while core PPI accelerated to 3.3% from 3.0%, defying forecasts for a decline to 2.9% and highlighting persistent upstream price pressures.
Echoing this view, St. Louis Fed President Alberto Musalem said further rate cuts are not justified at this stage, describing the current 3.50%–3.75% policy rate range as broadly neutral. Atlanta Fed President Raphael Bostic also urged patience, arguing that monetary policy should remain modestly restrictive.
Silver prices are struggling to regain momentum after a sharp selloff on Friday. The metal came under heavy pressure as a stronger US Dollar—boosted by Kevin Warsh’s nomination as the next Federal Reserve Chair—combined with profit-taking to trigger a steep decline.
Market participants are now turning their attention to the upcoming US Nonfarm Payrolls report for fresh clues on the Federal Reserve’s monetary policy outlook.
Silver (XAG/USD) is trading cautiously around $80 during the Asian session at the start of the week, holding slightly above Friday’s fresh four-week low of $73.33. The white metal is attempting to stabilize after last week’s sharp selloff, during which it shed more than 30% from its record high of $121.66. The decline was driven by a stronger US Dollar, profit-taking following a strong rally, and expectations of a more hawkish Federal Reserve policy outlook.
From a technical perspective, the firmer US Dollar continues to undermine Silver’s risk-reward profile. At the time of writing, the US Dollar Index, which measures the Greenback against six major currencies, remains near its weekly high at around 97.33.
The US Dollar drew strong support on Friday after the White House nominated former Federal Reserve Governor Kevin Warsh to succeed Jerome Powell as Fed Chair. Analysts see Warsh’s nomination as preserving the central bank’s independence, countering earlier concerns sparked by President Donald Trump’s repeated comments that the next Chair would deliver additional rate cuts.
Warsh is known for favoring a strong US Dollar during his previous tenure at the Fed, suggesting monetary conditions could remain relatively tight going forward.
Looking ahead, investor focus will turn to the US Nonfarm Payrolls report for January, which is expected to play a key role in shaping expectations for the Federal Reserve’s future policy path.
Silver technical analysis
On the daily chart, XAG/USD is trading around $81.38, holding above the rising 50-day Exponential Moving Average near $79.50 and preserving the medium-term uptrend. The upward slope of the moving average continues to underpin the broader bullish bias. Meanwhile, the Relative Strength Index sits near 44, in neutral territory, reflecting a cooling in momentum after a previously overbought phase.
As long as prices remain supported above the 50-day EMA, pullbacks are likely to attract initial buying interest around that dynamic level. However, the RSI’s position below 50 limits near-term upside, with a recovery above the midline needed to strengthen bullish momentum. If momentum stabilizes, buyers may look to extend the rebound, while a failure to regain traction could keep price action range-bound or tilt risks to the downside.
The Australian Dollar softened even as China’s RatingDog Manufacturing PMI edged up to 50.3 in January from 50.1. Meanwhile, Australia’s TD-MI Inflation climbed 3.6% year over year, though the monthly increase eased to 0.2%, its slowest pace since August. The US Dollar could gain further support after Donald Trump nominated Kevin Warsh as Fed Chair, a move seen as signaling a more cautious stance on monetary easing.
The Australian Dollar weakened against the US Dollar on Monday, extending losses after falling more than 1% in the prior session. The AUD/USD pair stayed under pressure despite China’s RatingDog Manufacturing PMI ticking up to 50.3 in January from 50.1 in December, in line with market expectations. While the reading signaled a modest expansion in factory activity, it marked the strongest growth since October.
Meanwhile, Australia’s TD-MI Inflation Gauge rose to 3.6% year over year in January from 3.5% previously. On a monthly basis, inflation increased by 0.2%, easing sharply from December’s two-year high of 1% and registering its slowest pace since August.
ANZ Job Advertisements surged 4.4% month over month in December 2025, rebounding from a revised 0.8% decline and marking the first increase since July. The rise was also the strongest monthly gain since February 2022, pointing to renewed hiring momentum toward the end of the year.
The data come ahead of the Reserve Bank of Australia’s policy meeting on Tuesday, following the central bank’s decision to keep the cash rate unchanged at 3.6% for a third consecutive meeting in December. Policymakers are widely expected to maintain a cautious stance, as underlying inflation remains above target and labor market conditions stay relatively tight, supporting a restrictive and data-dependent policy approach.
Meanwhile, Australia’s Consumer Price Index increased 3.8% year over year in December, up from 3.4% previously. With headline inflation still exceeding the RBA’s 2–3% target range, recent PMI and employment indicators strengthen the argument for a tighter monetary policy bias.
US Dollar edges lower ahead of ISM Manufacturing PMI
The US Dollar Index (DXY), which tracks the Greenback against six major currencies, is edging lower after posting gains of more than 1% in the previous session, trading near 97.10 at the time of writing. Market attention is turning to the release of the US ISM Manufacturing PMI for January later in the day.
Despite the modest pullback, the US Dollar had recently drawn support following President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve Chair, a move markets viewed as signaling a more disciplined and cautious approach to monetary easing. The Greenback also benefited from improved risk sentiment after the US Senate reached an agreement to advance a government funding package, averting a potential shutdown, according to Politico.
US producer-side inflation data further underpinned the Dollar, reinforcing the Federal Reserve’s restrictive policy stance. Headline PPI remained unchanged at 3.0% year over year in December, exceeding expectations for a slowdown to 2.7%. Core PPI, which excludes food and energy, accelerated to 3.3% YoY from 3.0%, defying forecasts for a decline to 2.9% and highlighting persistent upstream price pressures.
Federal Reserve officials echoed a cautious tone on easing. St. Louis Fed President Alberto Musalem said additional rate cuts are not justified at present, describing the current 3.50%–3.75% policy rate range as broadly neutral. Atlanta Fed President Raphael Bostic also urged patience, arguing that monetary policy should remain modestly restrictive.
In Australia, inflation and trade data pointed to continued price pressures. The RBA’s Trimmed Mean inflation rose 0.2% month over month and 3.3% year over year, while the monthly CPI jumped 1.0% in December from zero previously, exceeding forecasts of 0.7%. Export prices increased 3.2% quarter over quarter in Q4 2025, rebounding from a 0.9% decline in Q3 and marking the strongest gain in a year, while import prices climbed 0.9%, beating expectations for a fall and reversing a prior decline.
Following the data, markets now price in more than a 70% probability of a 25-basis-point rate hike by the Reserve Bank of Australia from the current 3.6% cash rate, up from around 60% previously. Rates are fully priced at 3.85% by May and near 4.10% by September.
Australian Dollar slides toward key confluence support near 0.6900
The AUD/USD pair is trading near 0.6940 on Monday. Analysis of the daily chart shows the pair continuing to move higher within an ascending channel, pointing to a sustained bullish bias. The 14-day Relative Strength Index has eased from the 70 level to around 67, suggesting a cooling in bullish momentum rather than a trend reversal.
On the upside, AUD/USD could recover toward 0.7093, its highest level since February 2023, reached on January 29. A sustained break above this level would open the door for a test of the channel’s upper boundary near 0.7190. On the downside, initial support is seen at a confluence zone around the nine-day Exponential Moving Average at 0.6927, which aligns closely with the lower boundary of the ascending channel near 0.6920.
Most Asian currencies traded in narrow ranges on Monday, while the dollar strengthened as investors assessed U.S. President Donald Trump’s nomination for the next Federal Reserve chair.
The Japanese yen weakened in volatile trading after remarks from Prime Minister Sanae Takaichi suggested a reduced likelihood of currency market intervention by Japanese authorities.
Broader moves across Asian currencies were subdued as investors awaited further economic signals this week, including a policy meeting by the Reserve Bank of Australia and the release of key U.S. jobs data.
Dollar gains after Trump taps Warsh as Fed chair nominee
The dollar index and its futures each rose around 0.1% in Asian trading, extending last week’s gains after the greenback staged a sharp rebound from a near four-year low.
The dollar’s advance was driven largely by U.S. President Donald Trump’s nomination of former Federal Reserve governor Kevin Warsh to succeed Jerome Powell as Fed chair.
Warsh is broadly seen as aligned with Trump’s push for significantly lower interest rates, but is also viewed as a critic of the Fed’s asset-purchase programs—suggesting that longer-term monetary policy under his leadership may prove less dovish than markets initially expected.
“We expect a Warsh-led Fed to favour a smaller balance sheet, limiting support for large-scale fiscal expansion,” ANZ analysts said in a note.
The analysts added that Warsh may view labour market weakness as the greater threat to the Fed’s dual mandate of maximum employment and price stability, and would likely back additional rate cuts if confirmed in the months ahead.
Powell’s term is set to expire in May. The current Fed chair said last week that his successor should remain independent of political pressures.
Yen weakens after Takaichi remarks
The Japanese yen underperformed its Asian peers on Monday, with USD/JPY climbing as much as 0.5% to trade above the 155 level.
The currency weakened after comments from Sanae Takaichi highlighted the benefits of a softer yen during a recent campaign speech—remarks that contrasted with earlier warnings from her administration against sustained currency weakness. Takaichi later appeared to moderate her stance, noting that a weaker yen supports exporters.
Previously, a series of comments from Japanese officials, including Takaichi, cautioning against excessive yen moves had fueled speculation of possible government intervention. That speculation helped the yen strengthen sharply in January, though it remains near levels that have triggered intervention in the past. Recent media reports have suggested Japan and the United States may be considering coordinated measures to support the currency.
Elsewhere in Asia, currencies traded in a narrow to softer range amid a lack of near-term catalysts. The Australian dollar slipped about 0.2% against the U.S. dollar, with attention focused on Tuesday’s Reserve Bank of Australia meeting, where a 25-basis-point rate hike is widely expected.
Expectations of a rate hike by the Reserve Bank of Australia were driven mainly by data pointing to a rebound in Australian inflation during the second half of 2025.
The South Korean won weakened, with USD/KRW climbing about 0.5%, as heavy outflows from domestic equity markets weighed on the currency amid selloffs in major technology stocks.
The Chinese yuan was largely unchanged, with USD/CNY flat as markets showed little response to mixed January purchasing managers’ index readings.
The Singapore dollar edged higher, with USD/SGD slipping 0.1%, while the Taiwan dollar was steady against the greenback.
The Indian rupee also weakened, with USD/INR rising roughly 0.2% and hovering near record levels, after investors reacted cautiously to the government’s fiscal 2027 budget, which signaled increased spending to bolster the manufacturing sector.
The U.K. economy is at risk of a “significant recession,” a scenario that could force the Bank of England into a far more aggressive easing cycle, according to BCA Research.
In a research note, analysts led by Robert Timper said key indicators of U.K. economic growth continue to show weakness, with business sentiment and labor market data sending what they described as recession-like signals.
They noted that although layoffs remain relatively contained for now, slowing profit growth increases the risk of deeper job cuts ahead.
“The bottom line is that the U.K. labor market is deteriorating at a concerning pace and, in many respects, already appears recessionary,” the analysts wrote. “If incoming data fails to improve, labor market conditions could tip the U.K. economy into recession.”
At the same time, wage growth has moderated and price pressures in the services sector have normalized, reinforcing expectations that underlying inflation will ease toward the Bank of England’s 2% target later this year.
Against this backdrop, the BoE is expected to deliver rate cuts broadly in line with market pricing, totaling around 41 basis points this year. The central bank cut interest rates by 100 basis points in 2025.
From an investment perspective, BCA Research said U.K. equities remain appealing despite domestic economic softness, supported by the prospect of lower borrowing costs, a weaker pound, and strong overseas revenue exposure. The firm favors U.K. stocks over Eurozone equities over the next three to six months.
The analysts said U.K. equities remain attractively valued and have yet to show signs of being overbought.
They added that energy markets could again provide support, noting that a potential collapse of Iran’s ruling regime could trigger what they described as a historic shock to global oil supply.
Given the heavy weighting of oil and gas companies in major U.K. indexes, they said the broader U.K. market has historically outperformed Eurozone equities during periods of rising oil prices.
The euro’s recent surge has brought renewed attention to the European Central Bank, though economists argue it is unlikely to prompt any near-term policy action.
Last week, the single currency climbed to $1.20 against the U.S. dollar for the first time since mid-2021, marking an unusually swift move by historical standards. According to Capital Economics, the euro has strengthened by a similar scale over a 10-day period only a few times in the past decade, while its trade-weighted exchange rate has reached a record high.
Even so, analysts expect the inflationary impact across the euro zone to remain modest. Capital Economics cited ECB sensitivity analysis showing that if the euro stabilizes at current levels, headline inflation next year would be roughly 0.1 percentage points lower than projected in the ECB’s December forecasts.
While this slightly increases downside risks to inflation, the brokerage said it falls far short of the threshold that would justify foreign-exchange intervention on price-stability grounds.
The ECB is likely to address the euro’s strength at its meeting next week, but concrete action appears improbable. Although the central bank has the authority to intervene in currency markets to prevent disorderly moves that could threaten price stability, Capital Economics noted that the euro would need to rise much further before such measures were considered. Even then, intervention through dollar purchases is viewed as highly unlikely.
Historically, the ECB has stepped into currency markets only twice—once in late 2000 and again in March 2011—both times to support, rather than weaken, the euro. Those interventions were coordinated with other major central banks. Capital Economics added that a coordinated effort to push the euro lower now looks extremely unlikely, particularly given the U.S. administration’s preference for a weaker dollar.
ECB officials have so far played down the recent appreciation. Vice President Luis de Guindos has previously described levels above $1.20 as “complicated,” while also calling the level itself “perfectly acceptable.” Meanwhile, Austria’s central bank governor has characterized the latest rise as “modest.”
Capital Economics expects ECB President Christine Lagarde to reiterate that policymakers are closely monitoring exchange-rate developments, but not to actively try to talk the currency down.
Although intervention is unlikely in the near term, prolonged euro strength could influence policy over time. Capital Economics said ECB analysis suggests that if the euro were to appreciate gradually to between $1.25 and $1.30 over the next three years, headline inflation in 2028 would be about 0.3 percentage points lower.
Under such conditions, policymakers would be more inclined to respond through stronger verbal guidance and lower interest rates rather than direct currency market intervention.
For now, economists say the euro’s rise largely reflects U.S. dollar weakness rather than stronger euro zone fundamentals, reducing the need for an immediate response. As a result, the ECB is expected to remain on the sidelines unless the appreciation becomes substantially larger and more persistent, according to Capital Economics.
Gold prices climbed to a new record above $5,600 an ounce this week, as persistent economic and geopolitical uncertainty continued to push investors toward traditional safe-haven assets.
The metal is up more than 17% so far this year, building on last year’s strong advance. Gold’s sustained rally has been driven by a combination of heightened global uncertainty, expectations of lower U.S. interest rates, and consistent purchases by central banks as part of a broader move to diversify away from the U.S. dollar.
Market anxiety has intensified in recent days after President Donald Trump said he intends to impose new tariffs on imports from South Korea, while concerns over a potential partial U.S. government shutdown re-emerged ahead of the January 30 funding deadline.
Following bullion’s surge to record highs, Investing.com spoke with John McCluskey, chief executive of Canadian miner Alamos Gold (NYSE: AGI), to explore the factors behind the rally and his outlook for gold prices over the rest of the year.
To what extent is today’s gold price driven by long-term structural demand, as opposed to short-term momentum and fear of missing out (FOMO)?
McCluskey noted that gold prices are currently strongly underpinned by sustained central bank purchases from at least six countries, including China, Russia, and their trading partners. This long-term structural demand has steadily pushed gold higher over the past decade, with prices hitting a new peak above $5,000 this week.
That rise has increasingly drawn in retail investors. According to fund managers, gold funds are experiencing record inflows, which is boosting both bullion prices and gold equities. Overall, structural demand remains the primary driver of current prices, but it has now spilled over into momentum-driven buying from retail investors.
How much does gold’s outlook hinge on additional U.S. interest rate cuts, and what would be the impact if the easing cycle ends earlier than markets anticipate?
“While U.S. Fed rate cuts may play a role, I don’t think gold’s outlook hinges on further easing, as prices have been—and continue to be—strongly supported by central bank buying. This trend has been in place for around a decade, and I believe there is still plenty of upside, with or without rate cuts,” McCluskey said.
Would a potential easing of global geopolitical tensions be sufficient to trigger a significant pullback in gold prices?
“While de-escalation could weigh on gold prices, there are numerous other tailwinds supporting the market, and I don’t see those trends fading anytime soon,” McCluskey told Investing.com.
“I expect gold prices to continue rising. And it’s not just gold mining CEOs saying this—chief executives at major banks are also pointing to a stronger gold outlook,” he added.
What is your outlook for gold prices by year-end?
I believe the fundamental drivers supporting gold remain firmly in place, pointing to a sustained bull market. With retail investors only now beginning to participate, gold could consolidate around the current $5,000 level and potentially move toward analysts’ year-end targets in the $5,400–$6,000 range.
Despite hitting record highs earlier in the week, precious and industrial metals retreated on Friday, as gold, silver, and copper declined amid profit-taking. The pullback followed a reassessment of expectations for aggressive U.S. interest rate cuts, alongside a stronger dollar.
Spot gold slid more than 6% to $5,042 by 10:55 ET (15:55 GMT).
The dollar gained after President Donald Trump announced former Federal Reserve Governor Kevin Warsh as his choice to lead the central bank, boosting the greenback against major currencies.
EUR/USD drops 0.75% as Kevin Warsh’s Fed nomination lifts US yields and fuels Dollar demand.
Hot US producer inflation reinforces expectations for a steady Fed, pushing Treasury yields above 4.25%.
Solid German and Eurozone GDP figures fail to counter Dollar strength driven by policy repricing.
EUR/USD slid 0.75% in the North American session as broad US Dollar strength followed Trump’s mildly hawkish Fed nominee and an inflation report supporting a steady-rate stance. The pair was trading at 1.1882 at the time of writing, down from a session high of 1.1974.
Euro sinks below 1.19 as hawkish Fed leadership signals and sticky inflation crush rate-cut hopes
Kevin Warsh has been named by President Trump as the next Chair of the Federal Reserve, confirming rumors that surfaced late Thursday. Financial markets reacted swiftly, sending precious metals sharply lower while the US Dollar climbed nearly 1%, as measured by the US Dollar Index (DXY), which tracks the greenback against six major peers. The DXY is on course to close above the 97.00 mark.
US Treasury yields also advanced, with the 10-year yield rising toward 4.25%. Meanwhile, US producer-side inflation edged higher, moving further away from the Federal Reserve’s 2% target and reinforcing the case for keeping interest rates unchanged. In addition to the December Producer Price Index (PPI) release, comments from Federal Reserve officials remained in focus.
Separately, breaking news reported that the US Senate reached an agreement to pass a government funding package later tonight, averting a potential shutdown, according to Politico.
Rising Treasury yields suggest investors see reduced odds that Warsh would pursue aggressive rate cuts to appease the White House. At the time of writing, the US 10-year Treasury yield was up around 1.5 basis points at 4.247%.
In Europe, Germany’s economy expanded by 0.4% year-on-year, beating expectations. However, stronger-than-forecast GDP readings for Germany and the Eurozone, along with an uptick in German inflation, failed to offer meaningful support to EUR/USD.
Looking ahead, the US economic calendar will feature a batch of labor market data, speeches from Fed officials, and January ISM Manufacturing and Services PMIs. In Europe, HCOB flash PMIs for the Eurozone, Germany, and France, alongside the European Central Bank’s monetary policy meeting, could inject volatility into EUR/USD.
Daily market movers: Dollar comeback sends Euro tumbling
St. Louis Fed President Alberto Musalem said there is no need for further rate cuts at present, noting that the current 3.50%–3.75% policy range is broadly neutral. He added that easing would only be warranted if the labor market weakens significantly or inflation falls materially.
Fed Governor Stephen Miran backed Kevin Warsh as a strong candidate for Fed Chair, attributing the recent rise in producer prices largely to housing costs and portfolio management fees. Meanwhile, Fed Governor Christopher Waller said the labor market remains soft despite steady growth, arguing inflation would be closer to 2% without tariffs, which he said are keeping price growth near 3%. Waller added that policy should be closer to neutral, around 3%.
Atlanta Fed President Raphael Bostic called for patience, stressing that interest rates should remain somewhat restrictive. He warned that the full inflationary impact of tariffs has yet to be felt and expects price pressures to persist.
US producer inflation data reinforced the cautious tone. The Producer Price Index (PPI) held steady at 3.0% YoY in December, missing expectations for a slowdown to 2.7%. Core PPI accelerated to 3.3% YoY from 3.0%, defying forecasts for a decline and highlighting ongoing upstream price pressures.
In Europe, EU GDP grew 1.4% YoY in Q4, unchanged from Q3 but above expectations. Germany’s economy expanded 0.4% YoY, beating forecasts and improving from the prior quarter. German inflation, measured by the HICP, edged up to 2.1% in January from 2.0%, remaining within the ECB’s target range.
Technical outlook: EUR/USD uptrend under threat after break below 1.1850
The EUR/USD technical outlook suggests the uptrend is under threat after the pair failed to sustain gains above the 2025 high at 1.1918, accelerating the decline below 1.1850. The Relative Strength Index (RSI) has turned mildly bearish, indicating a shift in momentum that could open the door to further downside.
On the downside, initial support is seen at 1.1800. A decisive break below this level could expose the 20-day simple moving average (SMA) at 1.1743.
On the upside, immediate resistance stands at 1.1900. A move back above this level would bring 1.1950 into focus, followed by the yearly high at 1.2082.
The US Federal Reserve experienced an eventful week. On Monday, it contacted New York–based banks to assess their USD/JPY exposure, sparking speculation that Washington could be coordinating with Japan to address the Japanese Yen’s weakness. This development prompted a sharp sell-off in the US Dollar early in the week.
The Fed’s midweek policy meeting resulted in no change to the federal funds rate, which was kept within the 3.50%–3.75% range, in line with expectations. During his press conference, Chair Jerome Powell avoided questions related to politics, his tenure, and the subpoena. However, he pointed to improving economic momentum and reduced risks to both inflation and the labor market.
The US Dollar Index (DXY) has since rebounded toward the 96.90 level, recovering most of its weekly losses after President Donald Trump nominated former Fed Governor Kevin Warsh as the next Fed Chair on Friday. The nomination now awaits Senate approval. Looking ahead, the US is set to release several key data points next week, including the ISM Manufacturing PMI for January, MBA mortgage applications, Challenger job cuts, and weekly initial jobless claims.
EUR/USD is hovering around the 1.1880 area after the US Dollar rebounded and recovered nearly all of its weekly losses. In the coming week, Hamburg Commercial Bank (HCOB) will release Manufacturing, Services, and Composite PMIs for both Germany and the Eurozone. Additional Eurozone data include the ECB Bank Lending Survey and December Producer Price Index (PPI), while Germany will publish December Factory Orders and Industrial Production figures.
GBP/USD is trading near 1.3600 ahead of the Bank of England’s monetary policy announcement on Thursday. Governor Andrew Bailey’s subsequent press conference is expected to shed further light on the central bank’s outlook for interest rates. UK data releases include the final January S&P Global PMIs and the Halifax House Price Index.
USD/JPY is holding close to the 154.50 level, paring earlier gains after Tokyo CPI data indicated easing inflation in January. Headline inflation slowed to 1.5% year-over-year from 2% in December, while core measures eased to 2%, undershooting forecasts. The softer inflation profile reduces pressure on the Bank of Japan to tighten policy.
USD/CAD is trading around 1.3580, with the Canadian Dollar maintaining a slight edge against the greenback despite data showing economic stagnation in November. Monthly GDP was flat following a 0.3% contraction in the prior month and fell short of expectations for modest growth. Upcoming Canadian releases include January S&P Global PMIs and the Ivey PMI.
Gold is trading near the $4,880 area after surrendering all weekly gains. Prices retreated from a record high of $5,598 as profit-taking emerged and the US Dollar strengthened sharply.
Looking ahead: Emerging views on the economic outlook
Scheduled central bank speakers for the week:
Monday, February 2: – Bank of England’s Breeden – Federal Reserve’s Bostic
Tuesday, February 3: – Federal Reserve’s Barkin
Wednesday, February 4: – Federal Reserve’s Cook
Thursday, February 5: – Bank of England Governor Andrew Bailey – Federal Reserve’s Bostic – Bank of Canada Governor Tiff Macklem
Friday, February 6: – European Central Bank’s Cipollone – European Central Bank’s Kocher – Bank of England’s Pill – Federal Reserve’s Jefferson
Central bank meetings and upcoming data set to influence monetary policy decisions
Key economic data and policy events for the week:
Monday, February 2: – Germany’s December Retail Sales – US ISM Manufacturing PMI
Tuesday, February 3: – Reserve Bank of Australia monetary policy decision – US December JOLTS job openings
Wednesday, February 4: – Eurozone January Harmonized Index of Consumer Prices (HICP) – US January ADP employment report
Thursday, February 5: – Australia’s December trade balance – Eurozone December retail sales – Bank of England monetary policy decision – European Central Bank monetary policy decision
Friday, February 6: – Canada’s January employment change – US January nonfarm payrolls – US February Michigan consumer sentiment
Here is what you need to know on Friday, January 30:
Markets were driven early Friday by the latest political and geopolitical developments linked to US President Donald Trump, as investors focused on the announcement of his pick for Federal Reserve Chair. Bloomberg reported that the Trump administration is preparing to nominate former Fed Governor Kevin Warsh for the role as early as Friday morning in the US.
At the same time, the Wall Street Journal noted that President Trump and Senate Democrats have reached an agreement to avoid a government shutdown.
Together with profit-taking and the Federal Reserve’s recent decision to keep interest rates unchanged, these developments helped revive demand for the US Dollar (USD), pushing it up from four-year lows against its major counterparts.
Despite the rebound, the US Dollar remains on course for a second consecutive weekly decline, weighed down by concerns over President Trump’s unpredictable foreign policy stance and repeated challenges to the Federal Reserve’s independence.
On Thursday, Trump threatened to levy a 50% tariff on all aircraft exported from Canada to the United States, accusing Ottawa of unfairly restricting the certification of Gulfstream business jets.
Reuters also reported that Trump plans to hold talks with Iran, even as the Pentagon readies for potential military action and the US steps up its naval presence in the Middle East.
In addition, the White House confirmed that Trump signed an executive order authorizing tariffs on countries that supply oil to Cuba.
Looking ahead, market attention remains firmly on Trump’s nomination of the next Fed Chair, along with the upcoming US Producer Price Index (PPI) release, which could shape the Dollar’s next move.
Before that, preliminary fourth-quarter 2025 GDP data from Germany and the Eurozone are expected to draw investor interest.
In G10 currencies, AUD/USD remains under heavy pressure below the 0.7000 mark amid profit-taking ahead of a likely Reserve Bank of Australia (RBA) rate hike next week. USD/JPY hovers near 154.00, with the Japanese Yen staying weak after softer Tokyo CPI data reduced expectations for an early Bank of Japan (BoJ) rate increase.
EUR/USD pares losses to reclaim the 1.1900 level, though downside risks persist ahead of key German and Eurozone GDP releases. GBP/USD continues to consolidate around 1.3750, weighed down by the ongoing recovery in the US Dollar.
In commodities, Gold slides nearly 4% to trade around $5,200 in early European hours after briefly testing the $5,100 level during the Asian session. Meanwhile, WTI crude oil extends its retreat from five-month highs near $66.25, trading close to $64 as Trump signals openness to talks with Iran.
Germany’s Federal Statistics Office will publish preliminary fourth-quarter GDP figures at 09:00 GMT on Friday, followed by Eurostat’s release of flash Eurozone GDP data at 10:00 GMT for the same period.
Germany’s economy is expected to expand by 0.2% quarter-over-quarter in Q4, rebounding from stagnation in the previous quarter, while annual growth is forecast to remain unchanged at 0.3%. At the Eurozone level, seasonally adjusted GDP is projected to grow by 0.2% QoQ in the fourth quarter, down from 0.3% previously, with year-over-year growth seen moderating to 1.2% from 1.4%.
How might Germany and the Eurozone’s Q4 GDP data influence the EUR/USD exchange rate?
The EUR/USD pair may face downside pressure if Germany and Eurozone GDP figures come in line with forecasts. Investors will also closely monitor December unemployment data from both regions, as well as Germany’s Consumer Price Index (CPI for January).
ECB policymaker Martin Kocher cautioned that additional strength in the Euro could lead the central bank to restart interest-rate cuts. After his remarks, market expectations for a summer rate reduction edged higher, with the implied probability of a July cut increasing to roughly 25% from around 15%. The ECB is set to meet next week and is broadly expected to leave interest rates unchanged.
Meanwhile, EUR/USD is under strain as the US Dollar gains traction amid speculation that US President Donald Trump may nominate former Federal Reserve Governor Kevin Warsh as the next Fed Chair. Trump indicated late Thursday that he would reveal his decision on Friday morning, with markets leaning toward Warsh, who is perceived as relatively hawkish.
From a technical perspective, EUR/USD is hovering near 1.1920 at the time of writing. Daily chart analysis continues to point to a bullish bias, with the pair holding within an ascending channel. A move toward the upper channel boundary near 1.2050 is possible, followed by 1.2082, the highest level since June 2021. On the downside, initial support is seen at the nine-day Exponential Moving Average (EMA) around 1.1870, with further support near the lower boundary of the channel at approximately 1.1840.
This may be the single most important chart in global bond markets right now.
Japanese investors rank among the world’s largest exporters of capital. Collectively, they hold a substantial share of European sovereign debt and U.S. Treasuries, with ownership running into the trillions of dollars. However, the economics underpinning these investments may soon begin to break down.
If that happens, Japan could see a meaningful repatriation of capital—away from foreign bond markets and back into domestic fixed-income assets.
The consequences for both global bond yields and currency markets would be significant. To understand why, it helps to look at the basic math.
The chart compares the 30-year Japanese government bond yield (blue) with the hedged yield on the 30-year U.S. Treasury (orange), adjusted for USD/JPY currency-hedging costs. The scenario assumes the Bank of Japan gradually lifts policy rates toward 1.75%, while the Federal Reserve cuts rates to around 3% over time.
Note how the two yields are now converging.
At current levels, Japanese investors gain little—if any—advantage from purchasing 30-year U.S. Treasuries on a currency-hedged basis versus simply holding long-dated Japanese government bonds at home. The picture becomes even more compelling when considering a longer-standing behavior.
For years, Japanese investors have also allocated heavily to foreign bonds without hedging currency risk—and for a clear reason.
The prevailing assumption was that the yen would continue to depreciate, allowing Japanese investors to benefit not only from higher foreign yields but also from favorable FX moves.
Earn higher yields in foreign bond markets
Gain additional returns from yen depreciation
With the United States signaling its willingness to prevent further yen weakness, and Japanese bond yields having risen sharply, this long-standing equation no longer holds.
Should Japanese investors begin to scale back capital outflows to overseas bond markets, the ripple effects across global bond yields and currency markets could be substantial.
The Japanese yen edged lower after softer-than-expected Tokyo CPI data dampened expectations for an imminent Bank of Japan rate hike.
Persistent fiscal challenges and political uncertainty continued to pressure the currency, although fears of official intervention helped limit losses.
Meanwhile, concerns over the Federal Reserve’s independence could restrain any rebound in the U.S. dollar and cap gains in the USD/JPY pair.
The Japanese yen (JPY) came under renewed selling pressure during Asian trading on Friday after data showed consumer inflation in Tokyo, Japan’s capital, slid sharply to a near four-year low in January. The weaker inflation reading reduces urgency for the Bank of Japan (BoJ) to move toward near-term rate hikes. In addition, concerns over Japan’s fiscal outlook, linked to Prime Minister Sanae Takaichi’s reflationary agenda, along with political uncertainty ahead of the February 8 snap election, continue to weigh on the currency. Coupled with modest U.S. dollar (USD) strength, these factors pushed USD/JPY toward the 154.00 level and the key 100-day Simple Moving Average (SMA) resistance.
That said, expectations of coordinated intervention by U.S. and Japanese authorities to support the yen may discourage aggressive bearish positioning. At the same time, lingering trade uncertainty stemming from President Donald Trump’s tariff threats and broader geopolitical risks is tempering risk appetite, as reflected in the cautious tone across equity markets, which could help limit downside in the safe-haven JPY. Meanwhile, the USD may struggle to gain sustained traction amid expectations of further Federal Reserve rate cuts and ongoing concerns over the central bank’s independence, potentially capping further upside in USD/JPY.
Japanese yen comes under pressure from soft Tokyo CPI, fiscal concerns and political uncertainty
A government report released earlier on Friday showed that Tokyo’s headline Consumer Price Index (CPI) fell to 1.5% in January from 2.0% previously, marking its lowest level since February 2022. Core inflation, which strips out fresh food prices, also softened to 2.0% from 2.3% in December, while a broader measure excluding both food and energy eased to 2.4% from 2.6% the month before.
The data signals easing demand-driven inflation pressures and diminishes the urgency for further monetary tightening by the Bank of Japan, following its December rate hike that lifted the policy rate to 0.75%, the highest level in three decades.
Meanwhile, concerns over Japan’s fiscal outlook persist as Prime Minister Sanae Takaichi has anchored her snap election campaign on expanded stimulus measures and pledged to suspend the consumption tax on food, raising questions about fiscal sustainability.
Adding another layer of complexity, reports of an unusual rate check by the New York Federal Reserve last Friday, following a similar move by Japan’s Ministry of Finance, have fueled speculation about potential coordinated U.S.-Japan intervention to curb yen weakness.
On the geopolitical front, U.S. President Donald Trump announced plans on Thursday to decertify all Canada-made aircraft and threatened to impose 50% tariffs unless U.S.-built Gulfstream jets receive certification in Canada. The move marks a fresh escalation in U.S.-Canada trade tensions.
These developments, alongside rising U.S.-Iran frictions and the prolonged Russia-Ukraine conflict, could help limit downside pressure on the safe-haven yen. The United States continues to deploy warships and fighter jets across the Middle East, while Secretary of War Pete Hegseth stated that Washington stands ready to act decisively under President Trump’s directives.
Russia has also reiterated its invitation for Ukrainian President Volodymyr Zelensky to travel to Moscow for peace talks, although prospects for a deal remain slim amid deep divisions between the two sides.
Meanwhile, the U.S. dollar received a modest boost amid speculation that Kevin Warsh may be appointed as the next Federal Reserve chair, lending additional support to the USD/JPY pair. President Trump is expected to announce his choice for Fed chair on Friday morning.
Looking ahead, traders will take further cues from the release of the U.S. Producer Price Index (PPI), which, alongside comments from Federal Reserve officials, is likely to influence dollar demand and provide direction for USD/JPY into the weekend.
USD/JPY bulls look for a sustained break above the 100-day SMA before adding new positions
The 100-day Simple Moving Average (SMA) continues to trend higher and is currently located near 153.98, with USD/JPY trading just below this level. This keeps near-term sentiment on the heavy side, despite the broader uptrend suggested by the rising trend filter. A sustained move back above this dynamic resistance would help steady the short-term outlook.
Momentum indicators show tentative signs of stabilization. The Moving Average Convergence Divergence (MACD) remains in negative territory, although its recent narrowing points to fading downside pressure. Meanwhile, the Relative Strength Index (RSI) stands at 37.81, below the neutral 50 mark but rebounding from oversold levels, indicating that bearish momentum is beginning to ease.
On the upside, the 38.2% Fibonacci retracement of the 159.13–152.07 decline, located at 154.77, is likely to act as initial resistance. A daily close above this level would enhance the recovery setup and open the door to further gains as momentum improves. Conversely, failure to break above this barrier would keep rebounds limited and reinforce a cautious near-term bias.
EUR/USD extended Monday’s positive momentum, pushing closer to the key 1.2000 level and reaching highs not seen since June 2021. The latest advance reflects continued selling pressure on the U.S. dollar, supported by a constructive risk backdrop and renewed investor focus on potential tariff-related risks stemming from the White House.
Macro & Fundamental Overview
EUR/USD’s bullish momentum remains firmly intact, closely mirroring persistent selling pressure on the U.S. dollar, which continues to be weighed down by concerns over trade policy, questions surrounding the Federal Reserve’s independence, and renewed shutdown risks.
The pair extended its advance for a fourth straight session on Tuesday, edging closer to the pivotal 1.2000 level for the first time since June 2021.
The latest leg higher reflects a further deterioration in the dollar’s outlook amid revived trade tensions and geopolitical uncertainty, all ahead of the Federal Reserve’s interest rate decision due on Wednesday.
Meanwhile, sentiment surrounding U.S.–European Union trade relations has improved after President Donald Trump softened his rhetoric last week regarding potential tariffs tied to the Greenland dispute. Markets have interpreted this shift positively, boosting risk appetite and lending support to the euro alongside other risk-sensitive currencies.
By contrast, the U.S. dollar continues to underperform. The Dollar Index (DXY) remains under heavy pressure, extending its decline toward the 96.00 area — levels last seen in late February 2022.
The FED: Rates on hold, politics in focus
The Federal Reserve delivered its widely anticipated December rate cut, but the key signal came from its messaging rather than the policy action itself. A divided vote and Chair Jerome Powell’s measured language suggested that additional easing is far from assured.
The Fed begins its two-day policy meeting today, with markets largely expecting rates to remain unchanged when the decision is released on Wednesday.
However, monetary policy may not be the primary focus this time. Market attention has increasingly turned to questions surrounding the Fed’s independence after reports earlier this month of a Justice Department investigation involving Chair Powell.
Compounding the uncertainty, President Trump has indicated that an announcement on his nominee for the next Fed Chair could be imminent, keeping scrutiny on the central bank well beyond the outcome of this week’s meeting.
ECB urges patience, not complacency
The European Central Bank left interest rates unchanged at its December 18 meeting, adopting a more measured and patient tone that has pushed expectations for near-term rate cuts further into the future. Modest upward revisions to growth and inflation projections helped underpin this approach.
Minutes from the meeting, released last week, showed policymakers saw little immediate need to adjust policy. With inflation hovering near target, the ECB has room to remain patient, while still retaining flexibility should risks materialize.
Governing Council members emphasized that patience does not equate to complacency. Monetary policy is viewed as appropriately calibrated for now, but not on autopilot. Markets appear to have absorbed this message, currently pricing in just over 4 basis points of easing over the coming year.
Positioning remains constructive, but confidence has softened
Speculative positioning remains tilted toward the euro, although bullish conviction appears to be easing.
CFTC data for the week ended January 20 show non-commercial net long positions declining to a seven-week low of around 111.7K contracts. At the same time, institutional participants also reduced short positions, which now stand near 155.6K contracts.
Meanwhile, open interest slipped to approximately 881K contracts, breaking a three-week streak of increases and suggesting that market participation may be thinning alongside fading confidence.
Key Events Ahead
Near term: The FOMC meeting is set to keep attention firmly on the U.S. dollar, while flash inflation data from Germany and preliminary GDP readings for the euro area will dominate the regional data calendar later in the week.
Risk: A more hawkish-than-expected outcome from the Fed could quickly tilt momentum back in favor of the dollar. In addition, a clear break below the 200-day simple moving average would increase the risk of a deeper medium-term correction.
EUR/USD Technical Outlook
EUR/USD continues to exhibit a firm bullish bias, trading at levels last seen in mid-2021 while gradually shifting focus toward the key 1.2000 psychological handle.
On the downside, initial support is located at the 2026 low of 1.1576 (January 19), reinforced by the closely watched 200-day simple moving average. A more pronounced correction could open the door to the November 2025 trough at 1.1468, followed by the August base at 1.1391.
Momentum indicators remain broadly supportive of further gains, although elevated conditions may challenge the immediate upside. The Relative Strength Index is hovering near 75, pointing to overbought territory, while an Average Directional Index reading above 26 confirms the presence of a well-established trend.
Bottom Line
For the time being, EUR/USD continues to be influenced primarily by U.S.-centric developments rather than euro area dynamics.
Absent clearer signals from the Federal Reserve on the extent of potential policy easing, or a more compelling cyclical recovery in the eurozone, any additional upside is likely to unfold in a steady, incremental manner rather than marking the beginning of a decisive breakout.
THE ETERNAL SOVEREIGN 