USD: Showing resilience near 1-month high
The US dollar index is holding near one‑month highs, showing notable resilience despite US policy uncertainty and ongoing concerns around Fed independence. Meanwhile, December’s US inflation report did little to shift expectations that the Fed will pause rate cuts this month. In fact, Bloomberg’s Fed sentiment tracker – based on commentary from Fed officials – shows rhetoric turning the most hawkish since April. Rates markets have reacted by pushing expectations for the next cut back to June, lifting relative yields in the dollar’s favour and offering the US currency support.
In broader markets, crude oil rose 2.6% to its highest level since October as tensions in Iran fuel supply‑risk premiums. A deterioration in the region could trigger a significant loss of production, and with the US now a net energy exporter, higher oil prices tend to offer the dollar additional support.
Risk assets have been mixed. Bitcoin climbed to a two‑month high, US equities erased gains yesterday and European equity futures point to modest gains this morning. Precious metals continue to surge: silver broke above $90/oz for the first time, while gold hit a fresh record. Metals remain the big winners from the turmoil surrounding the Fed, as investors rotate into real‑world hedges amid doubts over long‑term US policy credibility.
Attention now turns to a potential US Supreme Court ruling on President Donald Trump’s global tariffs — a decision that rattled markets when first announced in April. On the data front, US producer prices (PPI) and retail sales are also due, offering fresh insight into the strength of underlying inflation and the resilience of consumer demand.
Inflation overview
US CPI surprised to the downside in December, defying expectations for a sharp re‑acceleration in core inflation as November’s distortions unwound. Headline CPI rose 0.3% m/m, in line with consensus, but core increased just 0.2% versus the 0.3% forecast. The standout detail was the softness in goods prices: core goods inflation — where tariff effects should be most visible — is still running at only 1.4%, reinforcing the view that tariffs have had a muted inflation impact.
Overall, this is a constructive outcome, and with Chair Powell signalling that tariff effects are close to peaking this quarter, the data keep policymakers on track for further rate cuts. Two cuts look achievable, with risks tilting toward a third given the cooling labour market.
That said, the report’s signal is noisy. Data collection was disrupted by last year’s government shutdown, limiting how much can be inferred from the details. Moreover, several oddities in the sub‑components hinted that underlying inflation may be firmer than the headline suggests. Alternative core measures — the trimmed mean, median CPI, sticky‑price gauge, and the Fed’s supercore services ex‑shelter — all point to inflation drifting higher and sitting at or above the Fed’s 3% upper bound. A final note of caution: the core PCE deflator, the Fed’s preferred metric, is likely to rise more than core CPI.
EUR: Range bound by rate reality
The euro is down almost 1% year‑to‑date against the dollar. After a brief pop higher earlier this week on renewed Fed‑independence concerns, EUR/USD quickly slipped back below its 50‑ and 100‑day moving averages.
The pair has lacked clear direction for months, repeatedly capped near $1.18 and supported around $1.15. Since the “Liberation Day” aftermath, EUR/USD has tracked rate differentials more closely, producing more orderly price action. With the Fed reluctant to adopt a more decisively dovish stance since beginning its easing cycle in H2 2025, the pair has struggled to sustain any break above $1.18. In fact, rate expectations over the next twelve months have shifted in opposite directions — turning more hawkish for the Fed and less hawkish for the ECB — creating a growing mismatch between EUR/USD pricing and the underlying policy trajectory.
Still, looking ahead, the Fed‑independence risk premium could become a bearish dollar catalyst into Q2, when Trump’s new appointee replaces Powell. Markets have grown more resilient to Trump’s rhetoric, but a shift in the Fed’s leadership could give the administration greater influence over policy. That raises the risk of renewed de‑dollarisation concerns, which could weaken the dollar more materially and finally push EUR/USD out of its recent sideways range.
GBP: Reading between the MPC lines
Amid a broadly divided MPC, with December’s meeting showing a 5-4 split in favour of a cut and clear hesitancy to commit to a more decisive easing path, markets have come to price in these divisions. This makes rate‑setter commentary an important channel for detecting whether the committee is beginning to drift toward a more unified dovish stance. Today we will hear from Alan Taylor and Dave Ramsden, who both voted for a cut in December.
Markets currently price no cut for the February meeting and around a 40% chance of a cut in March. With tomorrow’s monthly GDP print, followed by next week’s inflation and jobs reports, likely to confirm labour‑market softness and a disinflationary trend, the unpriced BoE easing risk may begin to weigh on GBP. As said, however, the data alone may start to lose market‑moving power unless accompanied by MPC commentary that hints at a more unanimous dovish tone. We therefore do not expect much volatility in GBP’s price action ahead of the data releases over the next ten days.
After yesterday’s knee‑jerk gains following the US CPI release, GBP pared back against the dollar and found support at 1.3425. With markets pushing Fed easing expectations further into the year, the dollar faces less immediate downward pressure, leaving Monday’s lows at 1.3391 as the next support level in sight. Markets may need clearer deterioration in the US labour market to justify more immediate easing expectations.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: January 12-16
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
