Markets Split on Fed's Next Move as Dollar and Gold Dance to Central Bank Tunes

The dollar index surged to a 1-week high with a +0.18% gain today, buoyed by Japanese yen weakness and surprisingly dovish undertones from the Federal Reserve hierarchy. New York Fed President John Williams struck an optimistic tone, describing recent economic data as “pretty encouraging” and reassuring markets that employment deterioration remains absent from the Fed’s radar. His comments suggested patience with the current policy stance: “there’s no urgency to need to act further on monetary policy right now, because I think the cuts we’ve made have positioned us really well.”

Yet the dollar’s rally proved fleeting. The University of Michigan’s preliminary December consumer sentiment index disappointed with a downward revision of -0.4 points to 52.9, snuffing out momentum. Meanwhile, a separate surprise revision showed December 1-year inflation expectations ticking up to 4.2% from 4.1%, muddying the economic picture. Adding pressure, surging stock markets and aggressive Fed liquidity injections—including $40 billion monthly T-bill purchases that commenced last Friday—worked to undermine the greenback.

The appointment uncertainty hanging over the Federal Reserve chair position adds another layer of complexity. President Trump’s anticipated 2026 announcement is widely expected to favor a dovish candidate, with Kevin Hassett leading the speculation as markets’ preferred dovish pick. Such a development would likely weaken the dollar over time. The market consensus reflects this uncertainty, with only a 20% probability assigned to a 25 basis point rate cut at January’s FOMC meeting.

Eurozone Tumbles Into Dovish Territory

EUR/USD retreated to a 1-week low, down -0.04%, as the Eurozone stumbled with disappointing economic data. German November producer prices fell -2.3% year-over-year—steeper than the expected -2.2% and marking the sharpest decline in 20 months. Adding to the gloom, January’s German GfK consumer confidence index plummeted -3.5 points to -26.9, crushing expectations of a rise to -23.0 and hitting a 1.75-year nadir.

Fiscal headwinds intensified the pressure. Germany’s announcement that federal debt sales will balloon by nearly 20% to a record 512 billion euros ($601 billion) next year signaled mounting government spending pressures. These developments have cemented dovish expectations for the ECB, with markets pricing zero probability of a -25 basis point rate cut at February’s policy meeting—reflecting minimal tightening urgency ahead.

Yen’s Paradoxical Stumble Despite Rate Hike

USD/JPY powered 1.20% higher as the yen capitulated to a 4-week low, a counterintuitive move given Japan’s monetary tightening. The BOJ voted unanimously to raise its overnight call rate by 25 basis points to 0.75%, yet BOJ Governor Ueda tempered expectations, signaling caution about further hikes: “the pace at which we adjust our rate will depend on the state of the economy and prices.” He projected headline inflation dipping below 2% in the first half of 2026.

Despite a stunning surge in Japanese government bond yields—the 10-year JGB yield catapulted to a 26-year peak of 2.025%—the yen remained under assault. Japan’s November national CPI climbed +2.9% year-over-year, meeting forecasts, while the ex-food and energy reading also matched expectations at +3.0%. Fiscal concerns eclipsed these inflation readings, however, after Kyodo reported the government is eyeing a record 120+ trillion yen ($775 billion) budget for fiscal 2026. Markets assigned zero probability to another BOJ rate hike before January 23’s meeting.

Precious Metals Rally as Policy Divergence Sharpens

February COMEX gold climbed +10.90 points (+0.25%), while March silver surged +1.311 points (+2.01%), as precious metals flexed muscle amid shifting central bank dynamics. The gold-dollar relationship proved particularly telling: even as the dollar index touched 1-week highs, gold’s safe-haven allure and the broader dovish policy pivot supported prices. Weaker-than-expected US inflation data—November’s core CPI showed growth at a 4.5-year low—combined with the downwardly revised consumer sentiment index to reinforce expectations of additional Federal Reserve accommodation in 2026.

Geopolitical turbulence across Ukraine, the Middle East, and Venezuela, alongside uncertainty over Trump-era tariff policy, provided structural support for precious metals as haven assets. The prospect of a dovish Fed chair appointment particularly buoyed sentiment, offsetting the dollar strength that typically pressures metal prices.

Central bank demand remained a cornerstone of gold support. China’s People’s Bank boosted bullion reserves by 30,000 ounces in November alone to reach 74.1 million troy ounces—marking thirteen consecutive months of reserve accumulation. The World Gold Council reported global central banks purchased 220 metric tons in Q3, up 28% from Q2, underscoring institutional conviction.

Silver benefited from its own supply dynamics. Shanghai Futures Exchange warehouse inventories plummeted to 519,000 kilograms on November 21, marking a 10-year low and signaling tightness. Silver ETF long holdings rebounded to nearly 3.5-year highs on Tuesday, reversing earlier liquidation pressures that had weighed on both metals since mid-October record highs.

Headwinds persisted, however. Hawkish undertones from NY Fed President Williams—particularly his assertion that rate-cut urgency remains absent—tempered enthusiasm. Higher global bond yields, the BOJ’s rate increase, and the broader dollar strength at 1-week highs all acted as brakes on precious metals momentum.

November existing home sales provided a mixed US backdrop: sales rose +0.5% month-over-month to a 9-month high of 4.13 million units, though this fell slightly short of expectations for 4.15 million, leaving economic momentum ambiguous heading into year-end.