Fed Easing Outlook Weighs on Greenback as EUR/USD Slides

Thursday’s currency markets painted a mixed picture for the dollar, which managed only marginal appreciation despite several crosswinds. The dollar index (DXY) edged up just +0.05% as traders grappled with conflicting signals from Washington and the data landscape.

Economic Data Sends Mixed Messages, Initially Pressures Dollar

US economic releases presented a complicated narrative. While weekly jobless claims fell by 13,000 to 224,000—slightly better than the 225,000 forecast—inflation data came in softer than anticipated. November’s CPI rose just +2.7% year-over-year, well below the +3.1% expectation, with core inflation at +2.6% versus the forecast of +3.0%. The weaker-than-expected readings marked the slowest core CPI pace in 4.5 years. However, the December Philadelphia Fed business outlook survey dealt a sharper surprise, collapsing to -10.2 from expectations of a rise to 2.3.

These softer economic indicators initially sent the greenback lower, as markets interpreted them as signaling potential for continued Federal Reserve easing. Swaps currently price in a 27% probability that the FOMC will trim the fed funds rate by 25 basis points at its January 27-28 meeting.

Dovish Fed Chair Speculation Undercuts Dollar Strength

A significant headwind for USD stems from expectations about the central bank’s leadership. President Trump has signaled he will announce his Fed Chair selection in early 2026, with Bloomberg reporting that National Economic Council Director Kevin Hassett ranks as the frontrunner. Markets view Hassett as the most dovish candidate in consideration, a development that weighs on long-term dollar prospects.

Compounding this pressure, the Federal Reserve has ramped up its injection of liquidity into the financial system, purchasing $40 billion monthly in Treasury bills starting last Friday. This increased money supply dynamic typically limits upside for the currency.

EUR/USD Retreats on Rate-Cut Ceiling Expectations

The euro gave ground Thursday, with EUR/USD falling -0.14%, despite initial strength following the European Central Bank’s policy announcement. The ECB held interest rates steady as expected and raised its 2025 Eurozone GDP forecast to 1.4% from 1.2%, while maintaining its 2025 inflation outlook at 2.4%.

ECB President Lagarde struck a hawkish note, characterizing the Eurozone economy as “resilient,” which temporarily lifted the euro. However, the currency reversed course after Bloomberg reported that ECB officials now expect the rate-cut cycle to be largely complete. This dovish pivot proved headwind for the shared currency.

Fiscal concerns also burdened EUR/USD sentiment. Germany announced plans to boost federal debt sales by nearly 20% next year to a record €512 billion ($601 billion), raising questions about Eurozone fiscal stability. Rate-cut swaps currently show only a 1% chance of a -25 basis point ECB reduction at February’s 5th policy meeting.

Yen Edges Up as Rate Hike Looms

USD/JPY slipped -0.08% as the yen firmed amid dollar weakness and declining Treasury yields. The Bank of Japan is anticipated to raise rates by 25 basis points at Friday’s policy meeting, with markets pricing a 96% probability of this action. However, yen gains remained capped by concerns regarding Japan’s fiscal trajectory—the government is reportedly considering a record ¥120 trillion ($775 billion) budget for fiscal 2026.

Precious Metals Navigate Cross-Currents

February COMEX gold declined -9.40 points (-0.21%), while March silver fell -1.682 (-2.51%), as equities’ strength undermined their safe-haven appeal. Hawkish comments from central bankers—including Bank of England Governor Bailey noting a higher bar for further BOE rate cuts—weighed on bullion. The BOJ’s anticipated rate hike also pressured metals, while the BOE’s actual -25 basis point cut provided some support.

Softer US inflation readings offered underlying support, as did persistent geopolitical uncertainty spanning Ukraine, the Middle East, and Venezuela. Additionally, expectations that the incoming administration will pursue looser Fed policy in 2026 underpinned precious metals demand.

Strong central bank accumulation provided another tailwind. China’s PBOC increased gold reserves by 30,000 ounces to 74.1 million troy ounces in November—the thirteenth consecutive month of additions. Global central banks purchased 220 metric tons of gold in Q3, up 28% from Q2 according to the World Gold Council.

Silver benefited from supply-side concerns, with Shanghai Futures Exchange warehouse inventories dropping to 519,000 kilograms on November 21—the lowest level in a decade. Though ETF holdings retreated from October 21’s three-year peaks after mid-October record highs sparked liquidation, silver ETF long positions rebounded to nearly 3.5-year highs by Tuesday, suggesting renewed fund interest.