EUR to USD Weakness Caps Dollar's Rally as Market Digests Mixed Economic Signals

The dollar index (DXY) managed to eke out a +0.05% gain on Thursday, recovering from morning losses but stopping short of significant strength. The recovery came as EUR/USD retreated, with the euro sliding -0.14% amid shifting expectations around the European Central Bank’s policy trajectory.

Dollar’s Resilience Tempered by Mixed Signals

Thursday’s dollar movements reflected competing forces. On the positive side, US weekly jobless claims dipped to 224,000—marginally below the 225,000 forecast—providing some support for the currency. However, this strength was constrained by softer-than-expected inflation data that left the Fed potentially tilted toward continued rate cuts.

November’s CPI came in at +2.7% year-over-year, trailing the +3.1% consensus, while core CPI advanced just +2.6% y/y—the slowest pace in 4.5 years and well below the +3.0% expectation. The Dec Philadelphia Fed business outlook survey also disappointed, plummeting to -10.2 from expectations of +2.3.

Market pricing now reflects just a 27% probability of a 25 basis point fed funds cut at the January 27-28 FOMC meeting, suggesting caution among traders despite the softer economic data.

Fed Policy Uncertainty Weighs on Greenback

The dollar faced headwinds from multiple directions. Equity market strength sapped demand for safe-haven dollars, while the Federal Reserve’s ongoing liquidity operations—including $40 billion monthly T-bill purchases initiated last Friday—have increased money supply pressures.

Perhaps most significant for sentiment: speculation that President Trump will nominate a dovish Federal Reserve Chair is tempering dollar enthusiasm. Bloomberg reported that National Economic Council Director Kevin Hassett is viewed as the leading candidate, and markets perceive him as taking a more accommodative stance on monetary policy. Trump has indicated the announcement will come in early 2026.

EUR to USD Decline Reflects Rate-Cut Fatigue

The euro’s decline against the dollar reflects market reassessment of European Central Bank policy. Despite the ECB keeping rates steady at 2.00% on the deposit facility rate—as anticipated—and upgrading its 2025 GDP forecast to 1.4% from 1.2%, the currency ran into headwinds.

ECB President Lagarde’s description of the Eurozone economy as “resilient” initially supported the euro, but Bloomberg subsequently reported that ECB officials now view the interest rate cutting cycle as likely concluded. This shift in tone proved decisive, pushing EUR/USD lower.

Fiscal pressures have also weighed on sentiment. Germany’s announcement that federal debt sales will jump nearly 20% next year to a record 512 billion euros ($601 billion)—needed to fund expanded government spending—reminds markets of structural challenges facing the bloc. Swap markets are pricing only a 1% chance of a 25 bp ECB cut at the February 5 policy meeting.

Yen Supported by BOJ Tightening Expectations

The USD/JPY pair declined -0.08% as the yen found support from multiple sources. Lower US Treasury note yields boosted the safe-haven appeal of the Japanese currency, while markets anticipated a 96% probability of a 25 basis point rate hike from the Bank of Japan at Friday’s policy decision.

However, yen gains remained capped by fiscal concerns. Reports indicated the Japanese government is considering a record 120+ trillion yen ($775 billion) budget for fiscal 2026, raising questions about the sustainability of government finances and ultimately constraining currency appreciation.

Precious Metals Under Pressure Despite Dovish Fed Signals

February COMEX gold retreated -9.40 (-0.21%), while March COMEX silver dropped -1.682 (-2.51%), as rising equities reduced safe-haven demand. Hawkish commentary from central bank officials also weighed on sentiment: ECB President Lagarde’s resilience comments and BOE Governor Bailey’s assertion that the bar for further UK rate cuts has risen both pressured precious metals.

Anticipated BOJ tightening and stronger dollar dynamics triggered long liquidation and profit-taking in silver, which had rocketed to record highs just days prior after a three-week rally.

Support emerged from multiple sources. The Bank of England’s 25 bp rate cut boosted demand for precious metals as store-of-value assets, while softer November CPI and the disappointing Philadelphia Fed survey reinforced expectations of an easier Fed bias ahead. Geopolitical uncertainty—spanning US tariff policy, Ukraine, Middle East tensions, and Venezuelan developments—continues underpinning safe-haven demand.

Central Bank Demand and Supply Dynamics Support Bullion

Strong institutional demand is bolstering gold. China’s PBOC expanded gold reserves by 30,000 ounces to 74.1 million troy ounces in November, marking the thirteenth consecutive month of accumulation. The World Gold Council reported that global central banks purchased 220 metric tons of gold in Q3, representing a +28% jump from Q2 levels.

Silver inventories present a bullish supply picture. Warehouse holdings linked to the Shanghai Futures Exchange hit 519,000 kilograms on November 21—the lowest in a decade—signaling tight physical supply conditions that could support prices.

After ETF holdings reached 3-year peaks on October 21, fund liquidation subsequently pressured prices. However, the recent rebound in silver ETF long positions to a nearly 3.5-year high on Tuesday suggests renewed investor interest and potential support moving forward.