Forex

Dollar Direction:

The U.S. Dollar Index has collapsed through the psychological 100 mark and now trades around 97.70, extending its twelve-month decline to nearly 10%—the greenback's weakest run since the pandemic selloff of 2020. The FOMC held rates at 3.50–3.75% on January 28 with a notable two-dissenter split (Waller and Miran favoring a cut), and Trump's nomination of Kevin Warsh as the next Fed Chair on January 30 has injected fresh uncertainty over the central bank's independence and future rate path. Markets are pricing in roughly 58 bps of additional easing this year, with the first cut penciled in for June and a second potentially in September. The 10-year Treasury yield has slipped below 4.2% after a string of soft labor data—Challenger layoffs hit 108K in January, the highest since 2009—further eroding the dollar's yield premium as capital rotates into risk assets and non-dollar currencies.

Eurozone Resilience:

The ECB held its deposit rate at 2.0% and main refinancing rate at 2.15% for a fifth consecutive meeting on February 5, with President Lagarde reiterating that policy is in a "good place" while keeping a "close eye" on the euro's rapid appreciation. Eurostat flash data showed headline inflation cooling to 1.7% in January—the lowest since September 2024—while core inflation slipped to 2.2%, its weakest reading since October 2021. That sub-target print has sparked debate within the Governing Council: France's Villeroy de Galhau warned that further euro strength could force the ECB to resume cuts, while Deutsche Bank's base case sees rates on hold through 2026 with the next move a hike in mid-2027. EUR/USD touched a four-year high of 1.2019 on January 27 before consolidating near 1.1820—up roughly 14% year-on-year. Most major banks now target 1.20–1.24 by year-end, citing persistent dollar weakness and Germany's fiscal stimulus as structural tailwinds.

Sterling Stands Its Ground:

The Bank of England held rates at 3.75% at its February 5 meeting, but a razor-thin 5–4 vote—with four members pushing for a cut to 3.50%—surprised markets that had expected a clearer 7–2 split and sent cable tumbling over half a percent on the session. GBP/USD pulled back sharply from its January 27 multi-year high of 1.3869 and now trades around 1.3615. UK CPI rose to 3.4% in December, still well above the BoE's 2% target, though Governor Bailey noted inflation should fall back near target by April as energy base effects unwind. Services inflation, a key domestic pressure gauge, edged up to 4.5%, reinforcing the MPC's cautious posture. BNP Paribas sees the next cut as early as March, while Berenberg has pushed its call to April, and ING targets cable at 1.36 for 2026 as the weaker dollar trend reasserts itself—with dips toward the 50-day EMA near 1.3485 viewed as buying opportunities for those targeting a 1.38–1.40 range later this year.

Last updated: February 07, 2025