The U.S. dollar inched up on Tuesday but held near its lowest levels in about a week as market participants awaited a busy economic calendar that includes retail sales, nonfarm payrolls and consumer price index data later in the week.
At 04:30 ET (09:30 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, was trading marginally higher at 96.700 - a level last seen at the end of January.
Dollar awaits data deluge
Investors kept the dollar within a narrow trading range on Tuesday ahead of the release of U.S. retail sales data for December, due later in the session. Traders will then focus on January nonfarm payrolls on Wednesday and U.S. consumer price index inflation figures on Friday. These reports are expected to provide fresh guidance on the likely path for U.S. interest rates.
Markets are already parsing the implications of President Donald Trump nominating Kevin Warsh as the next Federal Reserve chair, to replace Jerome Powell. The nomination was initially read by some as a less dovish choice compared with other options, a view that previously helped push the dollar higher.
Despite a modest uptick on Tuesday, concern persists that payrolls could disappoint. Kevin Hassett, chair of the National Economic Council, urged markets to ‘not panic’ over lower jobs numbers.
Addressing near-term dollar prospects, analysts at ING wrote that “DXY [the dollar index] could well be in the middle of a new 96.50-97.50 range for the next few days and will probably take its cue from labor market releases.”
Sterling pressured by domestic politics
In Europe, sterling weakened, with GBP/USD trading 0.1% lower at 1.3683 after earlier gains. The pound weakened as investors weighed the political risks to Prime Minister Keir Starmer stemming from the appointment of Peter Mandelson as ambassador to the United States.
Anas Sarwar, leader of the Scottish Labour Party, on Monday publicly called for the prime minister to resign over the appointment. Starmer declined to step down. The controversy centers on Mandelson’s close ties to the late U.S. sex offender Jeffrey Epstein, which have come under renewed scrutiny.
On the market implications of potential leadership changes, Ruth Gregory, Deputy Chief UK Economist at Capital Markets, said gilt yields would initially rise and the pound would weaken should Starmer and/or Chancellor Rachel Reeves be replaced. She added that “the most likely longer-lasting influence is a loosening in fiscal policy that leads to higher gilt yields than otherwise and a weaker pound than otherwise.”
Euro steady after sharp rise
EUR/USD was largely unchanged at 1.1916 following a substantial 0.9% jump in the prior session. ING analysts noted the difficulty in timing buy-side dollar hedging and said it would likely take “a surprisingly soft U.S. NFP report tomorrow to launch an attack on 1.20.”
On short-term levels for the euro, ING specified that “1.1920/25 is the trigger for 1.1960.”
Yen extends recent gains
In Asia, USD/JPY fell 0.2% to 155.53, with the Japanese yen extending its gains from the previous session. The yen’s improvement came as additional government warnings about currency market intervention helped calm investor concerns about potentially expanded fiscal spending under Prime Minister Sanae Takaichi.
Takaichi’s ruling coalition secured a supermajority in the lower house after the weekend’s election, giving the prime minister the political latitude to pursue broader budgetary and fiscal changes, many of which would involve increased government spending and possible tax measures.
ING commented that “Japanese markets continue to do well after the LDP’s resounding success in Sunday’s election. JGBs are the key asset class to watch here in terms of whether the election proves a net yen negative or yen positive. So far, JGB yields have been contained and the yen is finding support.”
Yuan at multi-year strength
USD/CNY edged 0.1% lower to 6.9126, putting the yuan at its strongest level versus the dollar in well over two years. The currency’s firmness has been supported by a sequence of strong midpoint fixes set by Beijing. Chinese CPI data, scheduled for Wednesday, will be watched closely ahead of Lunar New Year holidays.
Aussie pulls back after recent move
AUD/USD fell 0.2% to 0.7074 after trimming some of the gains it recorded when the Reserve Bank of Australia raised rates last week and signalled a hawkish outlook in light of persistent inflation. Analysts at Bank of America said they regarded the Australian dollar’s recent rise as stretched and saw a reversal as near.
Market implications and positioning
- Major currency pairs remain sensitive to U.S. labor and inflation reports this week; liquidity and positioning may shift quickly as those prints arrive.
- Political developments in the U.K. are directly influencing gilt yields and sterling valuations, and could have longer-term fiscal and market effects if they alter policy direction.
- In Asia, policy signals and fixed-rate guidance in China and Japan are providing support to the yuan and yen, respectively, while central bank posture in Australia continues to underpin the aussie despite signs of overextension.
Outlook
With a packed data slate ahead, markets are likely to remain reactive to U.S. macro prints. The dollar may trade within a relatively narrow range until the labor market and inflation numbers provide clearer direction, while political and policy developments in the U.K., Japan, China and Australia continue to shape respective local currencies.