Dollar edges higher; set for weekly loss after soft inflation data
Investing.com - The U.S. dollar rose Friday, bouncing after the immediate selloff that following the previous session’s relatively subdued inflation data on the back of uncertainty surrounding the reliability of the release.
At 05:10 ET (10:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 98.337.
Even with these gains, the index is still lower this week and heading for an annual loss of over 9%, which would be its steepest annual decline since 2017.
The delayed U.S. consumer price data, released on Thursday, showed inflation cooling more than expected in November, with the annual headline rate easing to 2.7%, reinforcing expectations that the Federal Reserve could begin cutting rates next year.
However, caution persisted after U.S. officials flagged potential distortions in the data due to disruptions brought about by the prolonged government shutdown.
"There is some skepticism due to the scale of the downside ’miss’ relative to analyst expectations and the impact of the government shutdown, but it explains why Fed Chair Powell sounded so relaxed last week," ING analysts said in a note.
"This leaves the door wide open for earlier, swifter 2026 rate cuts," they added.
The economic data slate Friday includes housing starts and home sales, plus the final read of consumer confidence and inflation expectations for December.
“We doubt these will move markets,” ING added.
In Europe, GBP/USD traded largely unchanged at 1.3383 in the wake of Thursday’s decision by the Bank of England to lower interest rates to 3.75% from 4.0% after a sharp slowdown in inflation.
Several BoE decision-makers highlighted concerns about persistently high wage growth expectations and structural inflation pressures, suggesting the next cut in rates will be harder to come by.
That said, U.K. retail sales dropped 0.1% in November, adding to the previous month’s 0.9% fall, suggesting a lack of consumer confidence.
“We suspect that these wage expectations will come down in the New Year in line with lower headline inflation. In all, we continue to expect 25bp rate cuts in February and April, compared to market pricing of just one cut,” ING said.
EUR/USD traded 0.1% lower to 1.1713,after data showed that sentiment among German consumers is set to fall significantly heading into 2026.
The consumer sentiment index, published by the GfK market research institute and Nuremberg Institute for Market Decisions, fell to -26.9 points in January from a slightly downwardly revised -23.4 points.
The European Central Bank maintained its key interest rate at 2%, as widely expected, but upgraded its outlook for economic growth in the eurozone, saying it now expects growth of up to 1.4% in 2025 and 1.2% in 2026.
In Asia, USD/JPY gained 1% to 156.99, with the yen dropping despite the Bank of Japan delivering a widely expected rate hike, its first increase since January.
"The pace of future rate hikes will depend on data and economic developments at the time,” said BOJ Governor Kazuo Ueda at his post-meeting news conference. “We will make an appropriate decision so that we’re not behind the curve on inflation, and that we can make a smooth landing toward our inflation target."
USD/CNY traded largely unchanged at 7.0408, while AUD/USD slipped 0.1% to 0.6606.
