The dollar gained ground across major currency pairs following Friday's U.S. jobs report, which showed December wage growth accelerating and unemployment holding near historic lows. The data has prompted traders to scale back expectations for Fed rate cuts in 2026, with fed funds futures now pricing in fewer reductions than previously anticipated. The greenback's advance reflects a renewed focus on U.S. economic exceptionalism as other regions grapple with slower growth.
European Central Bank officials have struck a notably more cautious tone in recent weeks, with several policymakers highlighting downside risks to eurozone growth and opening the door to potential rate cuts in the first half of 2026. This stands in stark contrast to the Fed's apparent resolve to keep rates elevated until inflation shows clearer signs of returning to target. The policy gap has weighed particularly heavily on the euro, traders say, while the pound has also softened amid concerns about UK economic momentum.
The yen has exhibited choppy trading as markets continue to digest the Bank of Japan's gradual shift away from ultra-loose policy. While the BoJ is expected to continue its normalization path, the pace remains deliberately measured, leaving the currency sensitive to U.S. rate differentials. In commodity markets, crude oil has found support from persistent geopolitical tensions affecting key shipping routes, while gold has retreated as rising U.S. real yields enhance the opportunity cost of holding non-yielding assets. Bitcoin has traded in a narrow range as investors await regulatory clarity from U.S. authorities expected later this quarter.
Technical strategists note that the dollar index has reclaimed its 200-day moving average, a development that could signal further upside if sustained. Market participants are now turning their attention to Thursday's U.S. CPI data, which will provide the next major test for the current narrative. Analysts caution that while near-term momentum favors the dollar, overstretched positioning could leave the currency vulnerable to any signs of economic cooling. Until then, the combination of robust data and central bank divergence continues to provide underlying support.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.