Dollar Rebounds but Still Poised for Steep Annual Decline

Key Moments

U.S. Dollar Firms After Inflation-Driven Pullback

The U.S. dollar traded higher on Friday, recovering some ground after a sharp decline triggered by the prior session’s softer-than-expected inflation report and questions over the reliability of the data.

At 05:10 ET (10:10 GMT), the Dollar Index, which measures the performance of the greenback against a basket of six major currencies, was up 0.3% at 98.337. Even with this uptick, the index remained lower for the week and was heading toward an annual loss exceeding 9%, which would mark its most pronounced yearly drop since 2017.

Skepticism Surrounding U.S. Inflation Figures

The latest U.S. consumer price report, released on a delayed basis on Thursday, indicated that inflation cooled more than economists had anticipated in November. The annual headline rate eased to 2.7%, reinforcing market expectations that the Federal Reserve could start lowering interest rates next year.

However, caution persisted after U.S. authorities highlighted potential distortions in the data tied to disruptions from a prolonged government shutdown. Analysts at ING noted in a research briefing that, “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.”

The same note added, “This leaves the door wide open for earlier, swifter 2026 rate cuts,” underscoring the view that easing could come more quickly once the Fed begins to shift policy.

Friday’s U.S. data calendar included housing starts and home sales, along with the final readings for December consumer confidence and inflation expectations. ING commented, “We doubt these will move markets.”

Major Currency Levels Snapshot

Sterling Steady as U.K. Data and BoE Signals Diverge

In European trading, GBP/USD was broadly flat at 1.3383 after the Bank of England on Thursday cut its policy rate to 3.75% from 4.0% in response to a pronounced slowdown in inflation.

Several members of the BoE’s decision-making body pointed to worries about stubbornly high wage growth expectations and lingering structural inflation forces, indicating that further easing may not be straightforward.

At the same time, U.K. consumers showed signs of strain. Retail sales slipped 0.1% in November, following a 0.9% decline in the prior month, suggesting subdued consumer confidence.

ING commented on the wage backdrop and policy outlook: “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.”

Euro Edges Lower as German Sentiment Weakens

EUR/USD traded 0.1% lower at 1.1713 after data pointed to a notable deterioration in German consumer sentiment heading toward 2026. The consumer climate gauge compiled by the GfK market research institute and the Nuremberg Institute for Market Decisions dropped to -26.9 points in January from a slightly downwardly revised -23.4 points, signaling deeper pessimism among households.

The European Central Bank left its main policy rate unchanged at 2%, in line with expectations. However, the ECB revised its eurozone growth projections higher, stating that it now anticipates expansion of up to 1.4% in 2025 and 1.2% in 2026.

Yen Weakens Despite Bank of Japan Rate Hike

In Asian trading, USD/JPY climbed 1% to 156.99, with the yen selling off even after the Bank of Japan implemented a widely expected rate increase, described as its first hike since January.

BOJ Governor Kazuo Ueda, speaking at the post-meeting press conference, said, “The pace of future rate hikes will depend on data and economic developments at the time,” and added, “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.”

Elsewhere in the region, USD/CNY was little changed at 7.0408, while AUD/USD slipped 0.1% to 0.6606.