Fed Rate Cut Bets Recede, Dollar Surges to Monthly Peak

The dollar index staged a powerful rally on Friday, capturing a 1-month high and closing +0.20% higher, as investor expectations for near-term Fed rate cuts continued to recede amid mixed but ultimately hawkish economic signals. The currency’s strength reflected a reassessment of monetary policy trajectories across major economies.

Mixed Jobs Report Provides Dollar Support Despite Layoffs Concern

Friday’s US employment data painted a complex picture that ultimately favored dollar bulls. Nonfarm payrolls expanded by just 50,000 in December, disappointing expectations of 70,000, while November’s figure was downwardly revised to 56,000 from the initially reported 64,000. However, offsetting this softness, the unemployment rate ticked lower to 4.4%—exceeding market expectations of 4.5%—and average hourly earnings accelerated to +3.8% year-over-year, surpassing forecasts of +3.6%.

This contradictory dynamic—slower job creation paired with declining joblessness and stronger wage growth—appeared to support the case for maintaining higher interest rates longer, pushing rate cut odds to merely 5% for the FOMC’s January 27-28 meeting.

Consumer Sentiment Beats, Housing Starts Stumble

University of Michigan data added to the hawkish narrative on Friday. The January consumer sentiment index climbed to 54.0, exceeding the expected 53.5, signaling consumer resilience despite economic uncertainties. Notably, both 1-year and longer-term inflation expectations increased—1-year expectations held steady at 4.2% (above the 4.1% forecast), while 5-10 year expectations rose to 3.4% from December’s 3.2%.

On the softer side, October housing starts posted an unexpected -4.6% decline month-over-month to 1.246 million, marking a 5.5-year low and falling significantly short of the 1.330 million expectation. Building permits, however, edged slightly above forecast at 1.412 million.

Atlanta Fed Reinforces Inflation Vigilance

Atlanta Federal Reserve President Raphael Bostic delivered slightly hawkish remarks on Friday, emphasizing that despite recent labor market cooling, “inflation is too high, and we have to make sure that we don’t lose sight of the fact” that price pressures remain a primary concern. His commentary reinforced market conviction that aggressive rate cuts remain unlikely in the near term.

Structural Dollar Headwinds Persist Beneath Surface Gains

Despite Friday’s rally, structural factors continue to weigh on the dollar’s longer-term outlook. Markets are pricing in approximately 50 basis points of Fed cuts across 2026, while the Bank of Japan is expected to tighten by another 25 basis points and the ECB is projected to maintain current rates. Additionally, the Federal Reserve’s ongoing $40 billion monthly T-bill purchase program, launched in mid-December, injects fresh liquidity into financial markets—traditionally bearish for currency valuations.

Political uncertainty compounds these pressures. President Trump’s anticipated announcement of a new Fed Chair in early 2026 has sparked concerns that dovish monetary leadership could follow, potentially weighing on future dollar strength. National Economic Council Director Kevin Hassett has emerged as the market’s presumed frontrunner, viewed as the most dovish candidate among potential nominees.

Euro Stabilizes Amid Solid Eurozone Data

EUR/USD retreated to a 1-month low on Friday, finishing -0.21% lower as dollar strength proved predominant. However, Eurozone economic releases limited the euro’s downside. November retail sales grew +0.2% month-over-month (vs. +0.1% expected), while German industrial production unexpectedly expanded +0.8% month-over-month instead of the forecasted -0.7% contraction.

ECB Governing Council member Dimitar Radev signaled satisfaction with current policy settings, stating that “the current level of interest rates can be assessed as appropriate.” Market pricing reflects minimal rate hike probability (1%) at the February 5 policy meeting.

Yen Crumbles to 1-Year Low as BOJ Holds Rates

USD/JPY surged +0.66% on Friday as the yen slumped to a 1-year low against the dollar. The Bank of Japan’s decision to maintain rates unchanged at its latest meeting—despite revising economic growth projections upward—disappointed yen advocates. Higher US Treasury yields and broader dollar strength compounded selling pressure.

Political instability in Japan amplified yen weakness. Reports that Prime Minister Takaichi may dissolve the lower house of the National Diet added uncertainty to an already fragile sentiment backdrop. Meanwhile, escalating China-Japan tensions over export controls on military-related materials added another layer of concern for the yen, with potential supply chain disruptions threatening Japan’s economic prospects.

On the brighter side, Japan’s November leading index (CI) climbed +0.7 to a 1.5-year high of 110.5, and household spending surged +2.9% year-over-year—the strongest reading in six months—defying expectations of a -1.0% decline. Markets assign zero probability to a BOJ rate hike at the January 23 meeting.

Gold and Silver Rally on Quasi-QE Stimulus

February COMEX gold jumped +0.90% to close +40.20 higher, while March silver surged +5.59% (+4.197). The rally was catalyzed by President Trump’s directive for Fannie Mae and Freddie Mac to acquire $200 billion in mortgage bonds—a quasi-quantitative easing measure aimed at stimulating housing demand and lowering borrowing costs.

Precious metals drew additional support from safe-haven demand amid geopolitical risks spanning Ukraine, the Middle East, and Venezuela, plus uncertainty surrounding Trump administration tariff policies. Concerns about looser monetary policy under a potentially dovish new Fed chair, combined with increased financial system liquidity, bolstered the investment case for precious metals as store-of-value alternatives.

Countervailing headwinds emerged, however. The dollar’s 4-week high pressured metals valuations, while a rally in the S&P 500 to record levels reduced safe-haven buying interest. Citigroup analysts flagged potential $6.8 billion in outflows from gold futures—with similar volumes expected from silver—as the BCOM and S&P GCSI commodity indexes undergo reweighting.

Central Bank and Fund Demand Remain Strong

Gold prices drew underlying support from sustained central bank accumulation. China’s PBOC expanded bullion holdings by 30,000 ounces to 74.15 million troy ounces in December, marking the fourteenth consecutive month of reserve increases. The World Gold Council reported that global central banks purchased 220 metric tons in Q3, representing a 28% increase from Q2 activity.

Fund-level demand remained robust, with gold ETF long holdings climbing to a 3.25-year high on Thursday, while silver ETF positions reached 3.5-year highs in late December, signaling institutional conviction in precious metals as portfolio diversifiers.