The dollar index declined on Wednesday alongside falling Treasury yields, as dovish Fed commentary and weaker U.S. economic data reinforced expectations for rate cuts. The ISM non-manufacturing PMI fell to 52.8, with declines in new orders and prices paid, signaling softening demand and easing inflation pressures. A wider trade deficit in December added uncertainty, while the ADP report beat forecasts, showing 183,000 new jobs in January. Richmond Fed President Tom Barkin reaffirmed that inflation is cooling but cautioned that Trump’s policies on tariffs, immigration, and regulations could impact the economic outlook.

Euro Extends Rally Amid Dollar Weakness and ECB Easing Hints

The euro gained for a second day, with EUR/USD up 0.37%, as dollar weakness and short-covering lifted the pair. However, concerns over U.S. tariffs and soft eurozone growth capped gains below 1.05. ECB Chief Economist Philip Lane backed gradual rate cuts, reinforcing dovish expectations. Expiring options at 1.0400 provided short-term support.

Yen Surges as Treasury Yields Fall and U.S. Data Disappoints

The yen rallied, with USD/JPY dropping 1.26% after the weak ISM report added to earlier selling pressure. The pair broke below its 200-DMA and 100-DMA (152.73-80) and Ichimoku cloud bottom at 153.37, finding support near 152.00. Japanese wage growth and strong earnings reinforced yen demand, with FX options signaling further downside into Friday’s U.S. jobs data.

Pound Gains Ahead of BoE Decision

GBP/USD rose 0.2%, with traders positioning ahead of Thursday’s BoE meeting, where a rate cut is expected. The pound remained range-bound, with uncertainty about the BoE’s stance limiting upside.

Commodities: Gold Hits Record as Oil Drops on Rising Stockpiles

• Gold: Gained 0.8%, reaching a new record high as investors hedged against tariff risks.
• Oil: Dropped 2% after a report showed a significant U.S. stockpile build, raising supply concerns.

Currency Market Summary: Yen and Euro Lead Gains

• EUR/USD: Up 0.37%, benefiting from short-covering and Fed-driven dollar weakness.
• USD/JPY: Fell 1.26%, pressured by yen strength and falling Treasury yields.
• GBP/USD: Gained 0.25%, with BoE decision risk limiting gains.
• AUD/USD: Climbed 0.54%, supported by risk sentiment and a weaker dollar.
• Cross-Pairs:
  • EUR/JPY: Down 0.91%, reflecting yen strength.
  • GBP/JPY: Fell 1.03%, mirroring broad risk-off flows.
  • AUD/JPY: Dropped 0.73%, as commodity-linked currencies lagged.

Outlook: Market Focus on NFP, BoE Decision, and Trade Developments

With Friday’s U.S. non-farm payrolls, the BoE policy decision, and further Trump trade policy developments on the horizon, volatility remains elevated. The dollar’s trajectory hinges on Fed rate expectations, while the yen and euro stand to gain from diverging central bank policies and shifting risk sentiment.