The dollar index rose for a third consecutive day on Thursday, supported by safe-haven demand and further declines in sterling amid concerns over the U.K.’s fiscal outlook. U.S. markets were subdued due to a national holiday in honor of former President Jimmy Carter, but the Treasury yield curve steepened following hawkish commentary from Federal Reserve officials. Kansas City Fed President Jeff Schmid expressed reservations about additional rate cuts, citing economic resilience and persistent inflation above the Fed's 2% target. Fed Governor Michelle Bowman described the recent rate cut as the "final step" in recalibrating monetary policy, signaling caution amid ongoing inflation risks.

Market attention now turns to Friday’s U.S. jobs report, with expectations of 160K non-farm payroll additions, 0.3% hourly earnings growth, and unemployment holding at 4.2%. A strong report could reinforce hawkish Fed commentary and provide further support for the greenback.

Sterling Drops to 14-Month Low Amid Fiscal and Political Concerns

Sterling fell to a 14-month low of 1.2239 before recovering to trade around 1.23, pressured by surging gilt yields and political uncertainty. Bank of England Deputy Governor Sarah Breeden reassured markets about orderly bond market conditions but highlighted challenges in gauging the pace of future rate cuts, keeping the pound under pressure.

Euro Defensive Amid Strong Dollar and Higher Bund Yields

The euro remained defensive, falling 0.20% against the dollar, but managed to limit losses thanks to rising bund yields, EUR/GBP short-covering, and technical support from large options near 1.03. Asian central bank rebalancing efforts may have also contributed to capping the dollar’s gains against the euro.

Yen Gains Modestly on Haven Demand

The yen strengthened against its G10 peers as investors sought safety amid broader risk-off sentiment. USD/JPY fell 0.15%, though yen gains were limited by ongoing weakness in Asian currencies and anticipation of strong U.S. jobs data.

Treasury Yields Mixed as Curve Steepens

Treasury yields showed a mixed performance, with front-end yields falling by 2 basis points while the 2s-10s curve steepened by 2 basis points to +42.1bp, reflecting cautious optimism about longer-term growth prospects amid persistent inflation concerns.

Commodities See Positive Moves Amid Risk-Off Sentiment

• Oil: WTI crude rose 0.87%, driven by increased heating demand amid colder weather.
• Gold: Gained 0.25% as haven flows supported prices, despite broader dollar strength.
• Copper: Climbed on technical buying and resilient industrial demand, signaling optimism for base metals.

Currency Markets Reflect Risk-Off Sentiment and Positioning Adjustments

• EUR/USD: Fell 0.20%, pressured by a stronger dollar, despite support from higher bund yields and technical factors.
• USD/JPY: Dropped 0.15%, reflecting haven-driven yen demand, though losses were limited by expectations of robust U.S. jobs data.
• GBP/USD: Declined 0.50%, weighed down by rising U.K. yields, political instability, and bearish sentiment.
• AUD/USD: Fell 0.30%, pressured by risk aversion and commodity price sensitivity.
• Cross-Currency Pairs: EUR/JPY and GBP/JPY fell 0.35% and 0.63%, respectively, reflecting broader risk-off sentiment and defensive positioning ahead of key data.

Market Outlook: Jobs Report and Geopolitics in Focus

• Dollar: Likely to stay supported by haven demand and hawkish Fed commentary, with the U.S. jobs report expected to shape short-term momentum.
• Euro: Faces downside risks unless eurozone data improves or technical support near 1.03 holds.
• Sterling: Remains vulnerable to bearish sentiment unless political uncertainties and U.K. data show signs of improvement.
• Yen: Could gain further if risk aversion intensifies or if U.S. equity markets weaken.
• Commodity-Linked Currencies: Australian dollar and peers may face continued pressure unless risk sentiment improves or commodity prices rebound.

Conclusion: Cautious Markets Brace for Key Economic Data

As markets await Friday’s U.S. jobs report, the dollar remains firmly supported by robust yields and safe-haven flows. The euro and sterling face challenges from regional uncertainties and dollar strength, while the yen gains modestly on risk-off sentiment. Commodity markets reflect mixed dynamics, with oil and copper rising on supply and demand factors, while gold remains steady amid haven demand. Market volatility is expected to remain elevated as traders digest geopolitical risks and central bank signals heading into the weekend.