The dollar index fell for the third consecutive session on Thursday, pressured by easing Treasury yields and dovish remarks from Federal Reserve Governor Christopher Waller. Waller suggested that inflation is likely to continue easing, potentially enabling the Fed to cut rates sooner and more aggressively than previously expected. Mixed U.S. economic data further weighed on the greenback, with December retail sales rising by a weaker-than-expected 0.4% and weekly jobless claims edging higher, underscoring signs of a slowing economy. Treasury yields fell by 3 to 5 basis points across maturities, with the 2s-10s curve flattening slightly to +37.2bps.

Euro Gains Amid Short-Covering and ECB Policy Signals

The euro advanced against the dollar, reaching a post-London close high of 1.0313 as short positions were covered following dovish Fed commentary. However, gains were capped by large options expiries looming for Friday. European Central Bank accounts from December’s meeting revealed a cautious approach to rate cuts, emphasizing gradual policy easing while signaling further measures in the coming months.

Yen Strengthens on Retreating Yields and BOJ Rate Hike Speculation

The yen gained broadly, with USD/JPY dropping 0.79% to a near one-month low of 155.11. Retreating Treasury yields and declining oil prices supported safe-haven demand for the yen. Expectations of a potential Bank of Japan rate hike on January 24 further bolstered its strength, reflecting heightened market anticipation of a policy shift.

Pound Struggles on Weak U.K. GDP Data

Sterling edged lower, with GBP/USD nearly flat, down 0.01%, as weaker-than-expected U.K. GDP data for October tempered optimism about economic recovery. Traders remained cautious ahead of further data releases and Bank of England commentary, which could clarify the central bank’s policy trajectory.

Commodity Markets Reflect Mixed Sentiment

• Oil: WTI crude slid 1.4%, driven by hopes of de-escalation in Red Sea shipping tensions and steady U.S. supply forecasts.
• Gold: Rose 0.86%, benefiting from lower Treasury yields and persistent geopolitical uncertainties.
• Copper: Climbed 1.1%, hitting a five-week high as renewed hopes for additional Chinese stimulus boosted industrial demand.

Canadian Assets Face Volatility Amid Tariff Concerns

Canadian markets saw heightened volatility after Natural Resources Minister Jonathan Wilkinson hinted at potential U.S. retaliatory tariffs on critical minerals. Bank of Canada Deputy Governor Toni Gravelle added to the cautious sentiment by signaling the nearing end of the central bank’s quantitative tightening program, contributing to multi-month highs in Canadian asset volatility measures.

Equities Flat as Sector Performance Diverges

U.S. equity markets remained subdued, with the S&P 500 ending the session largely unchanged. Gains in utilities balanced out losses in tech shares, reflecting a cautious tone as markets processed mixed economic data and dovish Fed signals.

Currency Market Summary: Yen and Euro Lead Gains

• EUR/USD: Up 0.10%, supported by short-covering and cautious ECB policy guidance.
• USD/JPY: Fell 0.79%, reflecting yen strength amid falling yields and safe-haven demand.
• GBP/USD: Nearly flat, down 0.01%, as traders digested weak U.K. growth data.
• AUD/USD: Dropped 0.11%, reflecting weaker risk sentiment and subdued commodity prices.
• Cross-Currency Pairs: EUR/JPY and GBP/JPY declined 0.67% and 0.77%, respectively, while AUD/JPY fell 0.90%, mirroring yen strength and cautious market sentiment.

Market Outlook: Data and Geopolitical Developments Take Center Stage

• Dollar: Expected to remain sensitive to inflation data and Fed commentary, with dovish expectations potentially weighing further on the greenback.
• Euro: Faces near-term support from cautious ECB signals, though large option expiries and economic challenges may cap upside.
• Yen: Likely to remain strong amid safe-haven demand and BOJ rate hike speculation, with further gains possible if yields continue to decline.
• Pound: Vulnerable to further losses unless U.K. data surprises positively or BOE signals provide greater clarity on policy direction.
• Commodity Currencies: Australian and Canadian dollars may remain under pressure from weaker risk sentiment, though rising commodity prices could provide some relief.

Conclusion: Markets Await Key Data as Volatility Persists

The dollar’s retreat reflects easing yields and shifting Fed expectations, while the yen and euro capitalize on cautious sentiment and divergent central bank policies. Sterling and commodity-linked currencies face headwinds from weak domestic data and broader global uncertainties. Markets remain focused on Friday’s economic releases and geopolitical developments, which are expected to drive further volatility in the coming sessions.