In a significant market shift, the U.S. dollar plunged against major currencies after reports suggested the incoming Trump administration might delay imposing tariffs. The DXY index dropped 0.96%, reflecting broad dollar weakness. The EUR/USD rose 1.2%, nearing its year-to-date peak of 1.0437, while USD/JPY declined 0.35%, finding support above the key Fibonacci retracement level of 154.97. The GBP/USD gained 1.13%, though traders remained cautious about holding positions above 1.23 due to upcoming U.K. wage growth data.

Market Reactions Highlight Cautious Optimism

European equities showed modest gains, with the DAX rising 0.42% and the FTSE up 0.18%, as traders responded to reduced day-one tariff risks. However, skepticism persists, as President Trump’s inaugural speech maintained a strong stance on foreign trade policies, keeping broader tariff concerns on the table.

Currency Markets Reflect Complex Positioning Amid Dollar Weakness

• EUR/USD: Tested but fell short of its year-to-date high, stalling near 1.0437 as traders weighed lingering uncertainties.
• USD/JPY: Dropped from 156.56 to 155.48 but held support above 154.97, highlighting ongoing vulnerability amid U.S.-Japan rate differentials.
• GBP/USD: Showed reluctance to maintain positions above 1.23, with cautious sentiment ahead of U.K. economic data.
• AUD/USD: Capitalized on dollar weakness, reaching a two-week high of 0.6270, marking its strongest level since January 7.

Central Bank Policies and Economic Outlooks Shape Sentiment

Central bank actions and economic outlooks remain pivotal in driving market sentiment:

• ECB: Markets are pricing in up to four rate cuts this year, a stance supported by policymakers.
• BOE: Signaled openness to pro-growth banking reforms, adding a layer of optimism to the pound’s outlook.
• Fed: The withdrawal from green initiatives has created hurdles for central banks’ environmental goals, complicating long-term policy planning.

Commodities: Oil Consolidates as Geopolitical Risks Persist

• Oil: Consolidated after a four-week bull run, with WTI prices peaking at $82.63. Technical resistance levels at $83.20, $83.24, and the 200-week moving average of $84.41 now challenge further gains.
• Geopolitical Risks: Developments in Gaza, Russian oil exports, and Trump’s evolving policy stance on Ukraine and the Middle East remain key factors.
• Gold and Copper: Benefited from the dollar’s pullback, with both showing resilience amid geopolitical uncertainties.

Key Data and Events Ahead

• New Zealand: Business PSI and Electronic Card Retail Sales will provide insights into consumer sentiment and spending trends.
• Europe: Finance ministers will convene in Brussels to discuss competitiveness and fiscal tightening plans.
• U.S.: Markets await clarity on President Trump’s trade agenda, alongside further economic data and Fed commentary.

Market Positioning Suggests Dollar Resilience Amid Recent Pullback

Despite the dollar’s recent decline, peculiar positioning patterns suggest potential for renewed strength. Bets against secondary currencies dominate over majors, indicating relatively modest bearish positioning on the euro and yen compared to historical levels. This setup could provide support for the dollar if sentiment shifts back toward safe-haven assets.

Conclusion: Volatility Ahead Amid Tariff Speculation and Central Bank Dynamics

The dollar’s sharp decline highlights market sensitivity to evolving U.S. trade policies under the Trump administration. While reduced tariff risks have bolstered optimism, persistent geopolitical concerns and central bank policy shifts continue to drive volatility. Traders are closely monitoring key economic data and geopolitical developments, with central bank guidance and U.S. trade announcements expected to shape the market trajectory in the near term.