The euro reversed earlier losses on Thursday as short-covering emerged following the European Central Bank’s (ECB) widely expected 25-basis-point rate cut. ECB President Christine Lagarde emphasized that future policy moves would be data-dependent, reinforcing expectations of further easing amid sluggish eurozone growth. While the euro initially weakened, investors adjusted positions, supporting its recovery as markets reassessed the pace of future rate cuts.

Dollar Under Pressure as U.S. Growth Data Disappoints

The U.S. dollar edged lower, weighed down by falling Treasury yields after Q4 GDP data missed expectations, signaling potential economic headwinds. However, dollar losses were limited by trade policy concerns, as markets remained wary of a possible Trump administration announcement of new tariffs over the weekend.

Sterling Holds Steady While FTSE Hits Record High

The pound was little changed, holding steady amid broader dollar weakness, but upside momentum remained limited ahead of next week’s almost-certain Bank of England (BoE) rate cut. Meanwhile, the FTSE 100 reached a record high as investors positioned themselves ahead of expected monetary easing.

Yen Strengthens on Policy Convergence and Safe-Haven Demand

The yen extended gains across G10 currencies, benefiting from monetary policy convergence following the Fed and ECB meetings. Risk reversals shifted in favor of the yen, signaling expectations of further appreciation. Traders are closely watching Tokyo CPI data on Friday for additional confirmation that the Bank of Japan (BOJ) remains on course for a rate hike.

Gold Surges on Inflation Hedge and Trade Uncertainty

Gold surged 1.3% to a record high, driven by investor demand for inflation protection amid rate cuts and safe-haven positioning against potential U.S. trade disruptions.

Bonds and Equities Respond to Shifting Rate Expectations

• Treasury Yields: Declined 2 to 4 basis points, with the 2s-10s curve flattening slightly by 1 basis point to +30.9bp, reflecting weaker U.S. growth data and shifting rate expectations.
• Equities: The S&P 500 rose 0.5%, supported by broad-based gains as investors welcomed the likelihood of further monetary easing across major economies.

Commodities Reflect Risk-On Sentiment

• Oil: Rose 0.4%, as supply constraints continued to drive energy market concerns.
• Copper: Climbed 0.7%, benefiting from improving risk sentiment and firm industrial demand.

Currency Market Summary: Yen and Euro Lead Moves

• EUR/USD: Up 0.04%, holding gains from short-covering but struggling to push higher as ECB dovish guidance weighed on sentiment.
• USD/JPY: Fell 0.56%, reflecting continued yen strength amid shifting global rate expectations.
• GBP/USD: Rose 0.07%, maintaining stability ahead of next week’s BoE decision.
• AUD/USD: Gained 0.06%, supported by risk-on flows and stronger commodity prices.
• Cross-Currency Pairs:
  • EUR/JPY: Down 0.53%, as yen strength persisted.
  • GBP/JPY: Fell 0.51%, reflecting the broader yen rally.
  • AUD/JPY: Dropped 0.48%, highlighting cautious sentiment in commodity-linked currencies.

Market Outlook: Focus Turns to Tokyo CPI and U.S. Tariff Developments

• Euro: Further upside will depend on economic data strength and ECB guidance, with 1.06 as the next technical target.
• Dollar: Likely to remain under pressure if trade uncertainty increases or growth concerns escalate following weak GDP data.
• Yen: Expected to maintain strength, with potential for further gains if BOJ rate hike speculation intensifies.
• Sterling: Faces downside risks if BoE confirms rate cut expectations, but stability in gilt markets could provide support.
• Commodity-Linked Currencies: The Australian and Canadian dollars remain vulnerable to commodity price swings and global risk sentiment.

Conclusion: Markets Brace for Further Volatility Amid Policy and Trade Uncertainty

As markets react to central bank decisions and trade developments, the dollar’s trajectory remains tied to tariff policies and economic growth trends. The euro and yen reflect contrasting forces of policy easing and safe-haven demand, while gold and commodities respond to shifting inflation expectations. With Tokyo CPI data, U.S. tariff announcements, and key economic reports on the horizon, traders remain cautious and positioned for heightened volatility into the weekend.