The U.S. dollar index strengthened on Wednesday alongside Treasury yields after the Federal Reserve held its policy corridor steady at 4.25%-4.50%, as expected. The Fed dropped language suggesting inflation was progressing toward its 2% target, signaling a more patient approach to policy adjustments. Chair Jerome Powell reiterated that inflation remains "somewhat" elevated but emphasized that policy is well positioned, with no immediate need for adjustments. He also acknowledged that the Fed is assessing new executive orders under the Trump administration, including potential tariffs in February.

Ahead of the Fed’s decision, month-end flows and speculative buying had already lifted the dollar, with expectations that new U.S. trade policies could introduce fresh inflationary pressures. Commerce Secretary nominee Howard Lutnick reinforced the administration's aggressive trade stance, recommending across-the-board tariffs, with China facing the highest levies. Canada and Mexico were warned to avoid a 25% tariff if they took action to curb fentanyl production and illegal immigration.

Euro Slides Ahead of ECB Decision as Growth Outlook Weakens

The euro remained under pressure, with EUR/USD slipping 0.18%, after the German government slashed its 2025 growth forecast, and the French Socialist Party withdrew from budget negotiations. The European Central Bank (ECB) is widely expected to cut rates by 25 basis points on Thursday, adding to downside risks for the euro. Despite firm bund yields, the common currency struggled to gain momentum amid political and economic uncertainties.

Sterling Trades Steady as Markets Await UK Data

The British pound traded in a narrow range of 1.2394-1.2463, little changed ahead of the Fed announcement. Finance Minister Rachel Reeves highlighted infrastructure investment as a critical driver for accelerating the U.K. economy, though broader uncertainties kept sterling in check.

Yen Gains as Equity Weakness Supports Safe-Haven Demand

The yen strengthened, with USD/JPY briefly dipping below 155, testing its 55-day moving average amid fix-related sales. Falling equity prices boosted demand for safe-haven assets, limiting yen losses despite rising Treasury yields.

Bank of Canada Cuts Rates Amid Growth Concerns

The Canadian dollar faced volatility after the Bank of Canada (BoC) delivered a widely expected 25-basis-point rate cut, revised its growth forecast lower, and warned of potential inflation risks if U.S. tariffs take effect. BoC Governor Tiff Macklem described the recent depreciation of the Canadian dollar as "material," warning that it could start impacting economic conditions. Meanwhile, Canada’s Energy and Natural Resources Minister Jonathan Wilkinson stated that any retaliation to U.S. tariffs would be regionally fair, adding uncertainty to trade negotiations.

Commodities and Equities Reflect Cautious Market Sentiment

• Oil: Fell 1.5%, reaching a multi-week low after U.S. stockpiles rose more than expected, fueling concerns about oversupply.
• Gold: Declined 0.6%, as rising Treasury yields dampened safe-haven demand.
• Copper: Rebounded 0.9% from a three-week low, benefiting from expectations of increased industrial demand.
• Equities: The S&P 500 fell 0.68%, led lower by tech shares as investors await major earnings reports and assess the Fed’s cautious stance.

Currency Market Summary: Dollar Strength and Rate Expectations Drive Moves

• EUR/USD: Down 0.18%, weighed by weak growth outlook and upcoming ECB rate cut.
• USD/JPY: Fell 0.11%, as yen demand strengthened amid equity market weakness.
• GBP/USD: Held steady, down 0.02%, with traders awaiting UK economic data for further direction.
• AUD/USD: Gained 0.32%, supported by improved risk appetite despite global trade concerns.
• Cross-Currency Pairs:
  • EUR/JPY: Down 0.27%, reflecting cautious positioning ahead of central bank decisions.
  • GBP/JPY: Fell 0.13%, mirroring broader risk-off sentiment.
  • AUD/JPY: Dropped 0.52%, highlighting commodity-linked currency volatility.

Market Outlook: Focus on ECB Rate Decision and Trade Policies

• Dollar: Expected to remain firm amid Fed policy stability, with trade policy developments likely influencing near-term movements.
• Euro: Faces further downside risks unless the ECB signals a more optimistic growth outlook or bund yields remain firm.
• Yen: Likely to stay supported as a safe-haven asset, though BOJ policy expectations and U.S. yields will dictate near-term direction.
• Sterling: Direction remains dependent on UK economic data, with risks skewed to the downside unless growth prospects improve.
• Commodity-Linked Currencies: The Australian and Canadian dollars remain sensitive to global risk sentiment and trade-related volatility, with further moves expected after central bank commentary.

Conclusion: Markets Brace for ECB Decision and Economic Data Releases

The dollar’s rise reflects hawkish Fed commentary, rising yields, and geopolitical trade uncertainties under the Trump administration. The euro and pound remain vulnerable to weak economic conditions and central bank decisions, while the yen and gold offer some safe-haven stability. Commodity markets remain mixed, with oil pressured by supply concerns and copper showing resilience on industrial demand optimism. As traders await the ECB rate decision and key economic data releases, volatility is expected to persist, shaping near-term market dynamics.