The US Dollar Index (DXY) fell and traded near 96.60 during Asian hours on Wednesday. Traders were waiting for the delayed US jobs report due later in the day to gauge the outlook for US interest rates.
Markets expected Nonfarm Payrolls to show 70,000 jobs added in January. The Unemployment Rate was forecast to hold steady at 4.4%.
Us Retail Sales And Fed Watch
US Retail Sales were unchanged at $735 billion in December, after a 0.6% gain in November. This missed forecasts for a 0.4% increase. On a yearly basis, Retail Sales rose 2.4%.
Markets expected the Federal Reserve to keep rates unchanged in March. Traders priced in the first rate cut for June, with another possible cut in September.
Median one-year-ahead inflation expectations fell to 3.1% in January from 3.4% in December, the lowest level in six months. Food price expectations stayed at 5.7%, while three- and five-year expectations held at 3%.
Looking back at early 2025, traders were positioned for a weaker dollar, with the DXY near 96.60. This reflected the broad view that the Fed would start cutting rates by mid-year. However, the dollar strengthened through the rest of 2025 because those expected cuts were pushed back.
What Changed In 2025
The main shift came from the labor market, which stayed stronger than the soft forecasts seen in January 2025. Instead of the 70,000 jobs expected then, the US economy added an average of 175,000 jobs per month in the second half of 2025. That strength kept the unemployment rate below 4.0% for most of the year, giving the Fed little reason to cut rates quickly.
Inflation also stayed higher than the January 2025 forecast of 3.1% implied. In 2025, core CPI remained above the Fed’s 2% target, ranging from 2.9% to 3.3% because service prices kept rising. As a result, the Fed held rates steady through the summer and delivered only one 25-basis-point cut late in the fourth quarter of 2025.
In the coming weeks, we see opportunity in options markets. Implied volatility on dollar pairs is still low compared with the realized volatility seen in late 2025. Traders may want to consider buying straddles on major pairs like EUR/USD to prepare for a possible breakout from the current tight range. This can help protect against being caught on the wrong side of the next central bank surprise, a lesson many traders learned last year.
The focus now should be on central bank guidance, not just past data. Derivatives like Fed Funds futures now point to a much slower cutting cycle in 2026 than what markets once expected for 2025. We believe positioning for a “higher for longer” rate environment through interest rate swaps remains the more cautious approach until services inflation shows a clear drop.
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