The US Dollar (USD) increased to over 96.00 as the European trading session kicked off. Traders are waiting for the US Federal Reserve’s interest rate decision, which is expected to stay the same. Much attention is on Fed Chair Jerome Powell’s comments about future policies. The Australian Dollar climbed to a three-year high above 0.7000, thanks to stronger inflation data. Australia’s Consumer Price Index (CPI) rose to 3.8% year-over-year in December, beating expectations and raising hopes for a rate hike from the Reserve Bank of Australia.

Japan’s Fiscal Health

Japan’s financial situation is under the spotlight as USD/JPY stays above 152.70. Recent Bank of Japan meeting minutes reveal a plan to increase interest rates if the economy supports it. Gold prices soared above $5,200, marking its eighth straight day of gains, driven by geopolitical uncertainties and potential US interest rate cuts. The Canadian Dollar remained steady around 1.3575, supported by rising crude oil prices, ahead of the Bank of Canada’s stable interest rate decision. US President Trump highlighted the strong USD and expected lower interest rates with new Fed leadership. EUR/USD dropped below 1.1200 after reaching a five-year high, due to renewed demand for the USD. Quantitative tightening (QT) by the Federal Reserve usually strengthens the USD and contrasts with Quantitative Easing (QE), which tends to weaken it.

Focus on the Fed’s Statement

Today’s main focus is on the Fed’s statement and Jerome Powell’s press conference. We don’t anticipate a rate change today, but any indication of future cuts could lead to significant market fluctuations. Options traders might consider straddles on major USD pairs like EUR/USD to capitalize on this potential movement. Gold’s rise above $5,200 suggests a flight to safety, a trend evident since the geopolitical tensions began in 2025. Open interest in COMEX Gold futures has reached levels last seen during the global uncertainty of 2024, making long call options an appealing strategy. Any dovish comments from the Fed could push prices toward the next key level of $5,300. The unexpectedly high Australian inflation at 3.8% positions the Reserve Bank of Australia as one of the most aggressive central banks. The swaps market now indicates a strong chance of a rate hike at the next RBA meeting, creating a noticeable policy difference with a potentially dovish Fed. This supports buying AUD/USD call options for further growth beyond the 0.7000 mark. The pullback in EUR/USD below 1.1200 appears to be a temporary dip ahead of the Fed’s decision. Eurozone data has shown resilience throughout 2025, and with inflation still above the ECB’s target according to recent Eurostat numbers, there seems to be limited downside for the euro. Traders might see this decline as a chance to buy long positions through futures contracts, aiming for a rebound to previous highs. Sterling is also in a similar situation, with its pullback to 1.3810 presenting a possible entry point for buyers. Strong UK economic data from the last quarter, especially the notable wage growth in late 2025, suggests that the Bank of England is unlikely to cut rates soon. This support could make selling short-dated GBP/USD put options a good way to gain premium. The tension in USD/JPY near 152.70 reflects the clash between Japan’s fiscal policy and the Bank of Japan’s aggressive stance. The BoJ’s recent minutes confirm their plan to keep raising rates, marking a significant change since early 2025. This implies that any weakness in the USD after the Fed meeting may result in a sharp decline in this currency pair. Create your live VT Markets account and start trading now.

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