The US Dollar (USD) finished the week close to a four-month low at about 97.80 due to increased market risk aversion. This drop came after President Trump threatened tariffs against eight European countries unless Denmark sold Greenland. Tensions eased later when a potential deal involving NATO was announced. Revised figures for the US’s Q3 Gross Domestic Product (GDP) indicated an annual growth rate of 4.4%. Furthermore, inflation for October and November rose to 2.8% based on the PCE Price Index, which met market expectations.

US Dollar Index Performance

The US Dollar Index (DXY) fell to a multi-week low following weak preliminary S&P Global PMIs for January. It dropped 0.43% against the Euro. Initial PMIs from the Eurozone showed mixed results, with manufacturing still contracting. Next week, attention will be on more GDP and inflation data from the Eurozone and Germany. UK retail sales exceeded expectations, boosting GBP/USD. The USD/JPY pair softened as the Bank of Japan kept its policies unchanged. The AUD rose sharply after gold prices reached record levels, hitting figures not seen since September 2024. Gold’s price peaked at $4,988 amid ongoing geopolitical tensions. Upcoming economic events will feature speeches from ECB members and monetary policy announcements from the Bank of Japan and others. The Federal Reserve will also release various economic indicators from the Eurozone, Germany, and the US.

US Dollar and Economic Data

The US Dollar is quite weak, staying near a four-month low, even though recent economic data is strong. The revised 4.4% Q3 GDP and 2.8% PCE inflation show past strength. However, the market seems focused on recent softness, like the January PMI miss, suggesting we should be cautious about assuming a simple downtrend for the dollar, especially with a crucial Fed meeting ahead. With the Federal Reserve likely to keep interest rates steady next week, all eyes will be on their guidance. Given the weak PMI figures, any signals of a dovish stance could worsen the dollar’s decline. It might be wise to consider options like buying straddles on the DXY to prepare for potential volatility after the Fed’s announcement. On the other hand, the British Pound is showing solid strength, reaching levels we haven’t seen since September 2025. Strong UK retail sales and PMI data suggest the Bank of England may maintain a hawkish stance longer than other banks. This makes long GBP/USD positions appealing, potentially using call spreads to manage risk while benefiting from upward momentum. The Japanese Yen is an exception, with USD/JPY at around 156.00 following the Bank of Japan’s passive approach. This reminds us of the interest rate differentials seen in 2023, making carry trades funded by the Yen attractive. We see a chance to sell JPY against stronger currencies like the Pound. The Australian Dollar is benefiting from record gold prices, which are approaching $5,000 per ounce due to ongoing geopolitical tensions. Traders should monitor this trend, as AUD/USD call options could provide a leveraged way to take advantage of strong gold prices. The upcoming Australian inflation data on Wednesday is crucial for this currency pair. Despite a busy economic calendar, market volatility seems low, with the VIX index around a low of 13. This implies complacency and might lead to lower options premiums, providing an opportunity to buy protection or make speculative trades on major currency pairs ahead of next week’s central bank meetings and data releases. Create your live VT Markets account and start trading now.

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