Dollar still on the front foot

The dollar was on the front foot again yesterday supported by rising US bond yields, which in turn was driven by solid US labour market data (the number of new jobless claimants fell by more than expected last week) and some relatively hawkish ‘Fedspeak’. EURUSD is trading at around $1.1610 this morning, having briefly dipped below the $1.16 level yesterday, and has now given up all of the gains it made in December, falling by around 2 cents from last month’s high of just over $1.18. Sterling has slipped to under $1.34 against the US currency, and is also a touch weaker vis-a-vis the euro at around £0.8670.

The increase in US bond yields was seen mostly at the short-end of the curve with 2-year yields about 5bps higher on the day. They have now risen by more than 10bps relative to equivalent German yields since the start of the New Year, underpinning the dollar’s recent gains. Turning to equity markets, US stocks had a positive session, having been on the back foot earlier in the week, albeit gains were modest with the S&P 500 up around 0.3%. European indices were also in the black, with the Stoxx Europe 600 gaining around 0.5% to close at a new all-time high.

The message from Fed members this week has been uniformly consistent – there’s no urgency to lower interest rates again having cut by 75bps over the final few months of 2025. This is now reflected in current market pricing, with the next 25bps reduction in rates not fully priced in until July and a second one not seen until the very back end of this year.

Industrial production data in the Euro area were stronger than expected. Output posted another solid gain in November, increasing by 0.7% for a second month running to leave the year-on-year increase at 2.5% (up from 1.7% y-o-y in October).

Looking to the day ahead, US economic data due include industrial production/manufacturing output for December and the NAHB housing market index for January. We’ll also hear from a few more Fed members over the course of the day.